AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON March 23, 2016APRIL 4, 2018
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form20-F
(Mark One)
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 |
or
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
for the fiscal year ended December 31, 20152017
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
for the transition period from to
or
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Date of event requiring this shell company report
Commission file number1-16055
PEARSON PLC
(Exact name of Registrant as specified in its charter)
England and Wales
(Jurisdiction of incorporation or organization)
80 Strand
London, England WC2R 0RL
(Address of principal executive offices)
Stephen Jones
Telephone: +44 20 7010 2000
Fax: +44 20 7010 6060
80 Strand
London, England WC2R 0RL
(Name, Telephone,E-mail and/or Facsimile Number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of Class | Name of Each Exchange on Which Registered | |
*Ordinary Shares, 25p par value | New York Stock Exchange | |
American Depositary Shares, each | New York Stock Exchange | |
Representing One Ordinary Share, 25p per Ordinary Share |
* | Not for trading, but only in connection with the registration of American Depositary Shares, pursuant to the requirements of the SEC. |
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock at the close of the period covered by the annual report:
Ordinary Shares, 25p par value |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x☒ No ¨☐
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes ¨☐ No x☒
Note — Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x☒ No ¨☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨☐ No ¨☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated file” and “large accelerated filer”, in Rule12b-2 of the Exchange Act. (Check one):
x☒ Large accelerated filer ¨☐ Accelerated filer ¨☐ Non-accelerated filer
If an emerging growth company that prepares its financial statements in accordance with US GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing
|
by the International Accounting Standards Board |
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the Registrant has elected to follow: Item 17 ¨☐ Item 18 ¨☐
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act): Yes ¨☐ No x☒
In this Annual Report on Form20-F (the “Annual Report”) references to “Pearson”, the “Company” or the “Group” are references to Pearson plc, its predecessors and its consolidated subsidiaries, except as the context otherwise requires. “Ordinary Shares” refer to the ordinary share capital of Pearson of par value 25p each. “ADSs” refer to American Depositary Shares which are Ordinary Shares deposited pursuant to the Second Amended and Restated Deposit Agreement dated August 15, 2014, amended and restated as of August 8, 2000 among Pearson, The Bank of New York Mellon as depositary (the “Depositary”) and owners and holders of ADSs (the “Deposit Agreement”). ADSs are represented by American Depositary Receipts (“ADRs”) delivered by the Depositary under the terms of the Deposit Agreement.
We haveThe Group has prepared the financial information contained in this Annual Report in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) whichand in respect of the accounting standards applicable to the Group do not differ from IFRSconformity with International Financial Reporting Standards as adopted by the European Union (“EU”). Unless we indicate otherwise indicated, any reference in this Annual Report to our consolidated financial statements is to the consolidated financial statements and the related notes, included elsewhere in this Annual Report.
We publish ourThe Group publishes its consolidated financial statements in sterling. We haveThe Group has included, however, references to other currencies. In this Annual Report:
references to “sterling”, “pounds”, “pence” or “£” are to the lawful currency of the United Kingdom,
references to “euro” or “€” are to the euro, the lawful currency of the participating Member States in the Third Stage of the European Economic and Monetary Union of the Treaty Establishing the European Commission, and
references to “US dollars”, “dollars”, “cents” or “$” are to the lawful currency of the United States.
For convenience and except where we specifyspecified otherwise, we havethe Group has translated some sterling figures into US dollars at the rate of £1.00 = $1.47,$1.35, the noon buying rate in The City of New York for cable transfers and foreign currencies as certified by the Federal Reserve Bank of New York for customs purposes on December 31, 2015. We do2017. The Group does not make any representation that the amounts of sterling have been, could have been or could be converted into dollars at the rates indicated. On February 29, 201628, 2018 the noon buying rate for sterling was £1.00 = $1.39.$1.38
The Group currently consists of its education business, plus a 47%25% interest in the consumer publishing business Penguin Random House. See “Item 4. Information on the Company — Company—Overview of operating divisions”. The Pearson plc Consolidated Financial Statements are included in this report on pagesF-1 toF-80. The Penguin Random House Venture Combined Financial Statements are included in this report on pagesF-81 toF-151.
You should not rely unduly on forward-looking statements in this Annual Report. This Annual Report, including the sections entitled “Item 3. Key Information — Risk Factors”, “Item 4. Information on the Company” and “Item 5. Operating and Financial Review and Prospects”, contains forward-looking statements within the meaning of Section 27A of the U.S. Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that relate to future events or ourthe Group’s future financial performance. In some cases, you can identify forward-looking statements by terms such as “may”, “will”, “should”, “expect”, “intend”, “plan”, “anticipate”, “believe”, “estimate”, “predict”, “potential”, “continue” or the negative of these terms or other comparable terminology. Examples of these forward-looking statements include, but are not limited to, statements regarding the following:
operations and prospects,
growth strategy,
funding needs and financing resources,
expected financial position,
market risk,
currency risk,
US federal and state spending patterns,
debt levels, and
general market and economic conditions.
These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause ourthe Group’s or ourits industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by the forward-looking statements. In evaluating them, you should consider various factors, including the risks outlined under “Item 3. Key Information — Risk Factors”, which may cause actual events or our industry’sindustry results to differ materially from those expressed or implied by any forward-looking statement. Although we believethe Group believes that the expectations reflected in the forward-looking statements are reasonable, weit cannot guarantee future results, levels of activity, performance or achievements.
ITEM 1. | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS |
Not applicable.
ITEM 2. | OFFER STATISTICS AND EXPECTED TIMETABLE |
Not applicable.
ITEM 3. | KEY INFORMATION |
Selected consolidated financial data
The table below shows selected consolidated financial data under IFRS as issued by the IASB.IASB and in conformity with IFRS as adopted by the EU. The selected consolidated income statement data for the years ended December 31, 2015, 20142017, 2016 and 20132015 and the selected consolidated balance sheet data as at December 31, 20152017 and 20142016 have been derived from ourthe Group’s audited consolidated financial statements included in “Item 18. Financial Statements” in this Annual Report.
On July 23,1, 2013 Penquin Random House was formed through the combination of Penguin, owned by Pearson, and Random House, owned by Bertelsmann SE & Co. KGaA (Bertelsmann). From that date, Pearson no longer controlled the Penguin Group of companies and accounted for its 47% associate interest in Penguin Random House on an equity basis.
On February 4, 2014, the Group completed the sale of the Mergermarket group. The Mergermarket business was classified as held for sale on the Group’s balance sheet at December 31, 2013. The results of the Mergermarket business have been included in discontinued operations for all the years through to 2014.
On November 30, 2015, Pearson announcedthe Group completed the sale of The Financial Times to Nikkei Inc. The transaction completed on November 30, 2015 and from that point Pearson no longer consolidated The Financial Times’ results or net assets. The results of The Financial Times have been included in discontinued operations for all years through to 2014 and for the 11 months to November 30, 2015.
On August 11,October 16, 2015, Pearson announcedthe Group completed the sale of its 50% stake in The Economist Group. The transaction substantially completed on October 16, 2015 and from that point Pearson no longer had significant influence over The Economist Group. The share of profit after tax from the associate interest in the Economist Group has been included in discontinued operations for all years through to 2014 and for the period until October 16, 2015.
On November 29, 2013, Pearson announcedOctober 5, 2017 the Group completed the sale of the Mergermarket group which completed on February 4, 2014.a 22% share in Penguin Random House to Bertelsmann, retaining a 25% share. The anticipated loss of control as at December 31, 2013 resultedGroup also received recapitalization dividends in the Mergermarket business being classified as held for sale on the Pearson balance sheet at December 31, 2013.2017, with an additional amount due in 2018. The results of the Mergermarket business have been included in discontinued operations for all the years through to 2014.
In October 2012, Pearson and Bertelsmann entered into an agreement to create a new consumer publishing business by combining Penguin and Random House. The transaction completed on July 1, 2013 and from that point, Pearson no longer controlled the Penguin Group of companies. Pearson accounts for its 47%remaining 25% associate interest in Penguin Random House on an equity basis.
On May 5, 2017, the Group announced that it was undertaking a strategic review of its USK-12 courseware business. On February 23, 2018 the Group announced that it was in discussions with potential buyers regarding a disposal of the USK-12 courseware business. The loss of control resulted in the PenguinUSK-12 business beingwas classified as held for sale on the PearsonGroup’s balance sheet as at December 31, 2012.2017.
On August 16, 2017 the Group completed the sale of its test preparation business in China (GEDU) to Puxin Education.
On November 27, 2017 the Group announced that it had agreed to the sale of Wall Street English (WSE) to a consortium consisting of funds affiliated with Baring Private Equity Asia and CITIC Capital. Consequently WSE was classified as held for sale on the Group’s balance sheet as at December 31, 2017. The results of Penguin have been included in discontinued operations for all years through to 2012 and the first six months of 2013. The share of profit after tax from our associate interest in Penguin Random House from July 1, 2013 is included in operating profit from continuing operations.disposal completed on March 15, 2018.
The selected consolidated financial information should be read in conjunction with “Item 5. Operating and Financial Review and Prospects” and ourthe Group’s consolidated financial statements and the related notes appearing elsewhere in this Annual Report. The information provided below is not necessarily indicative of the results that may be expected from future operations.
For convenience, we havethe Group has translated the 20152017 amounts into US dollars at the rate of £1.00 = $1.47,$1.35, the noon buying rate in The City of New York for cable transfers and foreign currencies as certified by the Federal Reserve Bank of New York for customs purposes on December 31, 2015.2017.
Year Ended December 31 | ||||||||||||||||||||||||
2015 | 2015 | 2014 | 2013 | 2012 | 2011 | |||||||||||||||||||
$ | £ | £ | £ | £ | £ | |||||||||||||||||||
(In millions, except for per share amounts) | ||||||||||||||||||||||||
Consolidated Income Statement data | ||||||||||||||||||||||||
Sales operating | 6,568 | 4,468 | 4,540 | 4,728 | 4,615 | 4,390 | ||||||||||||||||||
(Loss)/profit | (594 | ) | (404 | ) | 348 | 431 | 469 | 638 | ||||||||||||||||
(Loss)/profit after taxation from continuing operations | (517 | ) | (352 | ) | 199 | 270 | 237 | 423 | ||||||||||||||||
Profit for the financial year | 1,210 | 823 | 470 | 539 | 314 | 945 | ||||||||||||||||||
Consolidated Earnings data per share | ||||||||||||||||||||||||
Basic earnings per equity share(1) | 148.8 | 101.2p | 58.1p | 66.6p | 38.7p | 118.2p | ||||||||||||||||||
Diluted earnings per equity share(2) | 148.8 | 101.2p | 58.0p | 66.5p | 38.6p | 118.0p | ||||||||||||||||||
Basic earnings from continuing operations per equity share(1) | (0.64 | ) | (43.3 | )p | 24.7p | 33.3p | 29.1p | 53.0p | ||||||||||||||||
Diluted earnings from continuing operations per equity share(2) | (0.64 | ) | (43.3 | )p | 24.6p | 33.3p | 29.0p | 52.9p | ||||||||||||||||
Dividends per ordinary share | 0.76 | 52.0p | 51.0p | 48.0p | 45.0p | 42.0p | ||||||||||||||||||
Consolidated Balance Sheet data at period end | ||||||||||||||||||||||||
Total assets (non-current assets plus current assets) | 17,103 | 11,635 | 11,397 | 10,931 | 11,348 | 11,244 | ||||||||||||||||||
Net assets | 9,434 | 6,418 | 5,985 | 5,706 | 5,710 | 5,962 | ||||||||||||||||||
Long-term obligations(3) | (4,866 | ) | (3,310 | ) | (3,225 | ) | (2,829 | ) | (3,175 | ) | (3,192 | ) | ||||||||||||
Capital stock | 301 | 205 | 205 | 205 | 204 | 204 | ||||||||||||||||||
Number of equity shares outstanding (millions of ordinary shares) | 821 | 821 | 820 | 819 | 817 | 816 |
Year Ended December 31 | ||||||||||||||||||||||||
2017 | 2017 | 2016 | 2015 | 2014 | 2013 | |||||||||||||||||||
$ | £ | £ | £ | £ | £ | |||||||||||||||||||
(In millions, except for per share amounts) | ||||||||||||||||||||||||
Consolidated Income Statement data | ||||||||||||||||||||||||
Sales | 6,093 | 4,513 | 4,552 | 4,468 | 4,540 | 4,728 | ||||||||||||||||||
Operating profit/(loss) | 609 | 451 | (2,497 | ) | (404 | ) | 348 | 431 | ||||||||||||||||
Profit/(loss) after taxation from continuing operations | 551 | 408 | (2,335 | ) | (352 | ) | 199 | 270 | ||||||||||||||||
Profit/(loss) for the financial year | 551 | 408 | (2,335 | ) | 823 | 470 | 539 | |||||||||||||||||
Consolidated Earnings data per share | ||||||||||||||||||||||||
Basic earnings/(loss) per equity share(1) | 67.4¢ | 49.9p | (286.8)p | 101.2p | 58.1p | 66.6p | ||||||||||||||||||
Diluted earnings/(loss) per equity share(2) | 67.4¢ | 49.9p | (286.8)p | 101.2p | 58.0p | 66.5p | ||||||||||||||||||
Basic earnings/(loss) from continuing operations per equity share(1) | 67.4¢ | 49.9p | (286.8)p | (43.3)p | 24.7p | 33.3p | ||||||||||||||||||
Diluted earnings/(loss) from continuing operations per equity share(2) | 67.4¢ | 49.9p | (286.8)p | (43.3)p | 24.6p | 33.3p | ||||||||||||||||||
Dividends per ordinary share | 22.9¢ | 17.0p | 52.0p | 52.0p | 51.0p | 48.0p | ||||||||||||||||||
Consolidated Balance Sheet data at period end | ||||||||||||||||||||||||
Total assets(non-current assets plus current assets) | 10,648 | 7,888 | 10,066 | 11,635 | 11,397 | 10,931 | ||||||||||||||||||
Net assets | 5,428 | 4,021 | 4,348 | 6,418 | 5,985 | 5,706 | ||||||||||||||||||
Long-term obligations(3) | (2,244 | ) | (1,662 | ) | (3,794 | ) | (3,310 | ) | (3,225 | ) | (2,829 | ) | ||||||||||||
Capital stock | 270 | 200 | 205 | 205 | 205 | 205 | ||||||||||||||||||
Number of equity shares outstanding (millions of ordinary shares) | 802 | 802 | 822 | 821 | 820 | 819 |
Notes:
(1) | Basic earnings per equity share is based on profit for the financial period and the weighted average number of ordinary shares in issue during the period. |
(2) | Diluted earnings per equity share is based on diluted earnings for the financial period and the diluted weighted average number of ordinary shares in issue during the period. Diluted earnings comprise earnings adjusted for the tax benefit on the conversion of share options by employees and the weighted average number of ordinary shares adjusted for the dilutive effect of share options. There is no dilution in 2015 and 2016 due to there being a loss from continuing operations. |
(3) | Long-term obligations comprise any liabilities with a maturity of more than one year, including medium and long-term borrowings, derivative financial instruments, pension obligations and deferred income tax liabilities. |
We payThe Group pays dividends to holders of ordinary shares on dates that are fixed in accordance with the guidelines of the London Stock Exchange. OurThe board of directors normally declares an interim dividend in July or August of each year to be paid in September or October. OurThe board of directors normally recommends a final dividend following the end of the fiscal year to which it relates, to be paid in the following May or June, subject to shareholders’ approval at ourthe annual general meeting. At ourthe Group’s annual general meeting on April 29, 2016 ourMay 4, 2018 shareholders will be asked to approve a final dividend of 34.0p12.0p per ordinary share for the year ended December 31, 2015.2017.
The table below sets forth the amounts of interim, final and total dividends paid in respect of each fiscal year indicated, and is translated into cents per ordinary share at the noon buying rate in The City of New York on each of the respective payment dates for interim and final dividends. The final dividend for the 20152017 fiscal year will be paid on May 1, 201611, 2018 (subject to shareholder approval),.
Fiscal year | Interim | Final | Total | Interim | Final | Total | Interim | Final | Total | Interim | Final | Total | ||||||||||||||||||||||||||||||||||||
(Pence per ordinary share) | (Cents per ordinary share) | (Pence per ordinary share) | (Cents per ordinary share) | |||||||||||||||||||||||||||||||||||||||||||||
2017 | 5.0 | 12.0 | 17.0 | 6.8 | 16.2 | * | 23.0 | * | ||||||||||||||||||||||||||||||||||||||||
2016 | 18.0 | 34.0 | 52.0 | 23.6 | 43.8 | 67.4 | ||||||||||||||||||||||||||||||||||||||||||
2015 | 18.0 | 34.0 | 52.0 | 27.8 | 52.0 | * | 79.8 | * | 18.0 | 34.0 | 52.0 | 27.8 | 49.0 | 76.8 | ||||||||||||||||||||||||||||||||||
2014 | 17.0 | 34.0 | 51.0 | 27.6 | 51.5 | 79.1 | 17.0 | 34.0 | 51.0 | 27.6 | 51.5 | 79.1 | ||||||||||||||||||||||||||||||||||||
2013 | 16.0 | 32.0 | 48.0 | 25.4 | 54.0 | 79.4 | 16.0 | 32.0 | 48.0 | 25.4 | 54.0 | 79.4 | ||||||||||||||||||||||||||||||||||||
2012 | 15.0 | 30.0 | 45.0 | 24.3 | 46.7 | 71.0 | ||||||||||||||||||||||||||||||||||||||||||
2011 | 14.0 | 28.0 | 42.0 | 22.1 | 45.2 | 67.3 |
* | As the |
Future dividends will be dependent on ourthe Group’s future earnings, financial condition and cash flow, as well as other factors affecting the Group. The dividend was rebased in 2017 to reflect portfolio changes, increased product investment, and the outlook for 2017.
The following table sets forth, for the periods indicated, information concerning the noon buying rate for sterling, expressed in dollars per pound sterling. The average rate is calculated by using the average of the noon buying rates in The City of New York on each day during a monthly period and on the last day of each month during an annual period. On December 31, 20152017 the noon buying rate for cable transfers and foreign currencies as certified by the Federal Reserve Bank of New York for customs purposes for sterling was £1.00 = $1.47.$1.35. On February 29, 201628, 2018 the noon buying rate for sterling was £1.00 = $1.39.$1.38.
Month | High | Low | ||||||
February 2016 | $ | 1.46 | $ | 1.39 | ||||
January 2016 | $ | 1.47 | $ | 1.42 | ||||
December 2015 | $ | 1.52 | $ | 1.47 | ||||
November 2015 | $ | 1.54 | $ | 1.50 | ||||
October 2015 | $ | 1.55 | $ | 1.52 | ||||
September 2015 | $ | 1.56 | $ | 1.51 |
Month | High | Low | ||||||
February 2018 | $ | 1.43 | $ | 1.35 | ||||
January 2018 | $ | 1.42 | $ | 1.38 | ||||
December 2017 | $ | 1.35 | $ | 1.33 | ||||
November 2017 | $ | 1.35 | $ | 1.31 | ||||
October 2017 | $ | 1.33 | $ | 1.31 | ||||
September 2017 | $ | 1.36 | $ | 1.30 |
Year Ended December 31 | Average rate | Average rate | ||||||
2017 | $ | 1.30 | ||||||
2016 | $ | 1.34 | ||||||
2015 | $ | 1.53 | $ | 1.53 | ||||
2014 | $ | 1.65 | $ | 1.65 | ||||
2013 | $ | 1.57 | $ | 1.57 | ||||
2012 | $ | 1.59 | ||||||
2011 | $ | 1.61 |
You should carefully consider the risk factors described below, as well as the other information included in the rest of this document. OurThe Group’s business, financial condition or results from operations could be materially adversely affected by any or all of these risks, or by other risks that weit presently cannot identify.
The pace and scope of ourthe Group’s business transformation initiatives increase the execution risk that benefits may not be fully realised,realized, costs of these changes may increase, or that ourits business as usual activities do not perform in line with expectations.
We are currently engagedBusiness transformation and change initiatives in restructuringsupport of the business.Group’s strategic goals to accelerate its digital transition and to simplify its business will continue throughout 2018. The pace and scope of change increases the risk that not all these changes will deliver within anticipated timeframes, or that the costs of these changes may increase. In addition, as a result of the increased pressure of transformational change, our business as usual activities may not perform in line with our plans or ourthe level of customer service may not meet expectations. In parallel with the business transformation, as we respondthe Group responds to the digital revolution and shift from a product to a services business, weit will continue to look at opportunities to develop business models and further refine organisationorganization structures. Resistance to change could restrict the organization from making the necessary changes to the business model.
Risk related to data quality and integrity may lead to noncompliance with legal and other requirements which could damage ourthe Group’s business.
Unavailability of timely, complete and accurate data limits informed decision-making and increases risk ofnon-compliance with legal, regulatory and reporting requirements. Business change and transformation success is dependent on migration of a significant number of datasets.
Global economy and cyclical market factors may adversely impact ourthe Group’s financial performance.
With the continued pressure and uncertainty in the worldwide economies, there remains a risk of a weakening in trading conditions, which could adversely impact our future financial performance. The effect of continued deterioration or lack of recovery in the global economy will vary across our different businesses and will depend on the depth, length and severity of any economic downturn. The education market can be affected by cyclical factors, which may lead to a reduction in demand for ourthe Group’s products and service.services.
Failure to successfully invest in and deliver the right products and services and respond to competitive threats could result in lower than expected revenues and profits.
A common trend facing all ourthe Group’s businesses is the digitization of content and proliferation of distribution channels, either over the internet, or via other electronic means, replacing traditional print formats. The digital migration brings the need for change in product and content distribution, consumers’ perception of value and the publisher’s position between consumers, retailers and authors.
This is a highly competitive market that is subject to rapid change. We faceThe Group faces competitive threats both from large media players and from smaller businesses, online and mobile portals and operators in the digital arena that provide alternative sources of content. New distribution channels, e.g. digital format, the internet, online retailers, growing delivery platforms (e.g.,e-readers or tablets), pose both threats and opportunities to our traditional publishing business models, potentially impacting both sales volumes and pricing.
Students are seeking cheaper sources of content, e.g. second hand and rental copies, online discounters, file sharing and use of pirated copies, and rentals, along with open source.copies. This change in behavior puts downward pressure on textbook prices in our major markets, and this could adversely impact ourthe Group’s results.
If we dothe Group does not adapt rapidly to these changes, weit may lose business to ‘faster’ and more ‘agile’ competitors, who increasingly arenon-traditional competitors, making their identification all the more difficult. WeThe Group may be required to invest significant resources to further adapt to the changing competitive environment.
Changes in government policy and/or regulations have the potential to impact ouraffect the Group’s business model and/or decisions across all markets.
OurThe Group’s educational services and assessment businesses may be adversely affected by changes in government funding resulting from either trends that are beyond ourthe Group’s direct control, such as general economic conditions, changes in government educational funding, programs, policy decisions, legislation and/or changes in the procurement process, or ourthe Group’s failure to successfully deliver previous contracts.
The results and growth of ourthe Group’s US educational services and assessment businesses are dependent on the level of federal and state educational funding, which in turn is dependent on the robustness of state finances and the level of funding allocated to educational programs. While the US tax reform bill that was signed into law by the President in December avoids the significant immediate impacts learners would have felt from earlier versions, concern remains about the potential impact that the cap on state and local tax (‘SALT’) deductions, the tax on certain college endowments, and the disincentives for charitable contributions could have on education funding. State, local and municipal education funding pressures remain, competition from low price and disruptive new business models continues and open source is promoted as a way to keep costs down for our customers. The current challenging environment could impact ourthe Group’s ability to collect on education-related debt.
State and local government leadership changes and resultant shifts in education policy can also affect the funding available for educational expenditure, which include the impact of educational reform. Similarly, changes in the government procurement process for textbooks, learning material and student tests, and vocational training programs can also affect ourthe Group’s markets. Political pressure on testing, changes in curricula, delays in the timing of the adoptions and changes in the student testing process can all affect these programs and therefore the size of ourthe market in any given year. For our UK examinationThe full impact of the UK’s pending departure from the EU is still unclear, however known potential risk areas include tax, data privacy and assessment businesses, changes in UK government policy have had, and could continue to have, a significant impact on our present business.non-tariff exposure arising from cross-border transactions.
There are multiple competing demands for educational funds and there is no guarantee that new textbookscourseware or testing or training programs will be funded, or that wethe Group will win or retain this business.
Failure to comply with anti-trust and competition legislation could result in costly legal proceedingproceedings and/or adversely impact ourthe Group’s reputation.
We areThe Group is subject to global and local anti-trust and competition law and although we areit is committed to conducting business in compliance with local and international laws, there is a risk that our management, employees or representatives may act in a way that violates applicable anti-trust or competition laws. As a result, there is a risk of litigation and regulatory proceedings in the countries in which we operate.the Group operates. These legal proceedings could result in greater scrutiny of ourthe Group’s operations in other countries for anti-competitive behavior and, in the worst case, incur a substantial financial cost. This would also have an adverse impact on ourthe Group’s reputation.
If we dothe Group does not adequately protect ourits intellectual property and proprietary rights, ourits competitive position and results may be adversely affected and limit ourits ability to grow.grow limited.
OurThe Group’s products and services largely comprise intellectual property delivered through a variety of print and digital media, online software applications and platforms. We relyThe Group relies on trademark, patent, copyright and other intellectual property laws to establish and protect ourits proprietary rights in these products and services.
Our
The Group’s intellectual property rights (IPR) in countries such as the USbrands and the UK, jurisdictions covering the largest proportion of our operations,content — historically its core assets — are generally well established within key markets. As technology has become an increasingly critical component of the exceptionGroup’s business strategy, it has also been steadily increasing investment in its patent program to expand its protection of patents, for which we only have a nascent portfolio based largelyhigh value inventions in the US. The Group’s forward-looking IP strategy also includes plans to increase its global patent footprint in key markets outside the US.However, wethe Group also conductconducts business in other countries where ourits protection efforts have been limited or inconsistent and the extent of effective legal protection for intellectual property rights is uncertain, and this uncertainty could affect our future growth. Where we havethe Group has registered or otherwise established ourits IPR, weit cannot guarantee that our such rights will provide competitive advantages to due to: the challenges and costs of monitoring and enforcement in jurisdictions where competition may be intense; the limited and/or ineffective IPR protection and enforcement mechanisms available
to usit in many countries; the potential that ourits IPR may lapse, be invalidated, circumvented, challenged, or abandoned, or that weit may otherwise lose the ability to assert ourits intellectual property rights against others. Moreover, despite trademark, brand and copyright protection, third parties may copy, infringe or otherwise profit from ourthe Group’s proprietary rights without ourits authorization. The loss or diminution in value of these proprietary rights or ourthe Group’s intellectual property could have a material adverse effect on ourthe Group’s business and financial performance.
A control breakdown or service failure in ourthe Group’s school assessment and qualification business could result in financial loss and reputational damage.
OurThe Group’s professional services and assessment businesses involveinvolves complex contractual relationships with both government agencies and commercial customers for the provision of various testing services. OurThe Group’s financial results, growth prospects and/or reputation may be adversely affected if these contracts and relationships are poorly managed or face increased competitive pressures.
There are inherent risks associated with ourthe Group’s assessment and qualification businesses, both in the US and the UK. A service failure caused by a breakdown in our testing and assessment processes could lead to amis-grading of student tests and/or late delivery of test results to students and their schools. In either event wethe Group may be subject to legal claims, penalty charges under our contracts,non-renewal of contracts and/or the suspension or withdrawal of ourits accreditation to conduct tests. A late delivery of qualification results could result in a potentially significant regulatory fine in addition to the contractual penalties. It is also possible that such events would result in adverse publicity, which may affect ourthe Group’s ability to retain existing contracts and/or obtain new customers.
OurThe Group’s investment intoin inherently riskier emerging markets may deliver returns that are lower than anticipated.
To take advantage of international growth opportunities and to reduce ourits reliance on ourthe US and UK markets, we havethe Group has invested in a number of emerging markets, some of which are inherently more risky than ourits traditional markets. Political, regulatory, economic and legal systems in emerging markets may be less predictable than in countries with more developed institutional structures. Political, regulatory, economic, currency, reputational and corporate governance and compliance risks (including fraud, bribery and corruption) as well as unmanaged expansion are all factors which could limit our returns on investments made in these markets.
Failure to effectively manage risks associated with compliance to global and local anti-bribery and corruption (ABC) legislation could result in costly legal investigations and/or adversely impact ourthe Group’s reputation.
Although we arethe Group is committed to conducting business in a legal and ethical manner in compliance with local and international statutory requirements and standards applicable to ourits business, there is a risk that ourthe Group’s management, employees or representatives may take actions that violate applicable laws and regulations prohibiting the making of improper payments for the purposes of obtaining or keeping business, including laws
such as the US Foreign Corrupt Practices Act or the UK Bribery Act. Responding to investigations is costly and requires a significant amount of management’s time and attention. In addition, investigations may adversely impact ourthe Group’s reputation, or lead to litigation and financial impacts.
Failure to generate anticipated revenue growth, synergies and/or cost savings from acquisitions, mergers and other business combinations, could lead to goodwill and intangible asset impairments.
We continually acquireThe Group periodically acquires and disposedisposes of businesses to achieve ourits strategic objectives and we will continue to consider both as means to pursue ourits strategic priorities, although we doit does not plan to make any significant acquisitions in the short term. We for instance hold a 47% equity interest in Penguin Random House, the world’s leading consumer publishing company. This investment and associated return are subject to the continuing success of this venture, in a competitive global market. In 2015, we divested the Financial Times and our equity interest in The Economist in order to increase our focus on the opportunities we see in global education.
We operateThe Group operates in markets that are dependent on Information Technology (IT) systems and technological change. Failure to maintain and support customer facing services, systems, and platforms, including addressing quality issues and execution on time of new products and enhancements, could negatively impact ourthe Group’s revenues and reputation.
All ourthe Group’s businesses, to a greater or lesser extent, are dependent on information technology. WeIt either provideprovides software and/or internet services to ourits customers or we useuses complex IT systems and products to support ourits businesses activities, including customer-facing systems, back-office processing and infrastructure. We faceThe Group faces several technological risks associated with software product development and service delivery, information technology security (including virus and cyber-attacks),e-commerce, enterprise resource planning system implementation and upgrades. Although plans and procedures are in place to reduce such risks, from time to time we havethe Group has experienced verifiable attacks on our systemits systems by unauthorized parties. To date, such attacks have not resulted in any material damage, to us, but ourthe Group’s businesses could be adversely affected if ourits systems and infrastructure experience a significant failure or interruption.
Failure to comply with data privacy regulations, or any unauthorized disclosure of personal information, could result in an incident or other issue potentially causing reputational damage to ourthe Group’s brands and financial loss.
Across ourthe Group’s businesses, we holdit holds large volumes of personally identifiable information including that of employees, customers, students and citizens. Any perceived or actual unauthorized disclosure of personally identifiable information, whether through breach of ourthe Group’s network by an unauthorized party, employee theft, misuse or error or otherwise, could harm ourthe Group’s reputation, impair ourits ability to attract and retain ourits customers, or subject usthe Group to claims or litigation arising from damages suffered by individuals, and thereby harm ourits business and operationoperational results. Failure to adequately protect personally identifiable information could potentially lead to penalties, significant remediation costs, reputational damage, cancellation of some existing contracts and difficulty in competing for future business. In addition, wethe Group could incur significant costs in complying with the relevant laws and regulations regarding the unauthorized disclosure of personal information. Changes to data privacy legislation must also be monitored and acted upon to ensure we remainthe Group remains in compliance across different markets.
Failure to prevent or detect a malicious attack on ourthe Group’s systems could result in a breach of confidentiality, integrity and/or availability of sensitive information.
Information security and cyber risk is continually evolving and comprises many complex external drivers: increasing customer demand to demonstrate a strong security posture, external compliance requirements, ongoing digital revolution, increasing use of the cloud and increasingly sophisticated attack strategies. Across ourits businesses, we holdthe Group holds large volumes of personally identifiable information including that of employees, customers, students and citizens.citizens, and other highly sensitive business critical data such as financial data, internal sensitive information, and intellectual property. Despite ourits implementation of security measures, individuals may try to gain unauthorized access to ourthe Group’s data in order to misappropriate such information for potentially
fraudulent purposes. A significant breach can result in a devastating impact on Pearson’sthe Group’s reputation, financecustomer loyalty, and student experience. Inability to prove due diligence can result in severe penalties and loss of business (existing and future).
OurThe Group’s reported earnings and cash flows may be adversely affected by changes in ourits pension costs and funding requirements.
We operateThe Group operates a number of pension plans throughout the world, the principal ones being in the UK and the US. The major plans are self-administered with the plans’ assets held independently of the Group. Regular valuations, conducted by independent qualified actuaries, are used to determine pension costs and funding requirements. As these assets are invested in the capital markets, which are often volatile, the plans may require additional funding from us,the Group, which could have an adverse impact on its results.
It is ourthe Group’s policy to ensure that each pension plan is adequately funded, over time, to meet its ongoing and future liabilities. OurThe Group’s earnings and cash flows may be adversely affected by the need to provide additional funding to eliminate pension fund deficits in ourits defined benefit plans. OurThe Group’s greatest exposure relates to ourthe UK
defined benefit pension plan, which is valued every three years. Pension fund deficits may arise because of inadequate investment returns, increased member life expectancy, changes in actuarial assumptions and changes in pension regulations, including accounting rules and minimum funding requests. As of the end of 2015,2017, the UK defined benefit plan continues to show a surplus on an IAS19 basis and following the latest valuation is expected to be in surplus on a technical provisions basis following funding payments made during 2015. Following discussions with the plan trustee in 2015, we havebasis. The Group has committed to targeting a self-sufficient level of funding, program with the target ofresulting in the plan becoming largely independent of Pearson within five years.by the end of 2019. However the plan’s ability to achieve and maintain this standard remains subject to market conditions, meaning that additional funding could still be required from Pearsonthe Group in the future.
Operational disruption to ourits business caused by our third party providers, a major disaster and/or external threats could restrict ourthe Group’s ability to supply products and services to ourits customers.
Across all ourits businesses, we managethe Group manages complex operational and logistical arrangements including distribution centers, data centers, and educational and office facilities, as well as relationships with third party print sites. We haveIt has also outsourced some support functions, including information technology, warehousing and logistics to third party providers. The failure of third parties to whom we haveit has outsourced business functions could adversely affect ourits reputation or financial condition. Failure to recover from a major disaster, (e.g. fire, flood, etc.) at a key facility or the disruption of supply from a key third party vendor or partner (e.g. due to bankruptcy) could restrict ourthe Group’s ability to service ourits customers and meet the terms of ourits contractual relationships with both government agencies and commercial customers. Penalty clauses and/or the failure to retain these contracts at the end of the contract term could adversely impact our future revenue growth. Similarly external threats, such as flu pandemic, terrorist attacks, strikes, weather etc., could all affect our business and employees, disrupting our daily business activities.
A significant deterioration in Groupthe Group’s profitability and/or cash flow caused by prolonged economic instability could reduce ourits liquidity and/or impair ourits financial ratios, and trigger a need to raise additional funds from the capital markets and/or renegotiate ourits banking covenants.
To the extent that worldwide economic conditions materially deteriorate, the Group’s revenues, profitability and cash flows could be significantly reduced as customers would be unable to purchase products and services in the expected quantities and/or pay for them within normal agreed terms. A liquidity shortfall
Disruption in capital markets or potential concerns about the Group’s credit, such as downgrades or negative outlooks by the credit rating agencies, may delay certain development initiatives or may expose the Group to a need to negotiate further funding. The proceeds from the divestments of the FT and the Economist have significantly improved liquidity. While we anticipatemean that our existing cash and cash equivalents, together with availability under our existing credit facility, commercial paper program, cash balances and cash from operations, will be sufficient to fund our operations for at least the next 12 months, we may need to raise additional capital to fund operations in the future or to finance acquisitions. If we seek to raise additional capital in order to meet various objectives, including developing future technologies and services, increasing working capital, acquiring businesses and responding to competitive pressures,this capital may not be available on favorable terms or may not be available at all.all, although the reduced size of debt maturities mean that this risk is reduced.
Our access to capital is influenced by, among other factors, the credit ratings assigned to our debt by the credit rating agencies. At the year-end our long-term ratings were Baa1 from Moody’s and BBB+ from Standard & Poor’s. Both ratings were on negative outlook. The short-term ratings were P2 and A2 respectively. In February 2016, Moody’s changed Pearson’s long-term rating to Baa2 (Stable) and in March 2016 Standard & Poor’s changed Pearson’s long-term rating to BBB (Stable). The short term ratings are unchanged at P2 and A2.
We generateThe Group generates a substantial proportion of ourits revenue in foreign currencies, particularly the US dollar, and foreign exchange rate fluctuations could adversely affect ourthe Group’s earnings and the strength of ourits balance sheet.
As with any international business, ourthe Group’s earnings can be materially affected by exchange rate movements. OurThe main exposure is to movements in the US dollar to sterling exchange rate as approximately 60% of ourthe Group’s total revenue is generated in US dollars. WeThe Group also havehas exposure to a range of other international currencies including emerging market currencies. SalesOperating profit for 2015,2017, translated at 20142016 average rates, would have been £137m£13m or 3%1% lower.
A lack of sufficient capital resources could adversely impact ourthe Group’s ability to operate.
If the global economy weakens further and/or the global financial markets collapse, wethe Group may not have access to or could lose ourits bank deposits or customers may fail to pay ussuffer a significant increase in time or may be unable to pay us.customer bad debts. Lack of sufficient capital resources could significantly limit ourthe Group’s ability to take advantage of business and strategic opportunities. If replacement funds are not available, wethe Group may be required to delay, reduce the scope of, or eliminate material parts of ourits business strategy, including potential additional acquisitions or development of new products, services and technologies. The Group aims to mitigate this risk by enforcing limits and financing through strong counterparties.
Changes in tax law or perceptions on tax planning strategies may lead to higher effective tax rate or negative reputational impact.
Changes in corporate tax rates and/or other relevant tax laws in the UK, US or other jurisdictions could have a material impact on ourthe Group’s future reported tax rate and/or ourits future tax payments. We haveThe Group has been subject to audit by tax authorities. Although we believe ourthe Group believes its tax provision is reasonable, the final determination of ourits tax liability could be materially different from ourits historical income tax provisions, which could have a material effect on ourthe Group’s financial position, results of operations or cash flows.
OurThe Group’s tax strategy reflects ourits business strategy and the locations and financing needs of ourits operations. In common with many companies, we seekthe Group seeks to manage ourits tax affairs to protect value for ourits shareholders, in line with ourits broader fiduciary duties. We areThe Group is committed to complying with all statutory obligations, to undertake full disclosure to tax authorities and to follow agreed policies and procedures with regard to tax planning and strategy.
If we failthe Group fails to attract, retain and develop appropriately skilled employees, ourit may limit its ability to achieve its strategic and operational goals and its business may be harmed.
OurThe Group’s success depends on the skill, experience and dedicationengagement of ourits employees. If we areit is unable to attract, retain and develop sufficiently experienced and capable personnel,staff, especially in technology, product development, sales and management, ourleadership, its business and financial results may suffer. When talented employees leave, wethe Group may have difficulty replacing them,those skills, and ourits business may suffer. There can be no assurance that wethe Group will be able to successfully retain and attract the personnelskills that we need.it needs.
Failure to adequately protect learners could result in significant harm to one or more.
Incidents may occur that could cause harm to learners. For example, where we havethe Group has direct learner contact via online learning, or in ourits direct delivery businesses where we areit is operating, either ourselvesitself or in partnership with schools, colleges, universities, testing and assessment centers. These incidents can cause harm to learners, which is something we takethe Group takes extremely seriously, and could also have anegative financial, legal and reputational impact to the business.
Failure to adequately protect the health, safety and securitywell-being of peoplethe Group’s employees, learners and assetsother stakeholders could increase our costs and adversely impact our reputation.the Group’s reputation, profitability and future growth.
We have implemented policiesAlthough the Group has invested in global Health and Safety to safeguard the health, safety well-being and protectionwellbeing of ourits employees learners and stakeholders. However, there may beother stakeholders, accidents or incidents thatcould still occur due to unforeseen risks, for example due to changing local and global threats, causing injury or harm to individuals and impacting ourthe Group’s business operations. This has the potential to lead to criminal and civil litigation, business disruption leading to operational loss, reduction in profitability and impact on the Group’s global reputation.
Social, environmentalFailure to ensure security for the Group’s staff, learners, assets and ethicalreputation, due to increasing numbers of and variety of local and global threats.
Pearson is a global business with locations in diverse, sometimes high-risk, locations worldwide. Although it has protective measures in place to secure its staff, learners and assets, the Group could still be impacted by external threats, such as flu pandemic, terrorist attacks, strikes, weather etc. The Group has seen an increase in these incidents in 2017 compared to 2016. Such occurrences could cause harm to individuals and/or disrupt business operations and have the potential to lead to operational loss, reduction in profitability and impact on the Group’s global reputation.
Environmental, social and governance risks may also adversely impact ourthe Group’s business.
We considerThe Group considers environmental, social environmental and ethical (SEE)governance risks (ESG) risks no differently to the way we manageit manages any other business risk. These include ethical business behavior, compliance with UN Global Compact standards, environmental impact, people and data privacy.editorial standards.
OurThe Group’s business depends on a strong brand, and any failure to maintain, protect and enhance ourits brand would hurt ourits ability to retain or expand ourits business.
At the start of 2016, we launched a new Pearson brand. Protecting the Pearson brand is critical to expanding ourthe Group’s business and will depend largely on ourits ability to maintain ourits customers’ trust in ourits solutions and in the quality and integrity of ourits products and services. If we dothe Group does not successfully maintain a strong brand, ourits business could be harmed. Beyond protection, strengthening the Pearson brand will enable usthe Group to more effectively engage governments, administrators, teachers, learners and influencers.
ITEM 4. | INFORMATION ON THE COMPANY |
Pearson plc, (Pearson)(Pearson or the Group) is an international education company with its principal operations in the education and consumer publishing markets. We createThe Group delivers content, assessment and manageservices, powered by technology, in order to drive personalized learning at scale. The Group creates and manages intellectual property, which we promoteit promotes and sellsells to ourits customers under well-known brand names. We deliver ourThe Group delivers its content in a variety of forms and through a variety of channels, including books and online services. We offerThe Group offers services as well as content, from test creation, administration and processing to teacher development and school software. Though we operateit operates in more than 70 countries around the world, today ourits largest markets are the US (63%North America (65% of sales) and Europe (15%(14% of sales) on a continuing basis..
Pearson was incorporated and registered in 1897 under the laws of England and Wales as a limited company andre-registered under the UK Companies Act as a public limited company in 1981. We conduct ourThe Group conducts its operations primarily through ourits subsidiaries and other affiliates. OurIts principal executive offices are located at 80 Strand, London WC2R 0RL, United Kingdom (telephone: +44 20 7010 2000).
PearsonThe Group consists of its worldwide education business plus a 47%25% interest in Penguin Random House.
Pearson education
The Group is a leading provider of educational materials and learning technologies. It provides test development, processing and scoring services to governments, educational institutions, corporations and professional bodies around the world. It publishes across the curriculum and provides a range of education services including teacher development, educational software and system-wide solutions, and also owns and operates schools.
From January 1, January 2014 the Group has been run as one global education company, organized around three geographical operating segments (North America, Core and Growth),. Within each segment, the Group provides content, assessment and three lines of business correspondingdigital services to the key stages of learning, (schools, higherschools, colleges and universities, as well as professional and vocational education and professional, which included the FTto learners.
The Group until the date of disposal in 2015). The lines of business are responsible for the global strategy, investment priorities, product strategy and product portfolio for respective learner age and stage. The geographies are responsible for customer relationships, sales and marketing, and delivery of education products in their markets. Supporting this structure are the global functions which partner with the geographies and lines of business and operate as integrated global functions to achieve scale economies.
Pearson owns a 47%25% interest in Penguin Random House, which was formed on July 1, 2013, upon the completion of an agreement between Pearson and Bertelsmann to merge their respective publishing companies, Penguin and Random House. Pearson originally owned a 47% stake in Penguin Random House, but sold 22% on October 5, 2017. The Group accounts for its remaining interest in Penguin Random House on thean equity basis.
During January 2018, the Group executed market tenders to repurchase €250m of its €500m Euro 1.875% notes due May 2021 and €200m of its €500m Euro 1.375% notes due May 2025.
On February 16, 2018 the Group completed its £300m share buyback programme. In January 2016, Pearson announced that it was embarking onaggregate between October 18, 2017 and February 16, 2018, the Group repurchased 42,835,577 shares, including 21,839,676 repurchased since December 31, 2017 at a restructuring program to simplify the business, reduce costs and position the company for growth in its major markets. The majoritycost of the program is
expected to be complete by mid-year 2016 and will involve implementation costs in 2016 of approximately £320m, and is expected to generate ongoing annualized benefits of £350m.£151m.
Pearson’s goalThe Group’s mission is to help people make measurable progress in their lives through all kinds of learning. Overlearning by being the past decade, through a major program of organic investment and acquisitions, Pearsontrusted gateway to lifelong education. To deliver on this, the Group has become one of the leading education companies in the world, with unique geographic reach, product breadth and professional depth.
Pearson’s strategy centers on a significant long-term opportunity: the sustained and growing global demand for greater access, achievement and affordability in education. We can meet this demand by accelerating our shift to digital, to services and to fast-growing economies, and by committing to deliver measurably improved learning outcomes, through our efficacy framework.
In 2016 thethree key strategic growth drivers set out below will guide our work:objectives:
Digital & services: Build on our global strength in educationalGrow market share through the digital transformation of the Group’s courseware and assessment with leading digital products and services, where we see the greatest potential for growth, scalability and impact on learner progress. We combine our insights into market need with our global education expertise. This perspective informs the planning and development of all our teaching and learning products and services, driven by technology, and shapes those where we place the greatest investment.businesses;
Market presence: Our strategyInvest to build on our leading presencethe Group’s businesses in developedstructurally growing markets more quickly; and the opportunity to meet growing global demand for education. Our leading position in educational courseware and assessment enables us to build our capabilities in fast-growing related services. We use our experience and expertise across the business to develop scalable, successful products and services, always meeting learner needs.
Measurable outcomes: Our efficacy programSimplify the company to be more efficient and deliver a much better experience for customers.
The Group will strive to leverage its core strengths in content and assessment, powered by services and technology, to deliver more effective teaching and personalised learning at scale. More detail on the three areas of focus is our long term commitmentset out below.
Grow market share through digital transformation
The Group’s digital transformation will help to satisfy changing learner consumption preferences and transition the assessment businesses to delivering measurable impact.fewer, smarter tests.
The single biggest opportunity to gain share through digital transformation is in US higher education courseware, which makes up 25% of revenues and 28% of product contribution. Profits have declined in this business over the last few years due to the business challenges, which will continue for the next couple of years. However the Group is making progress in shifting the business from an ownership to pay for use model, which is more viable and sustainable. The Group is achieving this by making the business significantly more digital, prioritising access to content over ownership and selling more product direct to consumers and institutions. The Group lowered the price of thousands of eBook rentals and launched a new print rental program. The Group is also focusing on an inclusive access model that provides both convenience and better value to students and is adirect-to-institution model which allows students to have materials for their course on day one.
The Group is building a Global Learning Platform, which is a single, cloud-based platform that is highly scalable and more reliable than current platforms. It informs allalso facilitates faster innovation and supports a lifelong learning ecosystem for learners.
The Group knows that getting products to market more quickly and improving the agility of its businesses is vital. To that end, the Group is investing heavily in its businesses each year (over £700m each year) to drive innovation.
Invest in structural growth markets
This second strategic decision making acrosspriority means the Group is investing and growing market share in its fastest growing businesses, such as:
Professional Certifications and Licensure (Pearson VUE), which helps more than 450 credentialed owners around the world to develop, manage, deliver and grow their assessment programs.
Virtual Schools (Connections Academy), which provide online education for around 78,000 K-12 students in the US.
English Language Learning curriculum, instruction and assessment. This includes the Pearson including our productTest of English, which offers a convenient way for people to demonstrate their English language proficiency as a gateway for other opportunities.
Online Program Management, which helps colleges and services strategy. We will begin reporting formally on this impact from 2018. We measureuniversities take their programs online and assess the impact of our products and services on learner outcomes. This feeds into our global insights capabilities, enabling us to buildimproves access for learners who cannot attend a deep understanding of learners’ and customers’ needs, and develop world-class products and services.brick-and-mortar school.
Our short term priorities are to deliver transformation, simplify our business, strengthen cash generation and return to growth. Our constant goals are: to generate sustainable returns by delivering long-term growth, extending our global presence and reach, and building on our leading education position; and to deliver measurable impact.
We intend to make PearsonBecome a simpler better integrated,and more cost-efficient company. Our goal isefficient company
This third strategic priority involves phasing out dated systems and technologies, eliminating duplication and streamlining operations. The Group has removed more than £650m in costs since 2013, and has announced plans to create single global product organization, combining our three previously separate lineseliminate a further £300m of business. We are integrating our school, clinical and professional assessment operations in North America. We are reducing our exposure to large, direct delivery operations to focus on online, virtual, and blended services in a much more scalable, and profitable way. Each of these changes will help us invest in fewer, bigger opportunities, and ensure that our world-class capabilities can be scaled to customers around the globe.
We are also making productivity improvements across all our enabling functions like Technology, HR and Finance — as our product offering and customer and employee support becomes more digital. We plan to rationalize our property portfolio and consolidate major supplier agreements to drive greater cost efficiency.
As a result of these changes, we expect to reduce Pearson’s global workforce by around 4,000 roles, approximately 10% of our headcount. These are decisions that we never take lightly and we are committed to
supporting our colleagues during the transition. We intend to complete these actionscosts by the end of 2016,2019 by further simplifying technology, increasing the use of shared service centres and standardising processes. This will further reduce our annual running coststhe Group’s headcount by around £350m. Importantly, they will also create a more focused, integrated business, better able3000, improve the Group’s operational efficiency and respond to create and sell products across our markets to improve learning outcomes. This restructuring will give us the improved operational and financial flexibility to invest in growth areas and underpin shareholder returns.
Our plan focuses on operational execution, tight cost management and a sharper strategy to return to growth. We expect to be faster, leaner and more agile as a resultneeds of the changes we are making.changing educational landscape.
While the Group is optimistic about the future and expects to make further progress in 2018, management continue to see challenging headwinds in US higher education courseware for the next few years. These challenges will be offset by growth in the Group’s other businesses, the creation of further cost efficiencies and the strength of the Group’s cash flow generation and balance sheet. Over time, these strategic actions, which increase the Group’s scale, investment and expertise, will help people make progress in their lives through learning.
Pearson is one of the leading providers of educational courseware, assessment and digital teaching and learning technologies. We provideservices. The Group provides test development, processing and scoring services to governments, educational institutions, corporations and professional bodies around the world. We publishThe Group publishes across the curriculum and provideprovides a range of education services including teacher development, educational software and system-wide solutions.
We report Pearson’sThe Group reports its performance in three segments: North America, Growth, and Core.
North America Segment
OurThe North American business serves educators and students in the US and Canada from early education through elementary, middle and high schools and into higher education with a wide range of products and
services: courseware including curriculum textbooks and other learning materials; assessments including test development and scoring; and services including the provision of online learning services. PearsonThe Group has a leading position in each of these areas and a distinctive strategy of connecting those parts to support institutions and personalize learning. OurThe largest market is North America, and across the US we are workingthe business works with states, schools and colleges to help make education more effective, accessible and affordable for a diverse community of learners.
OurThe North America school business offers early learning solutions that help educators and families teach fundamental math and literacy skills; elementary and secondary imprints publish leading school programs in reading, literature, math, science, and social studies; and digital instructional solutions for preK-12, such as enVisionMATH and Miller-Levine Biology. Nearly 50% of US schools use one of our tools to aid professional development and help teachers and administrators improve their effectiveness. Through ourThe Connections Education business we provideprovides school management services and operateoperates virtual and blended schools.schools, serving around 78,000 students. On February 23, 2018 the Group announced that it was in discussions with potential buyers regarding a disposal of the USK-12 courseware business.
Testing plays an integral role in determining educator and student success and we arethe business is the largest provider of educational assessment services in the US. We markIt marks large-scale school examinations for the US federal government and more than 25 American states, scoring billions of machine-scorable test questions and evaluating more than 111 million essays, portfolios and open-ended test questions every year. Working with educators and education advocates, ourthe business experts are helpinghelp to lead the development of Next-Generation Assessments that feature technology-enhanced items, performance-based assessments, and adaptive learning to foster problem-solvers and critical thinkers ready to compete in the global economy.
OurThe business’s solutions include learning assessments to help gauge how students learn, talent assessments to help growing companies develop their workforce, and clinical assessments to help psychologists and speech/language/hearing/occupational and physical therapists diagnose and monitor patients.
Our North America Higher Education business offers learning services for students, colleges and universities in the US. We provide learning tools and technologies, and about three million US college students are currently pursuing their studies online using Pearson Higher Education’s products. Our custom content and
curriculum solutions offer educators the opportunity to tailor their programs based on the needs of students. We also offer workforce education products and flexible workforce development solutions to fill the growing skills gap and increased demand for qualityThe professional certification prep training. College and career readiness is a K-20 issue, and it requires effective strategies employed in both K-12 and higher education. Our solutions are designed to help institutions retain students and prepare them for success in college and beyond.
Nearly 11 million North American college students registered with our higher education digital courseware to pursue their studies. The growing trend provides a wealth of data and analytics to improve the performance of individual students. Our advance capabilities in data, analytics and adaptive learning, and our leading efficacy research, enable us to design a smart learning path for every student.
The demand for online learning is steadily rising and we see this area as one of the fastest growing parts of the market where we can see demand increasing significantly over the next few years, where we’ve already got a good presence and where we think we could deploy our courseware, assessment, and technology capabilities at scale. Pearson On Line Services runs fully online undergraduate and graduate learning programs, such as the programs at Arizona State University Online. Likewise, at school level, Connections Education, our virtual school business serves tens of thousands of students through both virtual and blended school programs. This is one of our fastest growing businesses with demand continuing to increase year on year.
See “Item 5. Operating and Financial Review and Prospects — Results of Operations — Year ended December 31, 2015 compared to year ended December 31, 2014 — Sales and operating profit by division — Core” for a discussion of developments during 2015 with respect to this segment.
Growth Markets
Our aim is to take educational products and services and apply them at scale in countries such as Brazil, South Africa, China, India and other fast-growing economies. Around one third of our employees now work in these countries. We reach around two million students directly through our English language schools in China, Brazil and elsewhere, our partner schools in Brazil and India, and our higher education institutions in South Africa, as well as millions more with our textbooks and educational software.
In Brazil we are leading primary and secondary education with our ‘sistemas’ or learning systems which include COC, Dom Bosco, Pueri Domus and NAME. In South Africa we run thirteen of our CTI and MGI campuses throughout the country. We have over 11,000 students enrolled in courses ranging from undergraduate degrees in IT and sociology, to business diplomas and Masters courses in psychology. Our campuses prioritize digital learning with over 10,000 of our students accessing their courses through tablet devises, and focus on learning outcomes that prepare students for employment opportunities in their chosen careers.
See “Item 5. Operating and Financial Review and Prospects — Results of Operations — Year ended December 31, 2015 compared to year ended December 31, 2014 — Sales and operating profit by division — Core” for a discussion of developments during 2015 with respect to this segment.
Core Markets
Our biggest Core markets are the UK, Australia, Germany, France, the Benelux countries and Italy. These are countries where we work closely with educators and policy makers to improve learning through creating curriculum, designing assessments and developing digital learning systems. Additionally we have around 100 other markets, where we do not have scale ourselves, so we collaborate with others who share our values and commitment to efficacy to maximize reach and impact.
In the UK school market, we are the largest awarding organization offering academic and vocational qualifications that are globally recognized and benchmarked, with educational excellence rooted in names like
Edexcel, BTEC and LCCI. Learners take our qualifications in more than 80 countries worldwide. We use our online marking technology to mark over 97% of examination papers and our ResultsPlus service provides detailed analysis of every learner’s examination results. We are also driving innovation through digital products such as Bug Club and ActiveLearn, and supporting skills for employability for progression in study, work and life.
Through Pearson College we are the only FTSE 100 company delivering degrees in the UK. Our students get the chance to learn from leading employers as well as experienced academics and subject experts, in the heart of a 21st Century business.
See “Item 5. Operating and Financial Review and Prospects — Results of Operations — Year ended December 31, 2015 compared to year ended December 31, 2014 — Sales and operating profit by division — Core” for a discussion of developments during 2015 with respect to this segment.
The details below describe our professional line of business, which is geographically spread over the three above segments. During 2015 Pearson sold its interests in The Financial Times and The Economist Group. The results of The Financial Times and The Economist Group are included in discontinued operations up to the sale completion dates being November 30, 2015 and October 16, 2015 respectively.
Our professional testing business, Pearson VUE (VUE), is a global leader in electronic testing for regulatory and certification boards, providing a full suite of services from test development to test delivery and data management. Pearson VUE offers exams through an extensive network of over 7,20020,000 test centers across 194 countries,the globe, delivering the NCLEX exam for the National Council of State Boards of Nursing, the GMAT for the Graduate Management Admissions Council and numerous IT exams such as Cisco and CompTIA. In the UK Pearson VUE works with professional and government bodies including the Chartered Institute of Management Accountants (CIMA) and the Construction Industry Training Board (CITB).
Pearson VUE also includes Certiport, the world-leader in IT performance-based exams delivered through a global network of academic test centers, and GED Testing Service, a joint venture with the American Council on Education to deliver a leading high school equivalency exam.
Pearson’sThe North America Higher Education business offers learning services for students, colleges and universities in the US. It provides learning tools and technologies. Custom content and curriculum solutions offer educators the opportunity to tailor their programs based on the needs of students. The business also offers workforce education products and flexible workforce development solutions to fill the growing skills gap and increased demand for quality certification prep training.
Global digital user registrations of Mylab and related products are more than 13 million. The use of these digital homeworking platforms and integrated digital courseware provides a wealth of data and analytics to improve the performance of individual students. The business’s advanced capabilities in data, analytics and adaptive learning, and its leading efficacy research, enable it to design a smart learning path for every student.
The demand for online learning is steadily rising and management see this area as one of the fastest growing parts of the market with demand expected to increase significantly over the next few years both in school and higher education.
In higher education, Pearson Online Services provides Online Program Management (OPM) services to institutions including Arizona State University, Rutgers University and Maryville University, partnering with them to provide fully online undergraduate and graduate degree courses.
See “Item 5. Operating and Financial Review and Prospects — Results of Operations — Year ended December 31, 2017 compared to year ended December 31, 2016 — Sales and operating profit by division — North America” for a discussion of developments during 2017 with respect to this segment.
Core Segment
The biggest Core markets are the UK, Australia, Italy, Germany, France and the Benelux countries. These are countries where the business works closely with educators and policy makers to improve learning through creating curriculum, designing assessments and developing digital learning systems. Additionally the business participates in many other markets, where it does not have scale itself, but collaborates with others who share its values and commitment to efficacy to maximize reach and impact.
In the UK school market, the business is the largest awarding organization offering academic and vocational qualifications that are globally recognized and benchmarked, with educational excellence rooted in names like Edexcel, BTEC and LCCI. Learners take the business’s qualifications in many countries worldwide. Online marking technology marks over 94% of examination papers and the ResultsPlus service provides detailed analysis of every learner’s examination results. Innovation is also being driven through digital products such as Bug Club and ActiveLearn, and through supporting skills for employability for progression in study, work and life.
The Higher Education business has seen good growth in OPM in both Australia and the UK, launching degree programs with Monash and Griffith Universities in Australia and Kings College London, University of Leeds and Manchester Metropolitan University in the UK.
In English, assets make the companyPearson Test of English is being used to support visa applications to the world’s largest Australian Department of Immigration and Border Protection resulting in significant growth in volumes.
In the UK, the professional certification business, Pearson VUE, works with professional and government bodies including the Driving and Vehicle Standards Agency (DVSA), Chartered Institute of Management Accountants (CIMA) and the Construction Industry Training Board (CITB).
See “Item 5. Operating and Financial Review and Prospects — Results of Operations — Year ended December 31, 2017 compared to year ended December 31, 2016 — Sales and operating profit by division — Core” for a discussion of developments during 2017 with respect to this segment.
Growth Segment
The business aims to take educational products and services and apply them at scale in countries such as Brazil, South Africa, China, India and other fast-growing economies.
English language teaching and learning business. More than 1.5 million teachers and 35 million students use ouris one of the biggest opportunities in global education. The Group has refocused its activities in English language learning resources and tools each year. Thein 2017, with agreements to dispose of its Chinese direct delivery businesses, in Pearson’s English division include: Wall Street English (center-based learning for consumers);and GEDU. The opportunity in English is now addressed in three main ways:
Pearson ELT courseware (institutional English language publicationscourses including brands such asFOCUS, Poptropica English and Longman); is number two in the market. MyEnglish Lab and other English courseware registrations were over 860,000;
Pearson Test of English Business Solutions (online business(PTE), a computer-based test of English learning solutions)for study abroad and Grupo Multi (the leadingimmigration; and the Brazilian adult English language training company in Brazil).school franchises including Wizard.
In 2014, Pearson English released the Global Scale of English, the world’s first common, global benchmark of English language learning. It measures English language progress on a numeric scale in a way that is consistent, granular and actionable for governments, corporates, academics, institutions and learners. The Scale has been created as the Open Standard for English that meets a global need.
The Financial Times (FT)Brazilian business serves primary and secondary education with its ‘sistemas’ or learning systems which include COC, Dom Bosco and NAME.
In South Africa, the business is onethe largest player in the school textbook market and runs a private university with 8,500 students enrolled in courses ranging from undergraduate degrees in IT and sociology, to business diplomas and Masters courses in psychology.
In February 2017, the Group announced the intention to explore potential partnerships for, or sale of, its English language learning business (WSE) and possible sale of its English test preparation business (GEDU). The Group completed the world’s leading news organizations, recognized globally for its authority, integritysale of GEDU to Puxin Education on August 16, 2017 and accuracy. The FT provides a broad rangethe sale of essential services, including news, comment, data and analysis,WSE to a growing audienceconsortium consisting of internationally minded professionals. The FT is comprisedfunds affiliated with Baring Private Equity Asia and CITIC Capital on March 15, 2018.
See “Item 5. Operating and Financial Review and Prospects — Results of the FT newspaperOperations — Year ended December 31, 2017 compared to year ended December 31, 2016 — Sales and FT.com, Financial Publishing, FT Chinese, FT Labs, and Medley Global Advisors. The FT Group includedoperating profit by division — Growth” for a 50% interest in The Economist Group, a publisherdiscussion of one of the world’s leading weekly business and current affairs magazines,developments during 2017 with respect to this interest was substantially disposed of in October 2015. Pearson sold The Financial Times in November 2015.segment.
Penguin Random House
For the first six months of 2013, Pearson wholly owned Penguin, one of the most famous brands in book publishing. On July 1, 2013 Penguin Random House was formed, upon the completion of an agreement between Pearson and Bertelsmann to merge their respective publishing companies, Penguin and Random House, with the parent companies owning 47% and 53% respectively. With the integration of Penguin Random House complete, and with greater industry-wide stability on digital terms, the Group announced on February 24, 2017 that it had issued an exit notice regarding its 47% share in Penguin Random House to its JV partner Bertelsmann, with a view to selling its stake or recapitalizing the business and extracting a dividend. The Group completed the sale of 22% of Penguin Random House to Bertelsmann on October 5, 2017 and also received recapitalization dividends. The Group used the proceeds from this transaction to maintain a strong balance sheet; invest in its business; and return excess capital to shareholders, whilst retaining an investment grade credit rating.
Penguin Random House comprises the adult and children’s fiction and nonfiction print and digital book publishing businesses of Penguin and Random House in the US, UK, Canada, Australia, New Zealand and India, Penguin’s publishing activity in Asia and South Africa, as well as Dorling Kindersley worldwide, and Random House’s companies in Spain, Mexico, Argentina, Uruguay, Columbia and Chile.
Penguin Random House employs more than 10,000 people globally across almost 250 editorially and creatively independent imprints and publishing houses that collectively publish more than 15,000 new titles annually. Its publishing list includeincludes more than 70 Nobel Prize laureates and hundreds of the world’s most widely read authors.
Penguin Random House sells directly to bookshops and through wholesalers. Retail bookshops normally maintain relationships with both publishers and wholesalers and use the channel that best serves the specific requirements of an order. It also sells through online retailers such as Amazon.com, as well as its own websites and direct to the customer via digital sales agents.
In 2015, our2017, the Group’s share of Penguin Random House profit after tax as of December 31, 2015 was £64m.£71m.
See “Item 5. Operating and Financial Review and Prospects — Results of Operations — Year ended December 31, 20142017 compared to year ended December 31, 20132016 — Sales and operating profit by division — Consumer Publishing”Penguin Random House” for a discussion of developments during 20142017 with respect to Penguin Random House.
PearsonThe Group determines a normal operating cycle separately for each entity/cash generating unit within the Group with distinct economic characteristics. The “normal operating cycle” for each of the Group’s education businesses is primarily based on the expected period over which the educational programs and titles will generate cash flows, and also takes account of the time it takes to produce the educational programs. The operating cycles for the courseware markets are typically longer than one year as described below.
Particularly for the North American businesses, there are well established cycles operating in the courseware market:
The School courseware market is primarily driven by an adoption cycle in which major state education boards ‘adopt’ programs and provide funding to schools for the purchase of these programs. There is an established and published adoption cycle with new adoptions taking place on average every 5 years for a particular subject. Once adopted, a program will typically sell over the course of the subsequent 5 years. The Company renews itspre-publication assets to meet the market adoption cycles. Therefore the operating cycle naturally follows the market cycle.
The Higher Education courseware market has a similar pattern, with colleges and professors typically refreshing their courses and selecting revised programs on a regular basis, often in line with the release of new editions or new technology offerings. The Company renews itspre-publication assets to meet the typical demand for new editions of, or revisions to, educational programs. Analysis of historical data shows that the averagetypical life cycle of Higher Education content is up to 5 years. Again the operating cycle mirrors the market cycle.
A development phase of typically 12 to 18 months for Higher Education and up to 24 months for School precedes the period during which the Company receives and delivers against orders for the products it has developed for the program.
The Core and Growth courseware markets operate in a similar way although often with less formal ‘adoption’ processes.
The operating cycles in respect of ourthe Group’s professional line of businesscontent are more specialized in nature as they relate to educational or heavy reference products released into smaller markets (e.g. the financial training IT and travelIT sectors). Nevertheless, in these markets, there is still a regular cycle of product renewal, in line with demand which management monitor. Typically the life cycle is 5 years for Professional content. Elsewhere in the Group, operating cycles are typically less than one year.
Pearson’sThe Group’s businesses operate in highly competitive environments.
PearsonThe Group competes with other publishers and creators of educational materials and services. These companies include publishers such as Cengage Learning, McGraw-Hill Education and Houghton Mifflin Harcourt, andHarcourt.
In services, the Group competes with companies such asK-12 Inc in virtual schools and ETS,2U Inc. in online program management, alongside smaller niche players that specialize in a particular academic discipline or focus on a learning technology.
In US assessment, the Group competes with other companies offering test development and administration including Educational Testing Service (ETS), American Institute for Research (AIR), Measured Progress Inc, and others. The Professional Certification business competes with Prometric globally and a number of other smaller players in local markets.
In Core student assessment, the UK qualifications business competes with AQA and OCR in general qualifications and a number of smaller players in vocational qualifications.
In English language teaching (ELT) courseware, the Group competes with Oxford University Press, Macmillan and other publishers. In English language testing Pearson Test of English (PTE) competes with alternative tests including iELTS and TOEFL.
Competition is based on the ability to deliver quality products and services that address the specified curriculum needs and appeal to the student, organizations, school boards, educators and government officials making purchasing decisions.
OurThe Group’s principal intellectual property assets consist of our 1) its:
trademarks and other rights in ourvia its brands (including corporate and business unit brands, imprints, as well as product and service brands), 2) ;
copyrights for ourits textbook and related educational content and software code,code; and 3)
patents and trade secrets related to the innovative methods deployed in ourits key technologies. We believe we have
The Group believes it has taken all reasonable legal steps to protect ourits key brands in our topits major markets and copyright in ourits content and havehas taken appropriate steps to develop a comprehensive patent program to ensure appropriate protection of emerging inventions that are critical to ourits new business strategies.
Paper isremains the principal raw material used by Pearson. We purchasethe Group. The Group purchases most of ourits paper through ourits Global Sourcing department located in the United States. We haveThe Group has not experienced and dodoes not anticipate difficulty in obtaining adequate supplies of paper for ourits operations, with sourcing available from numerous suppliers. While local prices fluctuate depending upon local market conditions, we havethe Group has not experienced extensive volatility in fulfilling paper requirements. In the event of a sharp increase in paper prices, we havethe Group has a number of alternatives to minimize the impact on ourits operating margins, including modifying the grades of paper used in production.
The manufacture of certain of our products in various markets is subject to governmental regulation relating to the discharge of materials into the environment. Our operationsOperations are also subject to the risks and uncertainties attendant to doing business in numerous countries. Some of the countries in which we conductthe Group conducts these operations maintain controls on the repatriation of earnings and capital and restrict the means available to us for hedging potential currency fluctuation risks. The operations that are affected by these controls, however, are not material to us.material. Accordingly, these controls have not significantly affected ourthe Group’s international operations. Regulatory authorities may have enforcement powers that could have an impact on us. We believe,impact. The Group believes, however, that in light of the nature of ourits business the risk of these sanctions does not represent a material threat to us.threat.
Licenses, patents and contracts
We areThe Group is not dependent upon any particular licenses, patents or new manufacturing processes that are material to ourits business or profitability. Likewise, we areit is not materially dependent upon any contracts with suppliers or
customers, including contracts of an industrial, commercial or financial nature. Notwithstanding the foregoing, ourthe Education business is dependent upon licensed rights since most textbooks and digital learning tools include
content and/or software that is licensed to usit by third parties (or assigned subject to royalty arrangements). In addition, some of our software products in various business lines, particularly those of ourits Clinical business, rely upon patents licensed from third parties.
WeThe Group and ourits subsidiaries are from time to time the subject of legal proceedings incidental to the nature of ourits and their operations. These may include private litigation or arbitrations, governmental proceedings and investigations by regulatory bodies. We doThe Group does not currently expect that the outcome of pending proceedings or investigations, either individually or in aggregate, will have a significant effect on ourits financial position or profitability nor have any such proceedings had such effect in the recent past. To our knowledge, there are noThe Group is not aware of material proceedings in which any member of senior management or any of ourits affiliates is a party adverse to usit or any of ourits subsidiaries or in respect of which any of those persons has a material interest adverse to usit or any of ourits subsidiaries.
Pearson plc is a holding company which conducts its business primarily through subsidiaries and other affiliates throughout the world. Below is a list of ourits significant subsidiaries and associates as at December 31, 2015,2017, including name, country of incorporation or residence, proportion of ownership interest and, if different, proportion of voting power held.
Name | Country of incorporation/residence | Percentage interest/voting power | ||||
Pearson Education Inc. | United States (Delaware) | 100 | % | |||
Pearson Education Ltd. | England and Wales | 100 | % | |||
NCS Pearson Inc. | United States (Minnesota) | 100 | % | |||
Penguin Random House LLC. | United States (Delaware) | % | ||||
Penguin Random House Ltd. | England and Wales | % |
During 2013, the Group disposed of its interest in the Penguin group of companies in exchange for a 47% interest in Penguin Random House. During 2017, the Group disposed of 22% of Penguin Random House, retaining a 25% interest.
During 2014, the Group disposed of its interest in the Mergermarket group of companies and its North America business disposed of its joint venture interests in Safari Books Online and CourseSmart.
In February 2014, the Group acquired Grupo Multi, Brazil’s leading adult English language training company. There were no significant acquisitions in 2015 or 2013.
During 2015, the Group disposed of its interest in the FT Group including its 50% share of The Economist. The Financial Times sale was completed on 30in November 2015 and the sale of ourthe 50% share of The Economist Group was substantially completed on 16in October 2015.2015, with the remaining share sold in 2016. Also, in July 2015, the Group disposed of its interest in PowerSchool.
During 2014In May 2017, the Group disposedannounced that it was undertaking a strategic review of its interestUSK-12 courseware business. In February 2018, the Group announced that it is in discussions with potential buyers regarding a disposal of the Mergermarket group of companies and our North America business disposedUSK-12 courseware business.
In August 2017, the Group completed the sale of its joint venture intereststest preparation in Safari Books Online and CourseSmart.China (GEDU) to Puxin Education.
During 2013
In November 2017, the Group disposedannounced that it had agreed the sale of its interestWall Street English to a consortium consisting of funds affiliated with Baring Private Equity Asia and CITIC Capital. The disposal completed on March 15, 2018.
There were no material acquisitions in the Penguin group of companies in exchange for a 47% interest in Penguin Random House.2015, 2016 or 2017.
OurThe Group’s headquarters are located at leasehold premises in London, England. We ownAs at December 31, 2017 it owned or leaseleased approximately 1,000825 properties, including approximately 650 testing/teaching centers in over 6055 countries worldwide, the majority of which are located in the United Kingdom, the United States and China. Approximately 80 properties, primarily testing/teaching centers in China, were disposed in March 2018 as part of the WSE disposal.
The properties owned and leased by usthe Group consist mainly of offices, distribution centers and computer testing/teaching centers.
In some cases properties leased by the Group are then sublet to third parties. These properties are not included in the list below as they are not considered to be principal properties.
The vast majority of our printing is carried out by third party suppliers. We operateThe Group operates a small digital print operation as part of ourits Pearson Assessment & Testing businesses which providesshort-run andprint-on-demand products, typically custom client applications.
We ownThe Group owns the following principal properties at December 31, 2015:2017:
General use of property | Location | Area in square feet | ||||
Office | Iowa City, Iowa, USA | 312,760 | ||||
Warehouse/Office | Old Tappan, New Jersey, USA | 212,041 | ||||
Warehouse/Office | Cedar Rapids, Iowa, USA | 205,000 | ||||
Office | Southwark, London, UK | |||||
Office | Hadley, Massachusetts, USA | 137,070 | ||||
Printing | Owatonna, Minnesota, USA | 128,000 | ||||
|
WeThe Group leased the following principal properties at December 31, 2015:2017:
General use of property | Location | Area in square feet | ||||
| Midrand, South Africa | |||||
| ||||||
| ||||||
Office | New York City, New York, USA | 313,285 | ||||
Office | Westminster, London, UK | 282,923 | ||||
Office | Boston, Massachusetts, USA | 225,299 | ||||
Office | Hoboken, New Jersey, USA | 216,273 | ||||
Office | ||||||
| ||||||
| ||||||
| ||||||
| ||||||
| ||||||
| ||||||
| Glenview, Illinois, USA | 187,500 | ||||
Office | Bloomington, Minnesota, USA | |||||
Warehouse/Office | ||||||
| Uttar Pradesh, India | 145,041 | ||||
Office | ||||||
| Chandler, Arizona, USA | 135,460 | ||||
| Pretoria, South Africa | |||||
Warehouse/Office | Cedar Rapids, Iowa, USA | 119,682 | ||||
Office | Centennial, Colorado, USA | 117,554 | ||||
| San Antonio, Texas, USA | |||||
Warehouse | Naucalpan de Juarez, Mexico | 113,638 | ||||
Call Center/Office | Lawrence, Kansas, USA | 105,000 |
See “Item 5. Operating and Financial Review and Prospects — Liquidity and Capital Resources” for description of the Company’s capital expenditure.
ITEM 4A. | UNRESOLVED STAFF COMMENTS |
The Company has not received, 180 days or more before the end of the 20152017 fiscal year, any written comments from the Securities and Exchange Commission staff regarding its periodic reports under the Exchange Act which remain unresolved.
ITEM 5. | OPERATING AND FINANCIAL REVIEW AND PROSPECTS |
The following discussion and analysis is based on and should be read in conjunction with the consolidated financial statements, including the related notes, appearing elsewhere in this Annual Report. The financial statements have been prepared in accordance with IFRS as issued by the IASB.IASB and in conformity with IFRS as adopted by the EU.
Where this discussion refers to constant currency comparisons, these are estimated byre-calculating the current year results using the exchange rates prevailing for the prior period. The increase or reduction in the value calculated is the estimate of the impact of exchange rates. We believeThe Group believes this presentation provides a more useful period to period comparison as changes due solely to changesmovements in exchange rates are eliminated.
Introduction
Pearson’sThe Group’s primary segments for management and reporting are geographical as follows: North America, comprising the School, Higher Educationcourseware, assessment and Professionalservices businesses in the US and Canada; Core, comprising the courseware, assessment and services businesses in more mature markets outside North America, including the UK, Australia and Italy; and Growth, comprising the School, Higher Educationcourseware, assessment and Professionalservices businesses in emerging markets, which are investment priorities, including Brazil, China, India and South Africa; and Core, comprising the School, Higher Education and Professional businesses in more mature markets, including the UK, Australia and Italy.Africa. In addition Pearsonthe Group separately reports on an equity basis the results from its 25% interest in Penguin Random House (PRH) associate..
On August 16, 2017, the Group completed the sale of its test preparation business in China (GEDU) to Puxin Education, realizing apre-tax profit on sale of £44m. On October 5, 2017, the Group also completed the sale of a 22% share in Penguin Random House to Bertelsmann, realizing apre-tax profit on sale of £96m. Neither of these were significant enough to meet the definition of a discontinued business and their results to the date of disposal are included in continuing operations.
On November 27, 2017, the Group announced that it had agreed the sale of Wall Street English (WSE) to a consortium of funds affiliated with Baring Private Equity Asia and CITIC Capital. The sale of WSE was completed on March 15, 2018. On February 23, 2018, the Group announced that it had completed a strategic review of its USK-12 courseware business and was in discussion with potential buyers regarding a disposal of the business. Both of these businesses have been classified as held for sale on the balance sheet as at December 31, 2017.
On October 16, 2015, Pearsonthe Group substantially completed the sale of its 50% interest in the Economist to EXOR and The Economist Group and on November 30, November 2015 Pearsonthe Group completed the sale of the Financial Times to Nikkei. The results of the Economist and the Financial Times are included in discontinued operations in 2013 and 2014 and to the date of sale in 2015. Also, in July 2015, the Group disposed of its interest in PowerSchool to Vista Equity Partners for consideration of £222m realizing apre-tax gain of £30m net of a £70m write down of related software assets. The PowerSchool business was not significant enough to meet the definition of a discontinued business and its results to the date of disposal are included in continuing operations.
On February 4, 2014, Pearson completed the sale of the Mergermarket Group to BC Partners. The Mergermarket business was classified as held for sale on the balance sheet at December 31, 2013. Mergermarket’s results for 2014 to the date of sale and for 2013 have been included in discontinued operations.
In July 2013, Pearson and Bertelsmann completed a transaction to create a new consumer publishing business by combining Penguin and Random House, and from that point, Pearson no longer controlled the Penguin Group of companies. Pearson accounts for its 47% associate interest in the Penguin Random House on the equity basis. The results for Penguin in the first half of 2013 have been included in discontinued operations. The share of results from the associate interest in Penguin Random House arising in the second half of 2013, and in 2014 has been included in operating profits in continuing operations.
Sales from continuing operations declineddecreased from £4,540m£4,552m in 20142016 to £4,468m£4,513m in 2015,2017, a decrease of £72m£39m or 2%1%. This year on year declinedecrease was reduced by currency movements, primarily the comparative strength of the US dollar relative to sterling during the year. In 20152017 currency movements increased sales by £137m£126m when compared to the equivalent figures at constant 20142016 rates. When measured at 20142016 constant exchange rates, ourthe Group’s sales declined by 5%4%. Part of the decrease is due to the absence of sales from businesses sold during the year and also in light of the evolution of our Connections Education business in North America a greater proportion of that revenue is now recognized on a net basis. We estimateGroup estimates that after excluding the impact of acquisitions and disposals, and after taking account of the evolution of sales at Connections Education, sales declined by 2% at constant exchange rates. Although there was growth in the Pearson VUE, Connections Education and Wall Street English China businesses, this growth was more than offsetThis decrease is primarily explained by declines in the US Higher Education, UK QualificationsNorth America in higher education and South Africa businesses.school courseware, school assessment and in Learning Studio, a learning management system that is being retired.
In 2015, Pearson2017, the Group reported an operating loss (from continuing operations)profit of £404m£451m compared to a correspondingan operating loss of £2,497m in 2016. The increase in profit of £348m in 2014. The decrease of £752m£2,948m mainly reflects an increasea decrease in intangible charges. Following significant economic and market deteriorationAt the end of 2016, following trading in the Group’s operations in emerging markets and ongoing cyclical and policy related pressuresfinal quarter of the year, the Group determined that the underlying issues in the Group’s matureNorth American higher education courseware market operations, management’s expectations of future returns were revised down in the course of 2015 resulting in the impairment of intangible assets in North America of £282m, in Core markets of £37m and in Growth markets of £530m. In 2014 impairments of £77mmore severe than anticipated. These issues related to India.declining student enrolments, changes in buying patterns of students and correction of inventory levels by distributors and bookshops. As a result, the Group revised its strategic plans and estimates for future cash flows and, as a consequence, recognized an impairment to North American goodwill of £2,548m. Operating profit before these impairments increased by £20m£400m from £51m in 20152016 to £451m in 2017 mainly due to reduced restructuring costs and gains on the sale of businesses. After stripping out the effect of lower restructuring costs and gains on the sale of businesses, profits from trading declined by around £58m. This was primarily due to increased amortization charges, higher staff incentives and cost inflation, offset in part by the year on year benefit from restructuring savings.
In January 2016, the Group announced that it was embarking on a major restructuring program to simplify the business, reduce costs and position the company for growth in its major markets. Total restructuring in 2016 amounted to £338m and included costs associated with headcount reductions, property rationalization and closure or exit from certain systems, platforms, products and supplier and customer relationships. A new restructuring program, the 2017-2019 restructuring program announced in May 2017, began in the second half of 2017 and is expected to drive further significant cost savings. The cost incurred on the 2017-2019 program in 2017 was £79m.
Operating profit in 2017 included a gain of £128m from the sale of businesses. The sale of the Group’s test preparation business in China resulted in apre-tax profit on sale of £44m, while the sale of a 22% share in PRH resulted in apre-tax profit on sale of £96m. These were offset in part by net losses on other smaller disposals. The operating loss in 2016 included a £25m loss on the sale of businesses, primarily relating to the closure of the English language schools business in Germany and the sale of the Pearson English Business Solutions business.
Currency movements increased operating profit by £13m when compared to 2014. Cost savings in 2015 offset the impact of reduced sales and reduced service fee income from PRH. Cost savings followed restructuring in 2014 and consequent benefits that flowed through in 2015 and were compounded by a reduction in employee incentives in 2015. Currency movements had only a small impact on operating profit when comparing 2015 profitequivalent figures translated at constant 20142016 exchange rates.
The profit before taxation in 2017 of £421m compares to a loss before taxation of £2,557m in 20152016. The increase in profit of £433m compares to a profit before taxation of £255m in 2014. The decrease of £688m mainly£2,978m reflects the £752m decrease£2,948m increase in the reported operating profit identified above offset byand a reductiondecrease in net finance costs of £64m,£30m, from £93m£60m in 20142016 to £29m£30m in 2015.2017. The Group’s net interest payable decreasedincreased from £64m£59m in 20142016 to £46m£79m in 2015, mainly2017. The movement in net interest payable was due to higher US interest rates in 2017, additional charges relating to the lower levelearly redemption of average net debtvarious bonds in the period following disposals,2017 and additional interest receivable on cash balances held overseas and lower interest on tax following agreement of historical tax positions.provisions. Also included in net finance costs are net finance costs of deferred consideration associated with acquisitions,relating to employee benefit plans, foreign exchange and other gains and losses. In 20152017 the total of these items was a gainprofit of £17m£49m compared to a loss of £29m£1m in 2014. Both2016. Income relating to employee benefit plans was £8m lower in 2017 than in 2016 reflecting the gainlower net surplus on pension balances at the beginning of 2017 compared to the beginning of 2016. Other gains and losses in 20152017 and the loss in 2014 mainly2016 primarily relate to foreign exchange differences onun-hedged cash and cash equivalents, and other financial instruments.
Net cash generated from operations decreased to £518m£462m in 20152017 from £704m£522m in 2014. The decreased cash flow reflected trading conditions across all the businesses including the impact of an increase in US higher education textbook returns and2016. This decrease is due to higher pension deficit payments. Our averagepayments, including £202m of payments made in 2017 relating to the PRH merger in
2013 and £25m relating to the sale of the FT Group in 2015. Pension deficit payments of £90m were made in connection with the FT Group in 2016. The increase in pension payments more than offset the benefits from tight working capital control and a reduction in cash spend relating to sales ratio declined by 3.1 percentage points to 15.4% reflecting disposals of businesses with relatively lower levels of working capital but was also due to higher receivable balances and the absence of incentive accruals. Average working capital comprises the average of the monthly carrying values over the relevant 12 month period for inventory, pre-publication costs, debtors and creditors, including deferred revenue.
restructuring. Net interest paid at £69m in 2017 compares to £51m in 2015 was lower than the £73m paid in 20142016 and reflects the lowerincreased interest charge for the year. Tax paid in 20152017 was £232m£75m compared to £163m£45m in 2014. Tax paid2016 with the increase largely being due to higher profits following lower restructuring charges taken in 2015 included the tax on disposals made during the year of approximately £103m. compared to 2016.
Net capital expenditure on property, plant and equipment after proceeds from sales increasedwas £82m in 2017 compared to £84m in 2015 from £66m in 2014 and net2016. Net capital expenditure on software intangibles rosereduced slightly from £105m£157m in 20142016 to £160m£150m in 2015.2017. The increase inexpenditure on both tangible and intangible capital expenditure is largely attributed toincludes the continuing investment in enabling function technology designed to lower administrative costs. TheThere were no significant acquisitions in either 2017 or 2016 and the net cash outflow in respect of businesses and investments acquired was £463m£14m in 2014, the majority of which related to the acquisition of Grupo Multi, there were no significant acquisitions2017 and £21m in 2015 and expenditure totaled £27m in the year.2016. The net cash inflow in respect of businesses and investments disposed was £1,422m£430m in 20152017 compared to £375m£42m in 2014.2016. In 20152017 the cash received largely related to the Financial Times, The EconomistPRH and PowerSchoolGEDU disposals and in 2014 related primarily2016 includes proceeds from the sale of the remaining stake in the Economist partially offset by costs paid in 2016 relating to the Mergermarket sale.Financial Times sale in 2015. Dividends from joint ventures and associates increased from £120m£131m in 20142016 to £162m£458m in 20152017, primarily due to an increase in the £312m dividend from PRH.received uponre-capitalization of the PRH business as part of the transaction which included the sale of the 22% of the Group’s equity interest. Dividends paid of £423m£318m in 20152017 compares to £398m£424m in 2014 (including £1m paid2016 reflecting the rebasing of the dividend in 2017 to non-controlling interests).reflect portfolio changes, increased investment and to align with profit expectations. Overall the Group’s net borrowings reduceddecreased from £1,639m£1,092m at the end of 20142016 to £654m£432m at the end of 2015.2017. The reduction in net debt was due to the factors noted above, principallydisposal proceeds and PRHre-capitalization dividends, offset in part by higher pension payments and cash returned to shareholders via the receipt of proceeds from disposals, and was slightly offset by an increase in reported net debt due to the strengthening of the US dollar relative to sterling.sharebuy-back program.
Outlook
In 2018, the Group expects to report adjusted operating profit of between £520m and £560m (including businesses held for sale.) Adjusted operating profit, which is the key financial measure used by management to evaluate the performance of the Group and allocate resources to business segments, excludes profits and losses on the sale of businesses, acquisition costs, amortization and impairment of acquired intangibles, the cost of major restructuring programs and the impact of US tax reform. Reconciliations of adjusted operating profit to statutory operating profit are included in note 2 within Item 18–Financial Statements. The base for 2018 adjusted operating profit guidance is 2017 adjusted operating profit of £510m, being £576m less the full year impacts of disposals made in 2017 (£44m) and less favorable exchange rates at December 31, 2017 (£22m). The Group expects to complete the disposal of WSE and its stake in Mexican joint-venture Utel in the first-half of 2018 and has announced that it has concluded the strategic review of its USK-12 courseware business and has classified the business as held for sale. WSE contributed £195m to 2017 sales and WSE and Utel contributed £5m to 2017 adjusted operating profit and £5m to statutory operating profit. USK-12 courseware is expected to contribute £385m to 2018 sales and around £11m to 2018 adjusted and statutory operating profit. The Group’s 2018 guidance incorporates cost inflation of approximately £50m together with other operational factors and incentives of £30m. It expects incrementalin-year benefits from the 2017-2019 restructuring program of £80m in 2018. Costs relating to major restructuring of approximately £90m will continue to be excluded from adjusted operating profit.
In North America, our largest market, we anticipatethe Group expects US Higher Education courseware revenues to be flat to down by amid-single digit percent as similar pressures seen in the last two years continue with lower college enrolments, will be flat givenincreased use of open educational resources (OER) and attrition from growth in the forecast of modest improvements in US employment; a smaller adoptionsecondary market in K-12 learning services and lower
participation rate will bedriven by print rental, partially offset by growth in Open Territories driven by new products; reduceddigital revenues, benefits from the Group’s actions to promote access over ownership and a continued normalization of channel returns behavior. Evidence of a marginally slower rate of decline in US student enrolment together with slightly lower than expected attrition from OER in 2017, means that the Group is now planning for an underlying decline in demand of around 6% in US higher education courseware, slightly improved from its prior range of 6% to 7%. The Group expects stable testing revenues in North America reflecting Statestudent assessment as new contracts offset a continued contraction in revenue associated with the Partnership for Assessment of Readiness for College and National Assessment contract losses worth approximately £100m announced in 2015;Careers (PARCC) contract. Connections Education is expected to grow modestly as new partner school openings and good growth in clinical assessmentsenrolment is partially offset by
in-sourcing ofnon-core services by some partners and professional certification.contract exits. North American Online Program Management (OPM) is expected to see modest growth in revenue as investment in new programs begins to ramp up. Professional certification is expected to grow revenues in themid-single digits benefiting from new contracts, including the nationwide contract with the Association of American Medical Colleges (AAMC).
In our Core, markets (which includethe Group is expecting modest growth driven by its recent investments in student assessment and qualifications, which offer new products and services of considerably greater value, along with continued growth in Pearson Test of English (PTE) and OPM, with 10 new program launches in the UK, Italy and Australia), we expect declinesgrowth in vocational course registrationsexisting programs in UK schools, ongoing pressureAustralia.
In Growth, The Group expects a modest increase in our various learning services businesses,revenues, with growth in China in ELT products, PTE and in South Africa (due to improving enrolments in CTI), partially offset by declines in school courseware after a strong 2017. In Brazil, the Group expects revenue to increase modestly from growth in managed services in AustraliaWizard and the UK. At VUE, we will cease to deliver the contract to administer the UK Driving Theory test for the DVSA in September 2016.
In our Growth markets (which include Brazil, China, India and South Africa), we expect continued pressure in South Africa on government spending on textbooks and lower enrolments in CTI, macro-economic pressures in emerging markets, specifically China and Brazil,school sistemas, partially offset by growth from new products such as the New Student Experience.declines in government contracts. In India, PTE and MyPedia are expected to continue growing.
In Penguin Random House, we anticipate that additional benefits from the ongoing integrationGroup anticipates a broadly level publishing performance and an annualafter-tax contribution of the business will be broadly offset by reduced demand for eBooks, following industry-wide changes in terms in 2015.
We completed the sale of PowerSchool on 31 July 2015 for £222m; the sale of The Financial Times on 30 November 2015 for £858m; and substantially completed the sale of our 50% stake in The Economist Group on 16 October 2015 for £469m including the gain on revaluation of the remaining 11% investmentaround£60m-£65m to a fair value of £92m. In addition we disposed of Fronter and a number of print textbook lists in the US. Total disposals contributed approximately £90m to 2015ITS adjusted operating profit which will not recur in 2016.
Group incentive compensation was zero in 2015 reflecting the weakness of performance versus budget. The incentive pool will be reinstated to £110m in 2016 to ensure our work force is incentivized to sustain its strong competitive performance and to implement a significant program of change within the company.
Building on the work we have done over the last three years, we are taking further action to simplify our business and reduce our costs and position us for growth in our major markets. We intend to: create a single courseware product organization; integrate our North American assessment operations; reduce our exposure to large scale direct delivery and focus on more scalable online, virtual, and blended services; implement major efficiency improvements across all our enabling functions — technology, finance, HR; and rationalize our property portfolio and renegotiate and consolidate major supplier agreements. To implement this program, we will incur costs of approximately £320m in 2016 and expect to generate annualized savings of approximately £350m, with approximately £250m of savings in 2016 and a further £100m of savings in 2017. We have already implemented a number of significant associated actions since announcing the program in January 2016.profit.
Sales information by segment
The following table shows sales information for each of the past three years by segment:
Year Ended December 31 | ||||||||||||
2015 | 2014 | 2013 | ||||||||||
£m | £m | £m | ||||||||||
North America | 2,940 | 2,906 | 3,008 | |||||||||
Core | 836 | 910 | 1,008 | |||||||||
Growth | 692 | 724 | 712 | |||||||||
|
|
|
|
|
| |||||||
Total continuing operations | 4,468 | 4,540 | 4,728 | |||||||||
Discontinued operations | 312 | 343 | 962 | |||||||||
|
|
|
|
|
| |||||||
Total | 4,780 | 4,883 | 5,690 | |||||||||
|
|
|
|
|
|
North America Core Growth Total continuing operations Discontinued operations Total Year Ended December 31 2017 2016 2015 £m £m £m 2,929 2,981 2,940 815 803 815 769 768 713 4,513 4,552 4,468 — — 312 4,513 4,552 4,780
Sales information by geographic market supplied
The following table shows sales information for each of the past three years by geographic region:
Year Ended December 31 | Year Ended December 31 | |||||||||||||||||||||||
2015 | 2014 | 2013 | 2017 | 2016 | 2015 | |||||||||||||||||||
£m | £m | £m | £m | £m | £m | |||||||||||||||||||
Continuing operations | ||||||||||||||||||||||||
European countries | 667 | 725 | 775 | 646 | 648 | 667 | ||||||||||||||||||
North America | 2,907 | 2,871 | 2,980 | 2,896 | 2,947 | 2,907 | ||||||||||||||||||
Asia Pacific | 590 | 565 | 588 | 643 | 632 | 590 | ||||||||||||||||||
Other countries | 304 | 379 | 385 | 328 | 325 | 304 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Total continuing operations | 4,468 | 4,540 | 4,728 | 4,513 | 4,552 | 4,468 | ||||||||||||||||||
Discontinued operations | ||||||||||||||||||||||||
European countries | 198 | 236 | 386 | — | — | 198 | ||||||||||||||||||
North America | 74 | 69 | 454 | — | — | 74 | ||||||||||||||||||
Asia Pacific | 35 | 34 | 110 | — | — | 35 | ||||||||||||||||||
Other countries | 5 | 4 | 12 | — | — | 5 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Total discontinued operations | 312 | 343 | 962 | — | — | 312 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Total | 4,780 | 4,883 | 5,690 | 4,513 | 4,552 | 4,780 | ||||||||||||||||||
|
|
|
|
|
|
In the table above sales are allocated based on the country in which the customer is located.
Exchange rate fluctuations
We earnThe Group earns a significant proportion of ourits sales and profits in overseas currencies, principally the US dollar. Sales and profits are translated into sterling in the consolidated financial statements using average rates. The average rate used for the US dollar was £1:$1.30 in 2017, £1:$1.33 in 2016 and £1:$1.53 in 2015, £1:$1.65 in 2014 and £1:$1.57 in 2013.2015. Fluctuations in exchange rates can have a significant impact on ourthe Group’s reported sales and profits. In 2015, Pearson2017, the Group generated 63%65% of its continuing sales in the US (2014: 61%(2016: 65%; 2013: 60%2015: 63%). In 2015 we estimate2017 the Group estimates that a five cent change in the average exchange rate between the US dollar and sterling would have had an impact on ourits reported earnings per share of 2.0papproximately 2p and a five cent change in the closing exchange rate between the US dollar and sterling would have had an impact on shareholders’ funds of approximately £180m.£130m. See “Item 11. Quantitative and Qualitative Disclosures about Market Risk” for more information. Theyear-end US dollar rate for 20152017 was £1:$1.471.35 compared to £1:$1.561.23 for 20142016 and £1:$1.661.47 for 2013.2015. The total impact on shareholders’ funds of foreign exchange translation was a loss of £69m£313m in 20152017 compared to a gain of £175m£913m in 2014.2016. These net movements are principally driven by movements in the US dollar as a significant portion of the Group’s operations are in the US, however,US. However, in 20152016, other currencies contributed to the impactforeign exchange gain as many of a stronger US dollar comparedthese other currencies also strengthened in comparison to sterling was more than offset by sterling’s strength against other currencies.sterling.
Critical accounting policies
OurThe Group’s consolidated financial statements, included in “Item 18. Financial Statements”, are prepared based on the accounting policies described in note 1 to the consolidated financial statements.
Certain of ourthese accounting policies require the application of management judgment in selecting assumptions when making significant estimates about matters that are inherently uncertain. Management bases its estimates on historical experience and other assumptions that it believes are reasonable. These policies are described in note 1a(3)1a (3) in “Item 18. Financial Statements”.
Year ended December 31, 20152017 compared to year ended December 31, 20142016
Consolidated results of operations
Sales
OurThe Group’s total sales decreased from continuing operations decreased£4,552m in 2016 to £4,513m in 2017, a decrease of £39m or 1%. The year on year movement was impacted by £72m, or 2%, from £4,540m in 2014,currency movements, primarily the comparative strength of the US dollar relative to £4,468m in 2015. The 2015sterling during the year. In 2017, currency movements increased sales benefitted fromby £126m when compared to the impact of currency movements. The 2015 sales, translatedequivalent figures at 2014 averageconstant 2016 rates. When measured at 2016 constant exchange rates, would have been £137m less at £4,331m a 5% decrease at constant exchange rates.the Group’s sales declined by 4%. Part of the decrease is due to the absence of sales from businesses sold during the year and also in light of the evolution of our Connections Education business in North America a greater proportion of that revenue is now recognized on a net basis. We estimateGroup estimates that after excluding the impact of acquisitions and disposals, and after taking account of the evolution of sales at Connections Education, sales declined by 2% at constant exchange rates.
North America sales increaseddecreased by £34m£52m or 1%2% from £2,906m£2,981m in 2016 to £2,940m, due to the strengthening of the US dollar against sterling. We estimate£2,929m in 2017. The Group estimates that after excluding the impact of exchange and the contribution from acquisitionsbusinesses disposed in 2016 and disposals and adjustments made in respect of Connections Education,2017, North America sales declined by 1%4% in 20152017 compared to 2014. Revenue growth2016 due to declines in our professionalhigher education and clinical assessments businesses was offset by contract lossesschool courseware, school assessment and in our State and National assessments businesses. In addition Higher Education and School courseware sales fell asLearning Studio, a result of lower college enrolments and a smaller market opportunity in School despite market share gains in both Higher Education and School.learning management system that is being retired. North America continued to be the most significant source of ourthe Group’s sales and as a proportion of sales contributed 66%65% in 2015both 2017 and 64% in 2014.2016.
Core sales declinedincreased by £74m£12m or 8%1% from £910m£803m in 20142016 to £836m£815m in 2015. We estimate that after excluding acquisitions and disposals and the impact of exchange, Core sales declined by 5%. Growth in Pearson Online Services in Australia, Wall Street English in Italy, Clinical Assessment in Germany and the Pearson Test of English in Australia was more than offset by revenue declines in UK qualifications as the business nears the end of a period of policy change. In addition revenue declines at VUE, phasing and market weakness in Australian Higher Education courseware and the focusing of our UK school courseware on products that directly support Pearson Qualifications also contributed to the overall decline.
Growth sales declined by £32m or 4% from £724m in 2014 to £692m in 2015, much of the decline can be attributed to exchange and the strength of sterling against key emerging market currencies. We estimate2017. The Group estimates that after excluding the impact of exchange rates and the incremental contribution from acquisitions madebusinesses disposed in 20142016, Core sales declined by 1%. In China, revenues grew modestly reflecting strong sales of premium services in our direct delivery English Language Learning businesses offset by list disposals. In Brazil, revenues were stable with goodflat when comparing 2017 and 2016. Sales growth in private sistemasOPM in the UK and language schoolsAustralia and growth in the Pearson Test of English were offset by declines in government funded sistemasschool, higher education, English courseware and language schools. Instudent assessment and qualifications.
Growth sales increased by £1m from £768m in 2016 to £769 in 2017. The Group estimates that after excluding the impact of exchange and the contribution from businesses disposed in 2017, Growth sales were flat when comparing 2017 and 2016. Increases in China, school courseware in South Africa revenues declined significantlyand Pearson Test of English, were offset by declines in higher education services primarily due to a smaller textbook adoption cyclelower enrolment at CTI, the university business in South Africa and lower enrolments at CTI. In the Middle East, our business was impacted by the withdrawal from contractsrationalization in Saudi Arabia.India, and declines in Brazil.
Cost of goods sold and operating expenses
The following table summarizes ourthe Group’s cost of sales, net operating expenses and impairment of intangible assets:
Year Ended December 31 | Year Ended December 31 | |||||||||||||||
2015 | 2014 | 2017 | 2016 | |||||||||||||
£m | £m | £m | £m | |||||||||||||
Cost of goods sold | 1,981 | 2,021 | 2,066 | 2,093 | ||||||||||||
Operating expenses | ||||||||||||||||
Distribution costs | 80 | 84 | 84 | 88 | ||||||||||||
Selling, marketing and product development costs | 895 | 931 | 896 | 908 | ||||||||||||
Administrative and other expenses | 1,195 | 1,168 | 1,207 | 1,240 | ||||||||||||
Restructuring costs | 35 | 64 | 79 | 329 | ||||||||||||
Other net gains and losses | (13 | ) | (2 | ) | ||||||||||||
Other income | (98 | ) | (120 | ) | (64 | ) | (85 | ) | ||||||||
|
|
|
| |||||||||||||
Total net operating expenses | 2,094 | 2,125 | 2,202 | 2,480 | ||||||||||||
Other net (gains) and losses | (128 | ) | 25 | |||||||||||||
Impairment of intangible assets | 849 | 77 | — | 2,548 | ||||||||||||
|
|
|
| |||||||||||||
Total expenses | 4,924 | 4,223 | 4,140 | 7,146 | ||||||||||||
|
|
|
|
Cost of goods sold.Cost of sales consists of costs for raw materials, primarily paper, printing and binding costs, amortization ofpre-publication costs, royalty charges, the cost of service provision in the assessment and testing business and the cost of teaching and facilities in direct delivery businesses. OurThe Group’s cost of sales decreased by £40m,£27m, or 2%1%, from £2,021m£2,093m in 2014,2016, to £1,981m£2,066m in 2015.2017. The decrease corresponds primarily tolargely reflects the decrease in sales with costbut also includes some benefit from 2016 restructuring realized in 2017. Cost of sales at 44.3%was 45.8% of sales in 20152017 compared to 44.5%46.0% in 2014.2016.
Distribution costs.Distribution costs consist primarily of shipping costs, postage and packing. Distribution costs have decreased by £4m reflecting restructuring benefits and the continuing shift to digital and services products.
Selling, marketing and product development costs.The Group’s selling, marketing and product development costs decreased by £12m or 1% from £908m in 2016 to £896m in 2017. As a percentage of sales, these costs were consistent at 19.9% in both 2016 and 2017.
Administrative and other expenses.The Group’s administrative and other expenses decreased by £33m or 3% from £1,240m in 2016 to £1,207m in 2017. This decrease is largely due to the full impact of restructuring savings from the 2016 program flowing through in 2017, partly offset by continuing investment in technology.
Restructuring costs.In 2017, restructuring costs of £79m relate to the 2017-2019 restructuring program announced in May 2017 and include costs incurred in the second half of 2017 relating to this program. Total restructuring in 2016 amounted to £338m and included costs associated with headcount reductions, property rationalization and closure or exit from certain systems, platforms, products and supplier and customer relationships.
Other income.Other operating income mainly consists of freight recharges,sub-rights and licensing income, distribution commissions, investment income and gains on minor asset disposals together with the service fee income from Penguin Random House. Other operating income decreased to £64m in 2017 compared to £85m in 2016 mainly due to a decline in investment income following the disposal of investments and the absence of gains on asset disposals.
Other net gains and losses. Other net gains and losses in 2017 include the sale of the Group’s test preparation business in China, which resulted in apre-tax profit on sale of £44m, the sale of a 22% share in PRH, which resulted in apre-tax profit on sale of £96m and net losses of £12m relating to other smaller disposals. Included in other gains and losses in 2016 are losses of £25m associated with the closure of the English language schools in Germany and the sale of the Pearson English Business Solutions business.
Impairment of intangible assets.At the end of 2016, following trading in the final quarter of the year, the Group determined that the underlying issues in the North American higher education courseware market were more severe than anticipated. These issues related to declining student enrolments, changes in buying patterns of students and correction of inventory levels by distributors and bookshops. As a result, in January 2017, the Group revised its strategic plans and estimates for future cash flows and, as a consequence, recognized an impairment to North American goodwill of £2,548m. There were no impairments in 2017.
Share of results of joint ventures and associates
The contribution from the Group’s joint ventures and associates decreased by £19m to £78m in 2017 from £97m in 2016. The decrease is mainly due to the sale of 22% of PRH resulting in a lower share of profits for the final quarter of the year, which is the peak selling season for consumer publishing businesses.
Operating profit/(loss)
In 2017, there was an operating profit of £451m compared to an operating loss on a continuing basis of £2,497m in 2016. The increase in profits primarily reflects the absence of impairment charges in 2017 (£2,548m in 2016), lower restructuring costs (£79m in 2017 compared to £338m in 2016) and gains from the sale of businesses (a gain of £128m in 2017 compared to a loss of £25m in 2016). After stripping out the absence of impairments, lower restructuring costs and gains on the sale of businesses, profits from trading declined by around £58m. This was primarily due to increased amortization charges, higher staff incentives and cost inflation, offset in part by the year on year benefit from restructuring savings.
Net finance costs
Net interest payable in 2017 was £79m, compared to £59m in 2016. The increase was primarily due to higher US interest rates in 2017, additional charges relating to the early redemption of various bonds during the year and some additional interest on tax provisions. In March and November 2017 respectively, the Group redeemed the $550m 6.25% Global dollar bonds and $300m 4.625% US dollar notes, both originally due in 2018. In addition, in August 2017, the Group redeemed $383m out of the $500m 3.75% US dollar notes due in 2022 and $406m out of the $500m 3.25% US dollar notes due in 2023. Although there is a charge in respect of the early redemptions, there are partial year savings as a result which have flowed through the income statement in the period since redemption, with the full annualized savings coming through in 2018.
Other net finance costs are finance income and costs on retirement benefits, foreign exchange, interest costs relating to acquisition consideration and other gains and losses on derivative financial instruments. The decrease in finance income in respect of employee benefit plans from £11m in 2016 to £3m in 2017 reflects the lower net surplus on pension balances at the beginning of 2017 compared to the beginning of 2016. Both the exchange gain in 2017 of £44m and the exchange loss in 2016 of £20m mainly relate to foreign exchange differences on unhedged cash and cash equivalents and other financial instruments.
For a more detailed discussion of the Group’s borrowings and interest expenses see “— Liquidity and Capital Resources — Capital Resources” and “— Borrowings” below and “Item 11. Quantitative and Qualitative Disclosures about Market Risk”.
Taxation
The total tax charge in 2017 of £13m represents 3.1% ofpre-tax profit and compares to a benefit of £222m or 8.7% ofpre-tax losses in 2016. The tax benefit in 2016 was mainly due to the release of deferred tax liabilities relating to tax deductible goodwill that was impaired. The low tax rate in 2017 is largely attributable to uncertain tax position releases due to the expiry of the relevant statutes of limitation. As a result of US tax reform, the reported tax charge includes a benefit from revaluation of deferred tax balances to the reduced federal rate of £5m and a repatriation tax charge of £6m. The Group continues to analyze the detail of the new legislation and this may result in revisions to these impacts. In addition to the impact on the reported tax charge, the Group’s share of profit from associates was adversely impacted by £8m.
Discontinued operations
There were no discontinued operations in either 2016 or 2017.
Profit/(loss) for the year
The profit for the financial year in 2017 was £408m compared to a loss in 2016 of £2,335m. The loss in 2016 includes the impairment charge of £2,548m and higher restructuring charges, as noted above.
Earnings/(loss) per ordinary share
The basic earnings per ordinary share, which is defined as the profit for the financial year divided by the weighted average number of shares in issue, was 49.9p in 2017 compared to a loss per share of 286.8p in 2016 based on a weighted average number of shares in issue of 813.4m in 2017 and 814.8m in 2016. The increase in earnings per share was due to the increase in profit for 2017 described above and was not significantly affected by the movement in the weighted average number of shares.
The diluted earnings per ordinary share was also 49.9p in 2017, with the dilutive effect of options being minimal. The diluted earnings per ordinary share in 2016 was the same as the basic earnings per ordinary share due to the loss for the year.
Exchange rate fluctuations
Currency movements increased sales by £126m and increased the operating profit by £13m. See “Item 11. Quantitative and Qualitative Disclosures about Market Risk” for a discussion regarding the Group’s management of exchange rate risks.
Sales and operating profit by segment
The following tables summarize the Group’s sales and adjusted operating profit for each of the Group’s business segments. Adjusted operating profit is included as it is the key financial measure used by management to evaluate performance and allocate resources to business segments. The measure also enables investors to more easily, and consistently, track the underlying operational performance of the Group and its business segments by separating out those items of income or expenditure relating to acquisition and disposal transactions.
In the Group’s adjusted operating profit it has excluded other net gains and losses, acquisition costs, amortization and impairment of acquired intangibles, the cost of major restructuring programs and the impact of
US tax reform. The intangible charges relate only to intangible assets acquired through business combinations and acquisition costs are the direct costs of acquiring those businesses. The Group does not believe these charges are relevant to an understanding of the underlying performance. Charges relating to acquired intangible assets arenon-cash charges that reflect the historical expenditure of the acquired business. These acquired intangible assets continue to be supported by ongoing expenditure that is reported within adjusted operating profit. Other net gains and losses that represent profits and losses on the sale of subsidiaries, joint ventures, associates and other financial assets are also excluded from adjusted operating profit as it is important to highlight their impact on operating profit, as reported, in the period in which the disposal transaction takes place in order to understand the underlying trend in the performance of the Group. US tax reform in 2017 resulted in the revaluation of deferred tax balances. These revaluations have been excluded from adjusted earnings in 2017 due to theirone-off nature.
A reconciliation of operating profit to adjusted operating profit for continuing operations is included in the tables below:
Year Ended December 31, 2017 | ||||||||||||||||||||||||||||
£m | North America | Core | Growth | PRH | Continuing | Discontinued | Total | |||||||||||||||||||||
Sales | 2,929 | 815 | 769 | — | 4,513 | — | 4,513 | |||||||||||||||||||||
65 | % | 18 | % | 17 | % | — | 100 | % | ||||||||||||||||||||
Total operating profit | 242 | 27 | 28 | 154 | 451 | — | 451 | |||||||||||||||||||||
Add back: | ||||||||||||||||||||||||||||
Other net gains and losses | 3 | — | (35 | ) | (96 | ) | (128 | ) | — | (128 | ) | |||||||||||||||||
Acquisition costs | — | — | — | — | — | — | — | |||||||||||||||||||||
Costs of major restructuring | 60 | 11 | 8 | — | 79 | — | 79 | |||||||||||||||||||||
Intangible charges | 89 | 12 | 37 | 28 | 166 | — | 166 | |||||||||||||||||||||
Impact of US tax reform | — | — | — | 8 | 8 | — | 8 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Adjusted operating profit: continuing operations | 394 | 50 | 38 | 94 | 576 | — | 576 | |||||||||||||||||||||
Adjusted operating profit: discontinued operations | — | — | — | — | — | — | — | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total adjusted operating profit | 394 | 50 | 38 | 94 | 576 | — | 576 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
68 | % | 9 | % | 7 | % | 16 | % | 100 | % | — | % | 100 | % |
Year Ended December 31, 2016 | ||||||||||||||||||||||||||||
£m | North America | Core | Growth | PRH | Continuing | Discontinued | Total | |||||||||||||||||||||
Sales | 2,981 | 803 | 768 | — | 4,552 | — | 4,552 | |||||||||||||||||||||
65 | % | 18 | % | 17 | % | — | 100 | % | ||||||||||||||||||||
Total operating profit | (2,448 | ) | (33 | ) | (100 | ) | 84 | (2,497 | ) | — | (2,497 | ) | ||||||||||||||||
Add back: | ||||||||||||||||||||||||||||
Other net gains and losses | 12 | 12 | 1 | — | 25 | — | 25 | |||||||||||||||||||||
Acquisition costs | — | — | — | — | — | — | — | |||||||||||||||||||||
Costs of major restructuring | 172 | 62 | 95 | 9 | 338 | — | 338 | |||||||||||||||||||||
Intangible charges | 2,684 | 16 | 33 | 36 | 2,769 | — | 2,769 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Adjusted operating profit: continuing operations | 420 | 57 | 29 | 129 | 635 | — | 635 | |||||||||||||||||||||
Adjusted operating profit: discontinued operations | — | — | — | — | — | — | — | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total adjusted operating profit | 420 | 57 | 29 | 129 | 635 | — | 635 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
66 | % | 9 | % | 5 | % | 20 | % | 100 | % | — | % | 100 | % |
North America
Sales in North America decreased by £52m or 2% from £2,981m in 2016 to £2,929m in 2017 and adjusted operating profit decreased by £26m, or 6%, from £420m in 2016 to £394m in 2017. The Group estimates that after excluding the impact of exchange and the contribution from businesses disposed in 2017 and 2016, North America sales declined by 4% in 2017 compared to 2016 primarily due to anticipated declines in higher education and school courseware, school assessment, and Learning Studio, a learning management system was retired.
There were no impairment charges in 2017. In 2016, the Group recognized an impairment to its US goodwill. At the end of 2016, following trading in the final quarter of the year, the Group determined that the underlying issues in the North American higher education courseware market were more severe than anticipated. These issues related to declining student enrolments, changes in buying patterns of students and correction of inventory levels by distributors and bookshops. As a result, in January 2017, the Group revised its strategic plans and estimates for future cash flows and, as a consequence, recognized an impairment to North America goodwill of £2,548m. The 2017 North America results also include £60m in respect of the further major restructuring program announced during the year. 2016 results included £172m in respect of the previous major restructuring program and other losses on disposal mainly relating to the sale of the Pearson English Business Solutions business. Overall adjusted operating margins in the North America business declined in 2017 to 13.5% compared to 14.1% in 2016 due primarily to the impact of lower sales and other operating factors, partially offset by restructuring savings.
North America — courseware
In school courseware, revenue declined 6% primarily due to sharp declines across Open Territory states in the second half of the year. This was partially offset by growth in adoption state revenues where strong performance in Texas GradesK-12 Spanish, Indiana GradesK-12 Science and South Carolina Grades6-8 Science outweighed a lower adoption participation rate resulting from the decision not to compete for the California GradesK-8 English Language Arts (ELA) adoption with a core basal program. The new adoption participation rate fell to 61% in 2017 from 64% in 2016. The Group won an estimated 38% share of adoptions competed for (30% in 2016) and 29% of total new adoption expenditure of $365m (19% of $470m in 2016).
In higher education, total US college enrolments, as reported by the National Student Clearinghouse, fell 1.1%, with combinedtwo-year public and four-yearfor-profit enrolments declining 2.5%. Enrolment weakness was particularly focused on part-time students where enrolment declined 3.3%, a bigger decline than in any of the last five years. Full-time enrolment grew 0.3%, the first expansion since late 2010. Net revenues at constant exchange rates in the higher education courseware business declined 3% during the year. It is estimated that around 2% of this decline was driven by lower enrolment; just over 1% from the adoption of Open Educational Resources (OER); around 5% from the secondary market, new initiatives and other factors, primarily the growth in print rental; offset by an around 3% benefit from institutional selling and the shift to digital and a 2% benefit in 2017 from lower returns by the channel.
In 2017, the Group’s US higher education courseware market share, as reported by MPI, was in the upper half of the40-41.5% range seen over the last five years. During 2017, the Group performed strongly in Statistics and Business Statistics, Biology and Accounting. Statistics benefited from the popularity of “best in class” learning application StatCrunch, Biology from the success of Campbell Biology 11e and MasteringBiology, and Accounting from the success of Miller-Nobles Horngren Accounting 11e and MyAccountingLab. This was offset by weakness in Information Technology, particularly in thefor-profit sector, and continued softness in Developmental Mathematics.
Digital revenues grew 9% benefiting from continued growth in direct sales, favourable mix and selected price increases. Global digital registrations of MyLab and related products fell 1%. In North America, digital
registrations fell 3% with good growth in Science, Business & Economics and Revel offset by lower overall enrolment and continued softness in Developmental Mathematics. Revel registrations grew more than 50%. Including stand-alonee-book registrations, total North American digital registrations were flat.
The actions announced in early 2017 to promote access over ownership were successfully implemented. The rental price of 2,000 eBook titles was reduced and resulted in eBook revenues increasing by more than 20% in response. The print rental program has had a successful start, with the addition of more than 90 further titles. In institutional courseware solutions, 210 institutions were signed up to the Group’s Inclusive Access (Direct Digital Access, DDA) solutions, taking the total to over 500. During the year, over 1m course enrolments were delivered with inclusive access rising to around 5% of higher education revenue as more colleges and faculties see the benefit of this model.
North America — assessment
In school assessment (State and National assessments), revenues at constant exchange rates declined by 9% due to previously announced contract losses. Colorado announced in June 2017 they will be leaving the Partnership for Assessment of Readiness for College and Careers (“PARCC”) consortium after the 2017/2018 school year. The Group won the subsequent bid to deliver ELA, Math, Science, and Social Studies for at least the next six years and also secured contract extensions in Virginia, Indiana, Arizona, Minnesota, Puerto Rico, Kentucky, New York City and North Carolina and for the National Assessment of Educational Progress.
The Group delivered 25.3m standardized online tests toK-12 students, up 7% from 2016. TestNav 8, the Group’s next-generation online test platform, supported a peak load of 752,000 tests in a single day and provided 99.99% up time. AI scoring systems scored 35m responses to open-ended test items, around 30% of the total. Paper based standardized test volumes fell 7% to 20.4m.
In professional certification, revenues grew 2%. VUE global test volume rose 1% to over 15m. Revenues in North America were flat, with continued growth in certification for professional bodies, offset by modest declines in US teacher certification and the GED (General Educational Development, the high school equivalency test that is part of a joint venture with the American Council on Education), after strong performance last year, and by weakness in higher level IT certifications in the second half.
The Group signed over 50 new contracts in 2017 including aten-year contract with the Association of American Medical Colleges (AAMC) to administer the MCAT, and contracts with ExxonMobil for five years and the Project Management Institute for four years. Its renewal rate on existing contracts continues to be over 95%. During the year, the Group renewed over 50 contracts including the American Board of Internal Medicine (ABIM) for nine years, Florida Teacher Licensure Assessments for five years, Pharmacy Technician Certification Board (PTCB) for five years, and The Institute of Internal Auditors for four years.
Clinical assessment sales increased 2% largely due to the effect of exchange and, at constant exchange rates, declined slightly on an absence of new major product introductions.Q-Interactive, the Group’s digital solution for Clinical Assessment administration, saw continued strong growth in license sales withsub-test administrations up more than 33% over the same period last year.
North America — services
Connections Education the virtual school business, served nearly 78,000 Full Time Equivalent students through full-time virtual and blended school programs, up 6% on last year. Two new full-time online, state-wide, partner schools opened for the 2017-2018 school year. Enrolment growth from new and existing schools was partially offset by the termination of a school partnership at the end of the 2016-2017 school year. Revenues grew modestly as enrolment growth was partially offset by increasedin-sourcing, as some partners tooknon-core servicesin-house. Enrolment and revenue is expected to grow in 2018 as growth in existing school partnerships and the opening of new partner schools for the 2018-2019 school year offsets the termination of two further
contracts and thein-sourcing of services by some customers. The 2017 Connections Academy Parent Satisfaction Survey showed strong results with 92% of families with students enrolled in full-time online partner schools stating they would recommend the schools to others and 95% agreeing that the curriculum is of high quality.
In Pearson Online Services, revenues declined primarily due to a decline in Learning Studio revenues as the product is being retired and the restructuring of smallernon-OPM contracts. Learning Studio declined by just over 50% to a revenue contribution of £11m in 2017. In OPM, revenues grew modestly as course enrolments increased strongly, up 8% to more than 341,000, boosted by good growth and program extensions at key partners including Arizona State University Online, Maryville University, Rutgers University and University of Alabama at Birmingham and from new partners, partially offset by contract exits.
The Group signed 45 multi-year programs in 2017 renewed 19 programs and launched 14 new programs at partners including Maryville University, Duquesne University and Ohio University. During the year it also agreed the termination of nine programs that were not mutually viable and did not renew a further six programs.
Brinker International, Inc. (NYSE: EAT), one of the world’s leading casual dining restaurant companies and owner of Chili’s® Grill & Bar and Maggiano’s Little Italy®, with over 1,600 owned, operated and franchised restaurant locations, partnered with the Group to launch a comprehensive employer-education program Best You EDU that provides free educational opportunities to Brinker employees including foundational, GED and Associate Degree programs.
Core
Sales in Core markets increased by £12m, or 1%, from £803m in 2016 to £815m in 2017 while adjusted operating profit decreased by £7m, or 12%, from £57m in 2016 to £50m in 2017. At constant exchange and after excluding the contribution from disposals, Core sales were flat year on year and profits declined by 14%. Growth in OPM sales in the UK and Australia and growth in Pearson Test of English were offset by declines in school, higher education, English courseware and student assessment and qualifications.
The decline in adjusted operating profit was due to revenue mix, investment in new products and services and product line exits, partially offset by restructuring savings. The Group’s statutory results in 2017 included restructuring costs of £11m. The statutory results in 2016 included restructuring costs of £62m and a loss on closure of Wall Street English Germany of £12m.
Core — courseware
Courseware revenues declined 2%. In school, revenues declined in Australia, due to market contraction in the primary sector partly offset by slight growth in secondary, and declines in smaller markets in Europe and Africa. In higher education, revenues were down slightly due to declines in smaller markets, whilst in Australia and the UK an increase in direct to institution sales and a further shift to digital offset declines in traditional textbook sales. In English, there were declines in smaller markets.
Core — assessments
In higher education and School assessment, revenues fell 4% primarily due to lower AS level, iGCSE and Apprenticeship volumes as a result of policy changes. BTEC revenues also declined modestly as revenues recognized in 2017 lagged the greater stability seen in registrations and billed revenue in the year. The Group successfully delivered the National Curriculum Test for 2017, marking 3.5m scripts, up slightly from 2016.
Clinical assessment grew 15% with revenues benefiting from strong growth in the new editions of the Wechsler Intelligence Scale for Children(WISC-V) and the Clinical Evaluation of Language Fundamentals(CELF-5).
Pearson Test of English (PTE) saw continued strong growth in test volumes, which rose 84% from 2016, driven primarily by its use to support visa applications to the Australian Department of Immigration and Border Protection and good growth in New Zealand.
In Professional certification, revenues were flat as the impact of last year’s renegotiated terms of the UK Driving Theory test for the DVSA was offset by growth from new and existing contracts.
Core — services
In higher education services, revenues grew 17% and OPM revenues grew by 33%. In Australia, there was good growth due to the successful partnership with Monash University, and the continued success of the Graduate Diploma in Psychology. There are a total of around 9,300 course registrations across the seven programs in Australia (up from around 6,900 registrations in 2016). In the UK, five new programs were launched in addition to the two launched in 2016. UK course registrations grew to about 1,400, compared to about 370 in 2016.
English services grew, with strong growth in WSE Italy, due to the opening of new centers in 2015 and 2016, partially offset by declines in Japan.
Growth
Growth sales increased by £1m, to £769m in 2017 from £768m in 2016. Adjusted operating profit increased by £9m or 31% to £38m in 2017 from £29m in 2016. The Group estimates that, after excluding the impact of exchange rates and the incremental contribution from businesses disposed in 2017 and 2016, sales were flat year on year. Growth in China, school courseware in South Africa and Pearson Test of English was offset by declines in higher education services, primarily due to lower enrolment at CTI, business rationalization in India and declines in Brazil.
The adjusted operating profit increase reflected the benefits of prior year restructuring and the higher revenues in China, South Africa school courseware and PTE in India, partially offset by lower revenues in Brazil. The Group’s statutory results included restructuring costs of £8m in 2017 and £95m in 2016.
On November 27, 2017, The Group announced that it had agreed the sale of Wall Street English to a consortium of funds affiliated with Baring Private Equity Asia and CITIC Capital. The sale was completed on March 15, 2018.
Growth — courseware
Courseware revenues grew 7%, due to strong growth in school textbook sales in South Africa and English language courseware in China, partially offset by weakness in Brazil.
Growth — assessments
Professional Certification grew strongly. Pearson Test of English saw over 30% growth in the volume of tests taken in India.
Growth — services
In English services, growth in Wall Street English in China, due to new center openings, was more than offset by declines in Brazil due to macroeconomic pressures.
In school services, revenue fell, with student enrolment in the sistemas business in Brazil falling 14% primarily due to NAME, the public sistema, where the Group took the strategic decision to exit two thirds of its
contracts with municipalities due to unattractive economic prospects, together with a reduction in student enrolments in the Dom Bosco private sistema due to challenging economic conditions. In India, Pearson MyPedia, an inside service ‘sistema’ solution for schools, expanded to over 500 schools with approximately 157,000 learners.
In higher education services, revenues declined sharply due to a 14% fall in total student enrolment at CTI, the university business in South Africa, driven by the cumulative impact of economic factors in recent years, partially offset by improved new student enrolments in 2017, together with business exits in India.
Penguin Random House
The Group owns 25% of Penguin Random House, the first truly global consumer book publishing company. The Group owned 47% until October 5, 2017, when it completed the sale of 22% to Bertelsmann. The Group’s share of Penguin Random House adjusted operating profits were £94m in 2017 compared to £129m in 2016, primarily due to the sale of part of the Group’s share.
Penguin Random House performed in line with expectations with revenues up slightly year on year on rising audio sales, broadly stable print sales, and modest ongoing declines in demand fore-books, whilst the business benefitted from bestsellers by Dan Brown, R.J. Palacio, John Grisham, Jamie Oliver, and Dr. Seuss.
The Penguin Random House Venture Combined Financial Statements are included in this report on pagesF-81 toF-151.
Results of operations
Year ended December 31, 2016 compared to year ended December 31, 2015
Consolidated results of operations
Sales
The Group’s total sales from continuing operations increased from £4,468m in 2015 to £4,552m in 2016, an increase of £84m or 2%. This year on year increase was the result of currency movements, primarily the strength of the US dollar relative to sterling during the year but also due to the strength of many of the other currencies that the Group is exposed to. In 2016, currency movements increased sales by £486m when compared to the equivalent figures at constant 2015 rates. When measured at 2015 constant exchange rates, the Group’s sales declined by 9%. Part of the decrease was due to the absence of sales from businesses sold during the year and the Group estimates that after excluding the impact of disposals, sales declined by 8% at constant exchange rates.
North America sales increased by £41m or 1% from £2,940m to £2,981m, mainly due to the strengthening of the US dollar against sterling. The Group estimates that after excluding the impact of exchange and the contribution from businesses disposed in 2015 and 2016, North America sales declined by 10% in 2016 compared to 2015 due to a significant decline in US higher education courseware, together with anticipated declines in school assessment (due to previously announced contract losses) and in school courseware (due to a smaller adoption market and a lower participation rate). The declines were partially offset by growth in professional certification, virtual and blended schools and Online Program Management. North America continued to be the most significant source of the Group’s sales and, as a proportion of sales contributed 65% in 2016 and 66% in 2015.
Core sales declined by £12m or 1% from £815m in 2015 to £803m in 2016. The Group estimates that after excluding the impact of exchange movements and the closure of Wall Street English Germany, the disposal of othersub-scale businesses and the transfer of some smaller businesses to the Growth segment, Core sales declined by 4%. The decline was primarily due to expected declines in vocational course registrations in UK schools and courseware. This was partially offset by strong growth in English assessments in Australia and OPM services in the UK and Australia.
Growth sales increased by £55m or 8% from £713m in 2015 to £768 in 2016, almost all of the increase can be attributed to exchange movements, particularly the strength of key emerging market currencies compared to sterling. The Group estimates that after excluding the impact of exchange rates and the incremental contribution from businesses disposed in 2015 and 2016 and the transfer of smaller businesses from the Core segment, sales declined by 1%. In China, growth in adult English language learning and English courseware was partly offset by declines in English test preparation. In Brazil, revenues declined due to enrolment declines in the English language learning business, related to macroeconomic pressures. In South Africa, revenues grew strongly with growth in school textbooks, offset by enrolment declines at CTI. In the Middle East, revenues fell significantly due to the previously announced withdrawal from an agreement to run three Saudi Colleges of Excellence, with the colleges transitioning to new providers from 30 June 2015.
Cost of goods sold and operating expenses
The following table summarizes the Group’s cost of sales, net operating expenses and impairment of intangible assets:
Year Ended December 31 | ||||||||
2016 | 2015 | |||||||
£m | £m | |||||||
Cost of goods sold | 2,093 | 1,981 | ||||||
Operating expenses | ||||||||
Distribution costs | 88 | 80 | ||||||
Selling, marketing and product development costs | 908 | 895 | ||||||
Administrative and other expenses | 1,240 | 1,195 | ||||||
Restructuring costs | 329 | 35 | ||||||
Other income | (85 | ) | (98 | ) | ||||
|
|
|
| |||||
Total net operating expenses | 2,480 | 2,107 | ||||||
Other net gains and losses | 25 | (13 | ) | |||||
Impairment of intangible assets | 2,548 | 849 | ||||||
|
|
|
| |||||
Total expenses | 7,146 | 4,924 | ||||||
|
|
|
|
Cost of goods sold.Cost of sales consists of costs for raw materials, primarily paper, printing and binding costs, amortization ofpre-publication costs, royalty charges, the cost of service provision in the assessment and testing business and the cost of teaching and facilities in direct delivery businesses. The Group’s cost of sales increased by £112m, or 6%, from £1,981m in 2015, to £2,093m in 2016. The increase reflects the increase in sales but also the mix of sales, as sales declines in higher margin products were offset by sales increases in lower margin products and services. Cost of sales was 46.0% of sales in 2016 compared to 44.3% in 2015.
Distribution costs.Distribution costs consist primarily of shipping costs, postage and packing. Distribution costs increased due to the effect of exchange movements. After taking out the impact of exchange movements, distribution costs decreased due to the continuing shift to digital and services products.
Selling, marketing and product development costs. OurThe Group’s selling, marketing and product development costs decreasedincreased by £36m£13m or 4%1% from £931m in 2014 to £895m in 2015.2015 to £908m in 2016. As a percentage of sales these costs were relatively consistent at 19.9% in 2016 and 20.0% in 2015, and 20.5% in 2014,the slight decline reflecting some continuing benefits offrom restructuring.
Administrative and other expenses. OurThe Group’s administrative and other expenses increased by £27m£45m or 2%4% from £1,168m in 2014 to £1,195m in 2015. Increases2015 to £1,240m in intangible amortization2016. The increase is largely due to exchange and increased investment in technology, which offset decreasessignificant savings from restructuring in employee compensation.2016.
Restructuring costs.RestructuringIn January 2016, the Group announced that it was embarking on a major restructuring program to simplify the business, reduce costs which includeand position the company for growth in its major markets. The scope and costs of the 2016 program are significantly more than normal levels of restructuring. Total restructuring in 2016 for redundancythe Group’s subsidiary companies amounted to £329m compared to £35m in 2015 and includes costs associated with headcount reductions, property exits, returnedrationalization and closure or exit from certain systems, platforms, products and supplier and customer relationships.
Other income.Other operating income mainly consists of freight recharges,sub-rights and licensing income, distribution commissions, investment income and gains on minor asset disposals together with the service fee income from Penguin Random House. Other operating income decreased to £85m in 2016 compared to £98m in 2015 mainly due to a more normal levelreduction in Penguin Random House service fee income. This income decreased as Penguin Random House reduced its reliance on Pearson systems and processes and the fee of £16m in 2015 aftercompares to a periodfee of transformation£4m in 2013 and 2014. Restructuring costs were £29m lower in 2015 at £35m compared with £64m in 2014.2016.
Other net gains and losses.losses. Included in other gains and losses in 2016 of £25m are the losses associated with the closure of the Group’s English language schools in Germany and the sale of the Pearson English Business Solutions business. Included in other net gains and losses in 2015 is the profit on sale of PowerSchool of £30m, net of £70m of write downs on related software assets and small losses on investments and costs relating to prior year disposals totaling £17m. Other gains and losses in 2014 are gains on the sale of joint venture interests in Safari Books Online and CourseSmart totaling £40m and a loss on the disposal of an investment in Nook Media of £38m.
Other income. Other operating income mainly consists of freight recharges, sub-rights and licensing income and distribution commissions, together with the service fee income from Penguin Random House. Other operating income decreased to £98m in 2015 compared to £120m in 2014 mainly due to a reduction in Penguin Random House service fee income. This income decreased as Penguin Random House reduced its reliance on Pearson systems and processes and the fee of £41m in 2014 compares to a fee of £16m in 2015.
Impairment of intangible assets.Following significantAt the end of 2016, following trading in the final quarter of the year, it became clear that the underlying issues in the North American higher education courseware market were more severe than anticipated. These issues related to declining student enrolments, changes in buying patterns of students and correction of inventory levels by distributors and bookshops. As a result, in January 2017, the Group revised its strategic plans and estimates of future cash flows and, as a consequence, made an impairment to North American goodwill of £2,548m. In 2015, following economic and market deterioration in the Group’sits operations in emerging markets and ongoing cyclical and policy related pressures in the Group’sits mature market operations, management’s expectations of future returns were revised down in the course of 2015, consistent with our outlook for 2018, resulting in the impairment ofGroup impaired intangible assets in North America ofby £282m, in Core markets ofby £37m and in Growth markets ofby £530m. In 2014 impairments of £77m related to India.
Share of results of joint ventures and associates
The contribution from ourthe Group’s joint ventures and associates increased by £21m£45m to £97m in 2016 from £52m in 2015 from £31m in 2014.2015. The increase iswas mainly due to Penguin Random House where there was an improved operating performance coupled with a reduced amortization charge. The intangibles amortization charge arises on intangibles recognized on the creation of Penguin Random House in 2013. The amortization profile recognizes more of the amortization in the early years with progressively less amortization in later years.
Operating loss / profit
In 20152016, there was an operating loss on a continuing basis of £404m£2,497m compared to an operating profitloss on a continuing basis of £348m£404m in 2014.2015. The reductionincrease in profitloss is entirely due to the impairment of intangible assets and the additional restructuring charges taken in 2016, as outlined above.
Net finance costs
Net finance costs reduced by £64m, from £93m in 2014 to £29m in 2015. Net interest payable in 20152016 was £46m,£59m, compared to £64m£46m in 2014.2015. The majority of the movement in net interest payable iswas due to theaone-off release of accrued interest in 2015 following agreement of historical tax positions. For our debt portfolio, our fixed rate policy reduces the impact of changes in market interest rates, however we were still able to benefit from low average US dollar interest rates during the year as the majorityThe most significant element of the Group’snet interest payable figure is interest on bond debt, is US dollar denominated.Year-on-year, average three month US dollar LIBOR rose by 0.1% to 0.3%. This slight increase in floating market interest rates, along with the impact of changesinterest on tax provisions and interest receivable off setting each other. Interest on bond debt was in our debt portfolio, foreign exchange translation and the effect of slightly lower levels of average net debt in the period led to little change in the year-on-year interest charge on debt. Interest receivable on cash balances held overseas was reduced fromline with the prior year, due mainly towith the weakeningsavings from bond repayments offset by the impact of emerging market currencies against sterling. The Group’s average net debt fell by £61m, largely as a result of disposals in the fourth quarter of 2015 offsetting the translation of our predominantlyrising US dollar debt. These combined factors contributed to the overall decrease in the Group’s average net interest payable from 3.6% to 2.7%.rates.
Other net finance costs arecomprise finance income and costs on retirement benefits, finance costs on related to deferred consideration associated with acquisitions, foreign exchange and other gains and losses. InThe increase in finance income in respect of employee benefit plans from £4m in 2015 to £11m in 2016 is a reflection of the totalmore favorable funding position at the end of these items was a gain of £17m compared to a loss of £29m in 2014.2015. Both the exchange loss in 2016 of £12m and the exchange gain in 2015 and the loss in 2014of £13m mainly relate to foreign exchange differences on unhedged cash and cash equivalents and other financial instruments.
For a more detailed discussion of ourthe Group’s borrowings and interest expenses see “— Liquidity and Capital Resources — Capital Resources” and “— Borrowings” below and “Item 11. Quantitative and Qualitative Disclosures about Market Risk”.
Taxation
The total tax benefit in 20152016 of £81m£222m represents 18.7%8.7% ofpre-tax losses and compares to a chargebenefit of £56m£81m or 22.0%18.7% ofpre-tax profits losses in 2014. Our2015. The increased benefit in 2016 is mainly due to the release of deferred tax liabilities relating to tax deductible goodwill that was impaired. The Group’s overseas profits, which arise mainly in the US, are largely subject to tax at higher rates than that in the UK (which had an effective statutory rate of 20% in 2016 and 20.25% in 2015 and 21.5% in 2014). The reduced rate in 2015 reflects the lack of2015).Although tax relief on somethe impairment of our goodwill impairments offset in part by adjustments arising from agreement of historical tax positions. Both these items were morewas significant in both 2015 than they had been in 2014.and 2016, this tax relief only related to a portion of goodwill impaired and this has driven the overall tax rate below the effective statutory rates.
Discontinued operations
Profit from discontinued operations in 2015 wasof £1,175m comparedincludes the results to £271m in 2014 withdate of sale and the difference being due primarily to gainsgain on disposals in the respective years.
On 16 October 2015, Pearson substantially completed the sale of its 50% interest in the Economist to EXOR and on 30 November 2015 Pearson completed the sale of the Financial Times to Nikkei. The pre-tax gains on these sales were £473m and £711m respectively. We expect both of these transactions to qualify for substantial shareholder exemption in the UK and therefore there was no tax on the Economist gain and tax on the Financial Times sale amounted to £49m. The gains on these transactions and the results for both 2014 and 2015 to the respective sale dates have been included in discontinued operations.
The sale of Mergermarket to BC partners was completed on 4 February 2014 and resulted in a gain of £244m before tax. The gain on sale and the results for 2014 to the date of sale have been included in discontinued operations. Also included inEconomist. There were no discontinued operations in 2014 is a gain of £29m relating to adjustments to liabilities arising on the formation of the Penguin Random House group. Although this transaction completed in 2013 there were subsequent adjustments relating to the potential transfer of pension liabilities and tax.2016.
ProfitProfit/(loss) for the year
The profitloss for the financial year in 20152016 was £823m£2,335m compared to a profit in 20142015 of £470m.£823m. The loss in 2016 includes the impairment charge of £2,548m as noted above. The 2015 profit includes the gains on the sale of the Financial Times and Economist partly offset by significant impairment charges in the year. The net of these items were more significant than disposal gains and impairment charges had been in 2014.
EarningsEarnings/(loss) per ordinary share
The basic earnings per ordinary share, which is defined as the profit for the financial year divided by the weighted average number of shares in issue, was a loss of 286.8p in 2016 compared to earnings of 101.2p in 2015 compared to 58.1p in 2014 based on a weighted average number of shares in issue of 814.8m in 2016 and 813.3m in 2015 and 810.9m in 2014.2015. The increasedecrease in earnings per share was due to the increasedecrease in profit for 20152016 described above and was not significantly affected by the movement in the weighted average number of shares.
A diluted earnings per ordinary share was not calculated in either 2015 or 2016 as a result of the losslosses from continuing operations in 2015. The diluted earnings per share of 58.0p in 2014 was not significantly different from the basic earnings per share in that year as the effect of dilutive share options was again not significant.operations.
Exchange rate fluctuations
Currency movementmovements increased sales by £137m£486m and had only a small impact onincreased the operating profit.loss by £454m. See “Item 11. Quantitative and Qualitative Disclosures about Market Risk” for a discussion regarding ourthe Group’s management of exchange rate risks.
Sales and operating profit by segment
The following tables summarize oursummarizes the Group’s sales and adjusted operating profit for each of Pearson’sits business segments. Adjusted operating profit is a non-GAAP financial measure and is included as it is athe key financial measure used by management to evaluate performance and allocate resources to business segments. The measure also enables investors to more easily, and consistently, track the underlying operational performance of the Group and its business segments by separating out those items of income or expenditure relating to acquisition and disposal transactions.
In ourits adjusted operating profit we havethe Group has excluded other net gains and losses, acquisition costs, and amortization and impairment of acquired intangibles.intangibles and the cost of major restructuring. The intangible charges relate only to intangible assets acquired through business combinations and acquisition costs are the direct costs of acquiring those businesses. Neither ofThe Group does not believe these charges are consideredrelevant to be fully reflectivean understanding of the underlying performance of the Group. Charges relating to acquired intangible assets arenon-cash charges that reflect the historical expenditure of the acquired business. These acquired intangible assets continue to be supported by ongoing expenditure that is reported within adjusted operating profit. Other net gains and losses that represent profits and losses on the sale of subsidiaries, joint ventures, associates and other financial assets are also excluded from adjusted operating profit as they distortit is important to highlight their impact on operating profit, as reported, in the period in which the disposal transaction takes place in order to understand the underlying trend in the performance of the Group.
Adjusted In 2016, the definition of adjusted operating profit enables managementwas amended to more easily trackexclude the cost of major restructuring activity. In January 2016, the Group announced that it was embarking on a restructuring program to simplify the business, reduce costs and position itself for growth in its major markets. The costs of the program in 2016 are significant enough to exclude from adjusted operating profit so as to better highlight the underlying operational performance of the Group. performance.
A reconciliation of operating profit to adjusted operating profit for continuing operations is included in the tables below:
Year Ended December 31, 2015 | Year Ended December 31, 2016 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
£m | North America | Core | Growth | PRH | Continuing | Discontinued | Total | North America | Core | Growth | PRH | Continuing | Discontinued | Total | ||||||||||||||||||||||||||||||||||||||||||
Sales | 2,940 | 836 | 692 | — | 4,468 | 312 | 4,780 | 2,981 | 803 | 768 | — | 4,552 | — | 4,552 | ||||||||||||||||||||||||||||||||||||||||||
66 | % | 19 | % | 15 | % | — | 100 | % | 65 | % | 18 | % | 17 | % | — | 100 | % | |||||||||||||||||||||||||||||||||||||||
Total operating profit | 113 | 30 | (595 | ) | 48 | (404 | ) | 1,232 | 828 | (2,448 | ) | (33 | ) | (100 | ) | 84 | (2,497 | ) | — | (2,497 | ) | |||||||||||||||||||||||||||||||||||
89 | % | 32 | % | (25 | %) | 4 | % | 100 | % | |||||||||||||||||||||||||||||||||||||||||||||||
Add back: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other net gains and losses | (19 | ) | 5 | — | 1 | (13 | ) | (1,184 | ) | (1,197 | ) | 12 | 12 | 1 | — | 25 | — | 25 | ||||||||||||||||||||||||||||||||||||||
Acquisition costs | — | — | — | — | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
Costs of major restructuring | 172 | 62 | 95 | 9 | 338 | — | 338 | |||||||||||||||||||||||||||||||||||||||||||||||||
Intangible charges | 386 | 79 | 583 | 41 | 1,089 | 3 | 1,092 | 2,684 | 16 | 33 | 36 | 2,769 | — | 2,769 | ||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||
Adjusted operating profit: continuing operations | 480 | 114 | (12 | ) | 90 | 672 | — | 672 | 420 | 57 | 29 | 129 | 635 | — | 635 | |||||||||||||||||||||||||||||||||||||||||
Adjusted operating profit: discontinued operations | — | — | — | — | — | 51 | 51 | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||
Total adjusted operating profit | 480 | 114 | (12 | ) | 90 | 672 | 51 | 723 | 420 | 57 | 29 | 129 | 635 | — | 635 | |||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||
66 | % | 16 | % | (2 | %) | 13 | % | 93 | % | 7 | % | 100 | % | 66 | % | 9 | % | 5 | % | 20 | % | 100 | % | — | % | 100 | % |
Year Ended December 31, 2014 | ||||||||||||||||||||||||||||
£m | North America | Core | Growth | PRH | Continuing | Discontinued | Total | |||||||||||||||||||||
Sales | 2,906 | 910 | 724 | — | 4,540 | 343 | 4,883 | |||||||||||||||||||||
64 | % | 20 | % | 16 | % | — | 100 | % | ||||||||||||||||||||
Total operating profit | 336 | 100 | (103 | ) | 15 | 348 | 325 | 673 | ||||||||||||||||||||
97 | % | 29 | % | (30 | %) | 4 | % | 100 | % | |||||||||||||||||||
Add back: | ||||||||||||||||||||||||||||
Other net gains and losses | (2 | ) | — | — | — | (2 | ) | (273 | ) | (275 | ) | |||||||||||||||||
Acquisition costs | 2 | 1 | 3 | — | 6 | — | 6 | |||||||||||||||||||||
Intangible charges | 108 | 21 | 132 | 54 | 315 | 3 | 318 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Adjusted operating profit: continuing operations | 444 | 122 | 32 | 69 | 667 | — | 667 | |||||||||||||||||||||
Adjusted operating profit: discontinued operations | — | — | — | — | — | 55 | 55 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total adjusted operating profit | 444 | 122 | 32 | 69 | 667 | 55 | 722 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
61 | % | 17 | % | 4 | % | 10 | % | 92 | % | 8 | % | 100 | % |
Year Ended December 31, 2015 | ||||||||||||||||||||||||||||
£m | North America | Core | Growth | PRH | Continuing | Discontinued | Total | |||||||||||||||||||||
Sales | 2,940 | 815 | 713 | — | 4,468 | 312 | 4,780 | |||||||||||||||||||||
66 | % | 18 | % | 16 | % | — | 100 | % | ||||||||||||||||||||
Total operating profit | 113 | 21 | (586 | ) | 48 | (404 | ) | 1,232 | 828 | |||||||||||||||||||
Add back: | ||||||||||||||||||||||||||||
Other net gains and losses | (19 | ) | 5 | — | 1 | (13 | ) | (1,184 | ) | (1,197 | ) | |||||||||||||||||
Costs of major restructuring | — | — | — | — | — | — | — | |||||||||||||||||||||
Acquisition costs | — | — | — | — | — | — | — | |||||||||||||||||||||
Intangible charges | 386 | 79 | 583 | 41 | 1,089 | 3 | 1,092 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Adjusted operating profit: continuing operations | 480 | 105 | (3 | ) | 90 | 672 | — | 672 | ||||||||||||||||||||
Adjusted operating profit: discontinued operations | — | — | — | — | — | 51 | 51 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total adjusted operating profit | 480 | 105 | (3 | ) | 90 | 672 | 51 | 723 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
66 | % | 15 | % | (0 | )% | 12 | % | 93 | % | 7 | % | 100 | % |
North America
North America sales increased by £34m£41m or 1% from £2,906m£2,940m to £2,940m£2,981m and adjusted operating profit increaseddecreased by £36m,£60m, or 8%13%, from £444m in 2014 to £480m in 2015.2015 to £420m in 2016. The increase in headline terms was a resultGroup estimates that, after excluding the impact of currencyexchange movements due to the strengthening of the US dollar against sterling. At constant exchange and after taking account of the contribution from acquisitionsbusinesses disposed in 2015 and disposals and adjustments made in respect of Connections Education,2016, North America sales declined by 1% and adjusted profits increased by 1%, mainly reflecting sales10% in 2016 compared to 2015. This decline was due to a significant decline in US higher education courseware, together with anticipated declines in US Higher Educationschool assessment (due to previously announced contract losses) and in school courseware (due to a smaller adoption market and a lower participation rate). These declines were partially offset at a profit level by year-on-year cost savings.growth in professional certification, virtual and blended schools and Online Program Management.
In our statutory results in 2015 we2016, the Group recognized an impairment to ourits US goodwill. At the end of 2016, following trading in the final quarter of the year, the Group determined that the underlying issues in the North American higher education courseware market were more severe than anticipated. These issues related to declining student enrolments, changes in buying patterns of students and correction of inventory levels by distributors and bookshops. As a result, in January 2017, the Group revised its strategic plans and estimates of future cash flows and, as a consequence, recognized an impairment to North America goodwill of £2,548m. In 2015, the Group recognized an impairment of £282m following ongoing cyclical and policy related pressures in ourits main US marketsmarkets. Also in the results was the cost of the major restructuring program of £172m and we alsoother losses on disposal mainly relating to the sale of the Pearson English Business Solutions business. In 2015 the Group realized a gain on sale of
PowerSchool of £30m, net of the write down of related software assets. In addition to the gain on PowerSchool there were also small losses on the sale and write down of smaller investments of £11m. In 2014 we recognized a £38m loss on disposal of our 5% stake in Nook Media and a £40m gain on the disposal of our stakes in Safari Books Online and CourseSmart.
Overall adjusted operating margins in the North America business improveddeclined in 2016 to 14.1% compared to 16.3% in 2015 to 16.3% compared to 15.3% in 2014 as a result of cost savings andfrom restructuring were more than offset by the absencemargin impact of restructuring costs following restructuringlower sales, particularly in 2014 and the benefit from list sales in 2015.higher education courseware.
North America — Schoolcourseware
In School, strong enrolment growth in Connections Education,school courseware, revenue declined 10% with a smaller new adoption market and a lower participation rate, partially offset by good growth in Clinical Assessments and market share gains in courseware were offset by the impact of a smaller textbook adoptions market and weakness in the open territories in K-12 courseware, and a change in revenue model at Connections Education which records revenue for services charged at cost on a net basis.
Connections Education, our virtual school business servedOpen Territories resulting from new product launches. The Group’s new adoption participation rate fell from over 68,000 full time equivalent students through full-time virtual and blended school programs90% in 2015 up 11% from 2014 as a result of underlying growth and a new state-wide schoolto 64% in North Carolina. Connections manages 30 virtual public schools with three new full-time state-wide virtual public schools approved2016 due to its decision not to compete for the 2016-17 school year to serve studentsCalifornia GradesK-8 English Language Arts (ELA) adoption with a core basal
program. It won an estimated 30% share of adoptions competed for (31% in Arkansas, Washington2015) and New Mexico. In its annual Parent Satisfaction Survey 93%19% of parentstotal new adoption expenditure of students enrolled$470m (29% of $730m in full-time online partner schools “recommend” Connections to other families.
In courseware, revenue declined year on year despite strong market share performance primarily due to a smaller overall adoption market as compared to 2014. Overall market share increased slightly2015), driven by a strong performance in Indiana Math and Social Studies and South Carolina Science and Social Studies. Sales in open territories grew strongly benefiting from the new adoption markets where we won 31% (2014: 25%) of new adoptions competed for, or 29% (2014: 25%) of the total new adoption market of $730m in 2015 (2014: $910m), led by a strong performanceMyPerspectives program in Grades K-6 Social Studies6 – 12 ELA, ReadyGen, Investigations 3.0, the extension of enVisionMATH to cover Grades 6 – 8 and growth in Texas and Indiana and in Grades K-6 Science in Oklahoma. We expanded iLit, ourthe digital reading intervention program, covering a broader range of students including English Language Learners. Research studies show that students using iLit gain two or more years of reading growth in a year using this tablet based program (http://pear.sn/PErhf). We launched ReadyGEN, a K-6 reading series and enVisionMATH2.0, the newest offering in the highly successful enVisionMATH K-6 math program.
In State and National Assessments, revenues for the full year declined due to contract losses. High-stakes online test volumes grew strongly, up 130% on 2014 to 26.4 million, as customers transitioned to computer based testing. Paper based high stakes test volumes grew 3% to 32.7 million. Pearson successfully delivered English Language Arts and Math PARCC assessments to over 4.8 million students across 11 states and the District of Columbia. ACT Aspire delivered Common Core aligned college and career readiness assessments to 1.3 million students up 67% from 2014 and was chosen for three new state-wide deployments in 2016. The states of Arkansas, Mississippi and Ohio will discontinue PARCC assessments in 2016. We were awarded contracts to deliver the Indiana Statewide Test of Educational Progress (ISTEP); renewed the Puerto Rican Tests of Academic Achievement (PPAA) and parts of the assessments contract awarded by the Texas Education Agency; and extended our contracts to administer the Mississippi Science Test and Mississippi Subject Area Testing Program. We ceased to administer the majority of the current Texas STAAR contract in September 2015. Pearson extended its partnership with the College Board for the SAT assessment with the award of a five-year contract for processing of the redesigned SAT and PSAT assessments. Pearson will continue to provide the essay-scoring component for the SAT until March 2016.iLit.
Clinical Assessment grew well benefiting from continued growth of the fifth edition of theWechsler Intelligence Scale for Children (WISC-V), strong growth inBehavior Assessment for Children 3e (BASC) and rapid growth in Q-Interactive, Pearson’s digital solution for Clinical assessment administration with geographic expansion and continued strong growth in active users to over 9,000 from 4,000 in 2014 with test administrations up over 400% to 1.3 million sub-tests.
North America — Higher Education
In Higher Education, market share gains inhigher education courseware, were offset by lower enrolments (totaltotal US Collegecollege enrolments fell 1.7%1.4%, with combinedtwo-year public and four-yearfor-profit enrolments declining 4.4%5.0%, affected by a rising employment raterates and regulatory change affectingimpacting thefor-profit and developmental learning sectors), higher textbook returns and list sales. Strong enrolment growth at Pearson Online Services wassectors, partially offset by lowermodest growth in combined enrolments at four-year public and privatenot-for-profit institutions. Net revenues from Learning Studio, ain the Group’s US higher education Learning Management System (LMS)courseware business declined an unprecedented 18% during the year. The Group estimates that we are retiring,2% of this decline was driven by lower enrolment, particularly in Community College and among older students; 3 – 4% by an accelerated impact from rental in the secondary market; and approximately 12% due to an inventory correction in the channel reflecting the cumulative impact of these factors in prior years. Underlying market share trends remained stable and the impact of a change in revenue model.
Gross courseware revenues fell 1.5% (compared to industry gross revenue declines of 2.7%) due to lower college enrolments offset by market share gains. Net revenues declined 5.7% (compared to industry net declines of 7.5%) reflecting the impact of higher returns. OurGroup’s market share in courseware benefited from strong performance fromthe 12 months to January 2017 was 40.4%.
During 2016, the Group performed strongly in Science and Business & Economics with key titles including: HubbardEconomics 5eApplying, Biochemistry: Concepts, HibbelerEngineering Mechanics & Connections 1e; Amerman,Human Anatomy & Physiology 1e; Marieb,Human Anatomy & Physiology 10e; Young, Freedman,University Physics 14e and MariebParkin,Human Anatomy & Physiology 10eEconomics 12e.
Global digital registrations of MyLab and related products grew 3% to nearly 13 million.2%. In North America, digital registrations grew 3% to almost 11 million2% with good growth in Science, Business & Economics Statistics, REVEL and skills applications like Pearson Writer,Revel, partly offset by continued softness in developmentalDevelopmental Mathematics. Faculty generated caseSkill Builder Adaptive Practice, thein-house adaptive homework solution launched in over 60 titles in 2016. Faculty-generated studies indicate that the use of MyLab, Mastering and Revel programs, as part of a broader course redesign, can support improvements in student test scores and lower institutional cost (http://pear.sn/IZxLE)cost. Findings from an efficacy study suggest that students in Developmental Mathematics courses who increased their number of homework and quiz attempts in MyMathLab-Developmental increased their odds of passing; and that users of MyLab Writing who complete seven topics or more increase their final exam scores by 14%. We launchedIn another study at a suite of features that include Adaptive Practicemid-sized university in our MyLabsthe Midwest, during the 2015 – 2016 academic year, students using My IT Lab were able to personalize subjects including mathematics and nursing practice, Predictive Analytics Early Alerts in Mastering to help science instructors support at-risk students, gamification features in Business and rich learning analytics dashboards in numerous products that offer deep insight into students’ progress, performance and engagement.
raise their exam scores by half a letter grade for every seven additional activities attempted. In Pearson Online Services, our Higher Education Online Program Management (OPM) business, course enrolments grew strongly, up 25% to over 265,000, boosted by strong growth in Arizona State University Online where we renewed our partnership atinstitutional courseware solutions, the start of 2015. We extended our collaboration with Maryville University to launch a Bachelor and Master’s in Cybersecurity and a Doctorate in Leadership. Ohio University is partnering with Pearson to launch a Master’s in Financial Economics and Public Relations. University of Nevada Reno is partnering to increase access to the Master of Social Work degree program online. Pearson launched a new managed programs service model with Cincinnati State Technical and Community College, adapting traditional OPM services to the Community College market signing a landmark 10-year agreement to provide marketing, recruiting, admission, and retention services both to online and ground-based programs.
In enterprise solutions, PearsonGroup signed significant148 large-scale, enterprise adoptions of cross-disciplinedirect digital content,access (DDA), where content is purchased via an upfront course fee and integrated with university IT systems, with Jones County College, National University, Algonquin College andsystems. New signings in the year included University of Missouri system. We signed an expanded strategic partnership agreement with Southern New Hampshire University’s (SNHU) College of OnlineTennessee — Knoxville and Continuing Education (COCE). Pearson will support curriculum development, online tutoring, enterprise wide content and data integration, eBooks with a print-on-demand option and data and analytics services which will provide greater visibility into students’ achievement of learning outcomes. The Charles A. Dana Center at The University of Texas at Austin is collaborating with Pearson to provide web-based course resources to Community Colleges across Texas that dramatically shorten the time it takes for students to earn college credit in mathematics as part of the New Mathways Project. Three courses were launched in 2015: Foundations Mathematical Reasoning, Statistics Reasoning and Quantitative Reasoning, with more planned in 2016. Pearson was named as the premier US Green Building Council Education Partner and will offer curriculum and course services to universities, associations, training companies, corporations, and workforce education and apprenticeship programs. We are partnering with Broward College to launch new competency-based workforce certification pathways focused on IT and Healthcare. Pearson will support Broward’s strategy by providing 12 industry certifications with existing workforce education courseware, as well as curriculum development services to build new courses towards certification and the Acclaim badging platform.Kentucky State University.
North America — Professionalassessment
In Professional,school assessment (State and National Assessments), revenues declined 22% due to previously announced contract losses. The states of Arkansas, Mississippi and Ohio discontinued the PARCC assessments and the Group ceased to administer the majority of the current State of Texas Assessments of Academic Readiness (“STAAR”) contract, as announced in 2015. The Group replaced the loss from Massachusetts leaving PARCC by winning a five-yearsub-contract to deliver Massachusetts’ new custom assessment. The Group was awarded aone-year emergency contract in Tennessee to score and report 2016 state assessments. Kentucky renewed a contract with the Group for two years to provide its state assessments in Math, English Language Arts, and Science. Arizona extended the Group’s contract to provide the English language learner assessments for the 2016 – 2017 school year, while Colorado extended a contract with the Group to provide PARCC, science and social studies assessments. The Group won new contracts in Delaware for social studies assessment and asub-contract to develop high school math and English language arts assessments in Louisiana. The Group delivered 23.6 million standardized online tests toK-12 students, a reduction of 11% from 2015 due to overall reduction in test counts across contracts. Paper-based standardized test volumes fell 33% to 21.9 million. Digital tests on the Group’s TestNav platform now account for over 52% of testing volumes. The Group launchedaimswebPlusTM, an update to its leading formative assessment platform, first launched in 2000.
In professional certification, revenues grew strongly at VUE due to higher volumes of professional certification assessments.7% with VUE global test volumes grew 11% year on yearup 3% to 14.2almost 15 million, boosted by continued growth in IT, Professional and GED, with increased volumes from Microsoft Certified Professional (MCP) Program globally, National Council of State Boards of Nursing andprofessional, US teacher certification programs. VUEprograms and strong growth in GED. The Group renewed its contracts with the Certiport Microsoft Office Specialists and MicrosoftComputing Technology Associate programs for an additional year and extended our partnership with Cisco SystemsIndustry Association (CompTIA) for three years, the Florida Department of Business & Professional Regulation for five years, the American Register of Radiologic Technologists (ARRT) for seven years and halfa contract to administer insurance back office licensing services in North Carolina for five years.
Clinical assessment sales declined 1% following the strong performance over the previous two years driven by the introduction of the fifth edition of the Wechsler Intelligence Scale for Children(WISC-V). Behavior Assessment for Children 3e (BASC) continues to see strong growth; andQ-Interactive, the Group’s digital solution for clinical assessment administration, saw continued strong growth in licence sales withsub-test administrations up more than 80% over the same period last year.
North America — services
Connections Education, the Group’s virtual school business, served nearly 73,000 full-time equivalent students through full-time virtual and blended school programs, up 6% on last year. Connections revenues grew 8%. Five new full-time online, statewide, partner schools opened for the 2016 – 2017 school year in Arkansas, Washington, Colorado, Pennsylvania and New Mexico. The 2016 Connections Education Parent Satisfaction Survey showed strong results with 92% of families with students enrolled in full-time online partner schools stating that they would recommend the schools to others.
In Pearson Online Services, the higher education OPM business, course enrolments grew strongly, up over 19% to more than 314,000, boosted by strong growth in Arizona State University Online, new partners and program extensions. The Group signed 11 new programs in 2016 including two new partners: Eastern Gateway Community College in collaboration with American Federation of State, County and Municipal Employees, and took over an existing suite of online Nursing programs with Duquesne University. Strong growth in OPM was partially offset by a decline in Learning Studio, which is currently being retired. Overall revenues grew 5%.
Core
Sales in our Core markets decreased by £74m,£12m, or 8%1%, from £910m£815m in 20142015 to £836£803m in 20152016 while adjusted operating profit decreased by £8m,£48m, or 7%46%, from £122m£105m in 20142015 to £114m£57m in 2015.2016. At constant exchange there was a decline in salesand after excluding the closure of 5% and a decline in profits of 2%. Acquisitions and disposals were not significant in the Core segment in either 2015 or 2014. Growth in Pearson Online Services in Australia, Wall Street English in Italy, Clinical Assessment in Germany, the disposal of othersub-scale businesses and the Pearson Testtransfer of some smaller businesses to the Growth segment, Core sales declined by 4% and profits by 51%. This decline was primarily due to expected declines in vocational course registrations in UK schools and courseware. This was partially offset by strong growth in English assessments in Australia was more than offset by revenue declinesand OPM services in the UK qualifications as the business nears the end of a period of policy change, revenue declines at VUE, phasing and market weakness in Australian Higher Education courseware and the focusing of our UK school courseware on products that directly support Pearson Qualifications. Adjusted operating profit declines were due to lower revenue offset by tight cost control.Australia.
In ourits statutory results in 2016, the Group recognized restructuring costs of £62m and a loss on closure of Wall Street English Germany of £12m. In 2015, weit recognized an impairment to ourits goodwill of £37m mainly related to ourthe English language teaching businesses in Europe.
Core — courseware
Courseware revenues declined 7%. School revenues declined in smaller markets in Europe and Africa, in Australia as the Group exited a number ofsub-scale market segments and in the UK primary due to a smaller adoption cycle, partially offset by growth in secondary in the UK due to new product launches aligned with the Group’s qualifications and the successful delivery of The Crunch food project in partnership with the Wellcome Trust. In higher education courseware, revenues declined in smaller markets, in Australia due to phasing and in the UK as the Group exitedsub-scale market segments. In the UK, 2.1 million pupils are now using a Pearson
digital service on ActiveLearn Primary, including Bug Club, up from 1.8 million a year ago. In a randomized control trial, where its impact was periodically assessed, Bug Club was shown to have made a highly statistically significant impact on pupils’ reading, vocabulary and spelling performance, with a greater positive impact in schools with a higher proportion of children receiving free school meals.
Core — assessments
In thehigher education and School assessment, revenues fell 10%. UK qualifications have been impacted by government policy, where changes to accountability measures have led to a further 20% decline inlower vocational registrations. As expected, BTEC Firsts registrations in 2015.UK schools have begun to stabilize, though overall BTEC and apprenticeship registrations continued to fall in 2016, albeit at a slower rate. GCSE and GCE entries for summer 2015 grew2016 declined modestly compared with 2014 resulting from increases in GCSE registrations in Sport, ICT and Business and strength in iGCSE entries. We2015, primarily due to lower AS level entries as a result of a policy-driven shift to more linear courses. The Group successfully delivered the National Curriculum Test for 2015,2016, marking 43.4 million scripts from 1.7 million students and successfully transitionedimplemented the marking of the testtransition from levels to an online-only model.
In courseware, UK school revenue fell with growth in primary school more than offset by declines in secondary as the vocational market contracted and our upper secondary revenues were impacted by lower market participation as we focus on products that directly support our qualifications. More than 5,400 UK Schools now subscribe to at least one Bug Club service, our primary school blended reading program, representing growth of nearly 16% in the year. There are over 1.8 million pupils, more than 9,000 schools and 152,000 teachers currently using a service on ActiveLearn Primary. Italy revenues declined slightly with market share gains in primary offset by market weakness and a lower share in upper secondary. Australia revenues declined, with growth and increased market share in primary more than offset by a weaker secondary market.scaled scores.
Clinical assessment grew well9% with GermanyAustralian revenues benefiting from strong growth in KaufmanAssessment Batterythe new edition of theWISC-V. At VUE, revenues declined 1% due to the initial impact of contract renewals. The Group was awarded contracts: to continue to administer the UK driving theory test for Children (K-ABC), partly offset by declines in Australia afterthe UK DVSA for four years from September 2016; to continue to provide testing services to the Construction Industry Training Board for four years from April 2017; and to administer the UK Clinical Aptitude Test for five years from January 2017. In France, VUE was awarded a strong year in 2014 drivennew licence by the release of WechslerPrimary and Preschool Scale of Intelligence IV.
Core — Higher Education
In courseware, UK revenues declined, primarily dueDélégation à la Sécurité et à la Circulation Routières (DSCR) du Ministere de l’Intérieur to a weak market. In Australia, revenues declined significantly due to phasing and market weakness. In online services, our Australian University Partnerships business grew strongly with combined course enrolments of nearly 4,000 up 380% from 2014. The growth of our partnership with Monash University was led by the Graduate Diploma in Psychology, which is nowbe one of Monash’s largest postgraduate courses. Our new partnership with Griffith University started very strongly
seeing consistent demand for the MBA program andproviders administering the launch of two further courses. Kings College London partnered with Pearson to launch online postgraduate degree programs in Psychology and Law. Total enrolled students at Pearson College doubled to 232.
Core — Professionalcountry’s computer-based driving theory exam throughout France.
The Pearson Test of English (PTE) Academic (PTEA) saw continued strong growth in global test volumes and revenues after gaining approval fromwith the Australian Department of Immigration and Border Protection to administerand New Zealand immigration accepting the test for proof of English ability for a broad range of student visas. The number of professional associations using PTE Academic to credential English language tests linkedstandards of their members continued to visa applications. grow and now includes the Australian Nursing & Midwifery Accreditation Council. All Australian and NZ universities now accept PTE Academic for admissions purposes, as do most of the UK and Canadian universities, and a growing number of US institutions including Harvard Business School, Yale and Wharton Business School.
Core — services
In higher education services, revenues grew 12%. OPM revenues grew 74%. Australia saw strong growth due to the successful partnership with Monash University, led by the Graduate Diploma in Psychology, now one of Monash’s largest postgraduate courses. The partnership with Griffith University remains strong, with performance driven mainly by the MBA course. In the UK, the ongoing OPM partnership with King’s College London saw the Group commence teaching in early 2016 of several post graduate Psychology and Law programs. The Group has signed an additional partnership with Manchester Metropolitan University to launch three online postgraduate degrees in Business Studies in 2017, and has also partnered with another Russell Group University to launch a wide range of online postgraduate programs over the next four years.
Wall Street English revenues fell slightly with strong growthgrew strongly in Italy offset by declinesas the Group opened new centers and rolled out the New Student Experience (NSE) in all centers in the country. The NSE delivers a next generation Wall Street English service with adaptive, personalized learning incorporating Pearson’s Global Scale of English. The Group announced the closure of its unprofitable Wall Street English schools in Germany.
Growth
Growth sales decreasedincreased by £32m,£55m, or 4%8%, to £692m£768m in 20152016 from £724m£713m in 2014.2015. Adjusted operating profit decreasedincreased by £44m£32m to a profit of £29m in 2016 from a loss of £12m£3m in 2015. The Group estimates that after
excluding the impact of exchange rate movements, the incremental contribution from businesses disposed in 2015 and 2016 and the transfer of smaller businesses from a £32m profit in 2014. At constant exchange there was decline inthe Core segment, sales ofdeclined by 1%. In China, revenues grew modestly reflecting strong sales of premium services in our direct delivery English Language Learning businesses offset by list disposals. In Brazil, revenues were stable with good growth in private sistemasadult English language learning and language schoolsEnglish courseware was partly offset by declines in government funded sistemas andEnglish test preparation. In Brazil, revenues declined due to enrolment declines in the English language schools.learning business, related to macroeconomic pressures. In South Africa, revenues declined significantly due to a smaller textbook adoption cycle and lower enrolmentsgrew strongly with growth in school textbooks, offset by enrolment declines at CTI, due to a reduction in the number of qualified students graduating from high school and tightening consumer credit affecting re-enrolment rates.CTI. In the Middle East, our business was impacted byrevenues fell significantly due to the previously announced withdrawal from thean agreement to run three Saudi Colleges of Excellence, contracts.with the colleges transitioning to new providers from June 30, 2015.
Adjusted operating profit decreased due to the strengthening of Sterling against key Emerging Market currencies, revenue declines in South Africa, a contract termination charge arising from the transition of our three Saudi Arabian Colleges of Excellence to new providers, cost inflation and additional investment in China; partially offset byincreased reflecting the benefits of restructuring and integrationthe absence of a contract termination charge in Brazil.the Middle East which impacted the first half of 2015.
In ourits statutory results, the Group included restructuring costs of £95m in 2016. In 2015, reflecting the significant economic and market deterioration in the Group’s operations in emerging markets, wethe Group wrote down the balance sheet value of ourits goodwill and intangibles for businesses in Growth markets by £530m. This represented impairments of £269m for Brazil, £181m for China, £58m for South Africa and £22m for other Growth markets.
In 2014 we impaired intangible assets in our IndianFebruary 2017, the Group announced the intention to explore potential partnership for its English language learning business by £77m largely reflecting the reduced valueWall Street English (WSE) and possible sale of online tutoring which was primarily focused on the US market.its English test preparation business Global Education (GEDU).
Growth — Schoolcourseware
Courseware revenues grew 8%, due to strong growth in school textbook sales in South Africa and English language courseware in China, Argentina and Mexico partially offset by weakness in Brazil. The Group saw strong growth in registrations for MyEnglishLab boosted by new editions of key titles such as Speakout and Top Notch. Middle East school courseware declined as a result of macroeconomic pressure and lower purchases from key international school clients.
Growth — services
In China, growth in Wall Street English (WSE) was offset by declines at Global Education. Enrolments grew 8% at WSE, to 72,500. The Group launched the New Student Experience across all 68 WSE China centers, opened two new retail centers in Beijing and Shenzhen and a new corporate training center in Shenzhen. In Global Education, two cities were transferred to franchisees. Underlying revenue declined, with lower enrolments partially offset by an ongoing shift to more premium courses with smaller class sizes.
In Brazil, student enrolment in the Group’s sistemas business fell 9% due to attrition in NAME and Dom Bosco partially offset by new students at COC. Revenues grew slightly due to improved mix. Revenues in English language learning fell due to challenging economic conditions, partially offset by an increased footprint for the Group’s leading brand in language learning, Wizard, where new school openings expanded the number of franchise schools by 7% to 2,392. At the Group’s public sistema (NAME), an efficacy study suggested that, after controlling for all of the identified student and school level factors, grade 5 NAME students significantly outperformed comparison students by 28 points in mathematics equating to one level higher attainment in the state Prova Brasil assessment. In another study at the Group’s largest private sistema (COC), students scored significantly higher than students in similarnon-COC schools in Writing, natural sciences, humanities, language, and mathematics.
In South Africa, there was continued pressure on Government spending on textbooks duestudent enrolment at CTI Education Group and Pearson Institute of Higher Education fell by 25% to budget pressures, which resulted in the value of the textbook market falling 60% from a peak of R2.9bn in 2013 to an estimated R1.15bn in 2015. We continued to perform well competitively and maintained a leading market share.8,500 driven primarily by tightening consumer credit affecting enrolment rates.
In Brazil, sistemas revenues grew well with strong growth in private sistemas partly offset by declines in NAME, our public sistema, following the cancellation of a large contract as a result of government spending cuts. Overall sistema enrolments fell 7% to nearly 449,000 with declines in NAME partly offset by growth in our three private sistemas, led by our largest sistema, COC. More than half of COC schools that participated in the High School National Exam (ENEM) ranked among the top 3 schools in their municipalities.
In India, enrolments at our managed schools grew 14% to nearly 27,000 students and we launched a pilot in more than 60 schools ofPearson MyPedia, an inside service ‘sistema’ solution for schools comprising print and digital content, assessments and academic support services. Middle East school courseware and professional development revenues grew strongly on improved distribution.
Growth — Higher Education
In South Africa, after strong growthservices, expanded to over a number of years, student enrolments at CTI universities fell by 16% to 11,300 driven by a 13% decline200 schools with approximately 56,000 learners in qualified graduating high school students and tightening consumer credit affecting re-enrolment rates. In Mexico, our fully accredited online university partnership, UTEL, increased the number of students enrolled by 34% toits first full year since launch. PTE Academic saw nearly 12,600. In India, Higher Education courseware revenues grew strongly. Cornell University partnered with Pearson to launch the Cornell-ILR Experienced Managers Program in India, with a blended learning approach combining online and in-person instruction.
In the Middle East, our three-year partnership with Taibah University in Saudi Arabia, to enable its transformation to a fully blended and personalized learning model, is progressing with over 4,000 students enrolled in our solution in 2015. Our partnership with the Preparatory Year Deanship at Um Al Qura University (PYP-UQU) to provide online learning and assessment technology has delivered 13,000 MyMathLab, MyITLab and MasteringPhysics licences. We withdrew from an agreement to run three Saudi Colleges of Excellence, with the colleges transitioning to new providers from 30 June 2015. This resulted in a termination charge.
Growth — Professional
In Pearson English, good50% growth in direct delivery in China, private expenditure in language schools in Brazil, and English Language Teaching (ELT) was partly offset by the impactvolume of lower public expenditure in language schools in Brazil.
In China, Wall Street English (WSE) achieved strong revenue growth, reflecting success in the premium segment and the growth in VIP branded offerings. Overall enrolments grew modestly to over 67,000 with new enrolments growing strongly. We launched the New Student Experience (NSE) in six pilot centers during December 2015. The NSE delivers a major upgrade to the Wall Street English service with adaptive, personalized learning incorporating Pearson’s Global Scale of English. Global Education achieved moderate revenue growth as the market shifted to more intensive premium courses with smaller class sizes and new products, which resulted in enrolments declining 6.5% to 85,110.
We launched around 30 new MyEnglishLab products includingTop Notch 3e andProgress. MyTOEFLLab and the second edition of MyIELTSLab successfully launched in China in WSE and Global Education. Global student registrations for MyEnglishLab and other ELT digital courseware grew 14% to 739,000. Pearson Test of English grew strongly in India.
Grupo Multi in Brazil saw strong revenue growth at Wizard, our consumer facing franchised English language learning business, but this was offset by declines in government orders due to public spending cuts. We opened 40 new school-in-school units for Multi English franchises in K-12 sistemas partner schools.tests taken.
Penguin Random House
Pearson ownsDuring both 2016 and 2015, the Group owned 47% of Penguin Random House the first truly global consumer book publishing company. OurThe Group’s share of Penguin Random House adjusted operating profits were £90m£129m compared to £69m£90m for 2014.2015.
Penguin Random House haddelivered a strong profit performance in 2016 with continued net benefits from the merger integration. Revenues declined after a very strong performance in 2015, which was boosted by publicationthe success of hundreds of Adult and Children’s bestsellers across its territories, including the fiction mega-successes ofGreyandThe Girl on the Train, which each sold over 7 million copies.
The U.S. business published 584New York Times print and e-book bestsellers in 2015 (2014: 760, based on a broader New York Times title count than 2015). The division benefited from the multi-million copy successes ofGrey by E L James and the Adult debut novelThe Girl on the Train by Paula Hawkins. Children’s authors who extended their outstanding sales in 2015 include Dr. Seuss, John Green, R.J. Palacio, James Dashner, Rick Yancey, Drew Daywalt, and Oliver Jeffers. Additional notable Adult titles includeThe Life-Changing Magic of Tidying Up by Marie Kondo;Rogue Lawyer by John Grisham;Lost Ocean by Johanna Basford;Between The World and Me by Ta-Nehisi Coates; and the movie tie-in paperbackThe Martian by Andy Weir.
The UK business published 201 titles on theSunday Times bestseller lists (2014: 206). The division enjoyed outstanding sales forsellersGrey andThe Girl on the Train, which eachdue to the anticipated industry-wide decrease in ebook purchases following 2015’s industry-wide digital-terms changes.
Revenues in 2016 benefited from strong sales ofThe Girl on the Train by Paula Hawkins, in its second year of publication, and Jojo Moyes’sMe Before You andAfter You, together with broad resilience of print books, including growing print sales online and increased demand for audio books. The US business published 585 New York Times print and ebook bestsellers in 2016 (2015: 584). The division benefited from multi-million copy successes ofThe Girl on the Train and two novels from Jojo Moyes. Additional number one adult titles wereThe Whistler by John Grisham;Night School by Lee Child;Fool Me Once by Harlan Coben;When Breath Becomes Airby Paul Kalanithi; and Ina Garten’sCooking For Jeffrey. Children’s authors who extended their outstanding sales in 2016 included Dr. Seuss and Roald Dahl, whoseThe BFG benefited from a movietie-in; Rick Yancey; James Dashner; Drew Daywalt; Oliver Jeffers; and R. J. Palacio.
The UK business published 202 titles on the Sunday Times bestseller lists (2015: 201). The division’stop-selling hardback wasNight School by Lee Child.The Girl On The Train sold over three million copies in multi-formats, andMe Before You andAfter You cumulatively sold more than 2 million copies,2.5 million.Top-performing children’s franchises were Roald Dahl and for Harper Lee’sGo Set A Watchman and Jamie Oliver’sEveryday Super Food. Great demand continued forthe tenth volume in Jeff Kinney’sDiary of aOf A Wimpy Kid and John Green’s titles, and for DK Publishing’s Star Wars publications. Penguin Random House’s promising 2016 publishing lists include new titles from Lisa Brennan-Jobs, Bill Bryson, Lee Child, Harlan Coben, Phil Collins, Janet Evanovich, Ina Garten, John Grisham, Jazz Jennings, Jeff Kinney, Marie Kondo, John le Carré, Jojo Moyes, Jamie Oliver, James Patterson, Nathaniel Philbrick, Pope Francis, Nora Roberts, John Sandford, Danielle Steel and Star Wars.series.
Penguin Random House completed the sale of Author Solutions, its supported self-publishing servicestravel-content division, Fodors, to Internet Brands, an online media and technology company, on June 30, 2016, and transferred the ownership of Random House Studio, its film and television development and production division, to an affiliatea division of Najafi Companies, an international private-investment firm, on 31 December 2015, and sold its Australian online bookseller Bookworld to online retailer Booktopia in August 2015.Bertelsmann.
The integration of Penguin and Random House continued to provide benefits in 2016 including net benefits through organizational alignments andfrom the first full year of systems and warehouse combinations in 2015, as well as for 2016 and thereafter. The North America warehouse consolidation was completed in February 2015, and in December, the UK business announced it will be gradually closing its Rugby distribution center and relocating its inventory to two other locations. The integration in Spain and Latin America of Santillana with Grupo Editorial Penguin Random House remains on course.America.
Results of operations
Year ended December 31, 2014 compared to year ended December 31, 2013
Consolidated results of operations
Sales
Our total sales from continuing operations decreased by £188m, or 4%, from £4,728m in 2013, to £4,540m in 2014. The overall decrease reflected growth on a constant exchange rate basis of 2% together with additional contributions from acquisitions, which was more than offset byWith the impact of currency movements. The 2014 sales, translated at 2013 average exchange rates, would have been £269m more at £4,809m.
North America sales declined by £102m or 3% from £3,008m to £2,906m, due to the strengthening of sterling against the US dollar. We estimate that after excluding acquisitions and disposals and the impact of exchange, North America sales growth was 2% in 2014 compared to 2013. North America continued to be the most significant source of our sales and as a proportion of sales contributed 64% in both 2014 and 2013. Revenue growth in Connections Education, VUE, Clinical and Higher Education was partially offset by declines in School courseware and State assessments.
Core sales declined by £98m or 10% from £1,008m in 2013 to £910m in 2014. We estimate that after excluding acquisitions and disposals and the impact of exchange, Core sales declined by 6%. Modest growth in Italy and good growth at VUE was offset by declines in UK assessment revenues, due to the impact of policy changes on our UK school qualifications business and reduction in partner market revenues, due to divestments and a move to distributor models implemented in 2013.
Growth sales increased by £12m or 2% from £712m in 2013 to £724m in 2014, despite the strength of sterling against key emerging market currencies. We estimate that after excluding both the impact of exchange rates sales grew by 12%, benefiting from the acquisition of Grupo Multi, and after excluding the impact of exchange rates and acquisitions and disposals were flat primarily due to the phasing of purchasing and a stronger school textbook adoption in South Africa in 2013. Growing English Language Learning enrolments in China and college enrolments in Saudi Arabia and South Africa were offset by a smaller school textbook market in South Africa, lower revenues in Brazil from sistemas, and ELT and higher education textbooks.
Cost of goods sold and operating expenses
The following table summarizes our cost of sales and net operating expenses:
Year Ended December 31 | ||||||||
2014 | 2013 | |||||||
£m | £m | |||||||
Cost of goods sold | 2,021 | 2,123 | ||||||
Operating expenses | ||||||||
Distribution costs | 84 | 88 | ||||||
Selling, marketing and product development costs | 931 | 995 | ||||||
Administrative and other expenses | 1,168 | 1,056 | ||||||
Restructuring costs | 64 | 162 | ||||||
Other net gains and losses | (2 | ) | 16 | |||||
Other income | (120 | ) | (115 | ) | ||||
|
|
|
| |||||
Total net operating expenses | 2,125 | 2,202 | ||||||
Impairment of intangible assets | 77 | — | ||||||
Total expenses | 4,223 | 4,325 | ||||||
|
|
|
|
Cost of goods sold. Cost of sales consists of costs for raw materials, primarily paper, printing and binding costs, amortization of pre-publication costs, royalty charges, the cost of service provision in the assessment and testing business and the cost of teaching and facilities in direct delivery businesses. Our cost of sales decreased by £102m, or 5%, from £2,123m in 2013, to £2,021m in 2014. The decrease corresponds primarily to the decrease in sales, with cost of sales at 44.5% of sales in 2014 compared to 44.9% in 2013.
Distribution costs. Distribution costs consist primarily of shipping costs, postage and packing. Distribution costs decreased due to the shift to digital and services products.
Selling, marketing and product development costs. Our selling, marketing and product development costs decreased by £64m or 6% from £995m in 2013 to £931m in 2014. As a percentage of sales these costs were relatively consistent at 20.5% in 2014 and 21.0% in 2013, reflecting some benefits of restructuring and the effect of foreign exchange.
Administrative and other expenses. Our administrative and other expenses increased by £112m or 11% from £1,056m in 2013 to £1,168m in 2014 due to increased intangible amortization and increased IT costs.
Restructuring costs.Restructuring costs decreased to £64m in 2014 compared with £162m in 2013. In 2013 the Group began a significant transformation and restructuring program which incurred significant upfront costs primarily related to redundancies and property rationalization. These costs decreased in 2014 as the program reached completion.
Other net gains and losses. Included in other net gains and losses in 2014 are gains on the sale of joint venture interests in Safari Books Online and CourseSmart totaling £40m and a loss on the disposal of an investment in Nook Media of £38m. Included in 2013 is a loss on the disposal of the Japanese school and local publishing assets.
Other income. Other operating income mainly consists of freight recharges, sub-rights and licensing income and distribution commissions, together with the service fee income from Penguin Random House. Other operating income increased to £120m in 2014 compared to £115m in 2013 due to a full yearintegration of Penguin Random House service fee income of £41m in 2014 comparedcomplete, and with a half year of income of £28m in 2013, offset by a decrease in gainsgreater industry-wide stability on minor asset disposals in 2014 compared with 2013.
Impairment.In 2014 we impaired intangible assets in our Indian business by £77m largely reflectingdigital terms, on February 24, 2017 the reduced value of online tutoring which was primarily focused on the US market.
Share of results of joint ventures and associates
The contribution from our joint ventures and associates increased by £3m to £31m in 2014 from £28m in 2013. The increase is due to a full year contribution from Penguin Random House partly offset by intangible amortization.
Operating profit
Operating profit decreased by £83m or 19% from £431m in 2013 to £348m in 2014. In 2014 our operating profit included a £77m write down of the balance sheet value of intangibles in our Indian business, a £38m loss on disposal of our stake in Nook Media and a £40m gain on the disposal of our stake in Safari Books Online and CourseSmart. Currency movements adversely affected operating profit, and we estimateGroup announced that operating profit would have been approximately £49m higher if translated at constant 2013 exchange rates.
Net finance costs
Net finance costs increased from £73m in 2013 to £93m in 2014. Net interest payable decreased from £71m in 2013 to £64m in 2014. Although our fixed rate policy reduces the impact of changes in market interest rates, we were still able to benefit from low average US dollar and sterling interest rates during the year. Year-on-year, average three month LIBOR (weighted for the Group’s net borrowings in US dollars and sterling at each year end) fell by 0.1% to 0.2%. This decrease in floating market interest rates, along with the impact of foreign exchange translation and additional interest receivable on cash balances held overseas, more than offset the effect of higher levels of average net debt in the period. These factors contributed to the overall decrease in the Group’s average net interest payable from 4.8% to 3.6%. The Group’s average net debt rose by £260m, largely as a result of net acquisition activity and the translation of our predominantly US dollar debt.
Other net finance costs are finance income and costs on retirement benefits, finance costs on put options and deferred consideration associated with acquisitions, foreign exchange and other gains and losses. In 2014 the total of these items was a loss of £29m compared to a loss of £2m in 2013. Both the losses in 2014 and 2013 mainly relate to foreign exchange differences on un-hedged cash and cash equivalents and other financial instruments. For a more detailed discussion of our borrowings and interest expenses see “— Liquidity and Capital Resources — Capital Resources” and “— Borrowings” below and “Item 11. Quantitative and Qualitative Disclosures about Market Risk”.
Taxation
The total tax charge in 2014 of £56m represents 22.0% of pre-tax profits compared to a charge of £88m or 24.6% of pre-tax profits in 2013. Our overseas profits, which arise mainly in the US, are largely subject to tax at higher rates than that in the UK (whichit had issued an effective statutory rate of 21.5% in 2014 and 23.25% in 2013). The decrease in the tax rate is mainly due to tax benefits arising on the increase in intangible charges partly offset by adjustment arising from settlements with tax authorities.
Discontinued operations
In October 2012, Pearson and Bertelsmann announced an agreement to create a new consumer publishing business by combining Penguin and Random House. The transaction completed on July 1, 2013 and from that point, Pearson no longer controlled the Penguin Group of companies and has equity accounted forexit notice regarding its 47% associate interest in Penguin Random House.
The loss of control resulted in the Penguin business being classified as held for sale on the Pearson balance sheet June 30, 2013 and a subsequent gain on sale of £202m was reported in the second half of 2013. Included in the gain reported in 2013 was a provision for amounts payable to Bertelsmann upon settlement of the transfer of pension liabilities to Penguin Random House. During 2014 it was decided that this transfer would not go ahead as planned and the costs have been credited back in the £29m gain reported against the disposal in 2014.
The results for Penguin in the first half of 2013 and the gains reported in both 2013 and 2014 have been included in discontinued operations. The share of results from the associate intereststake in Penguin Random House arising into its JV partner Bertelsmann, with a view to selling its stake or recapitalizing the second half of 2013business and in 2014 has been included in operating profit in continuing operations.
extracting a dividend. On November 29, 2013 we announcedOctober 5, 2017 the sale of the Mergermarket Group to BC Partners. The sale was completed on February 4, 2014 and resulted in a gain of £198m after tax. The gain on sale and the results for the Mergermarket business for 2013 and 2014 have been included in discontinued operations.
On 16 October 2015, Pearson substantially completed the sale of a 22% share in Penguin Random House to Bertelsmann, retaining a 25% share. The Group used the proceeds from this action to maintain a strong balance sheet; invest in its 50% interest in the Economistbusiness; and return excess capital to EXOR and on 30 November 2015 Pearson completed the sale of theshareholders whilst retaining an investment grade credit rating.
The Penguin Random House Venture Combined Financial Times to Nikkei. The results of the Economist and the Financial TimesStatements are included in discontinued operations in 2013 and 2014.
Profit for the year
The profit for the financial year in 2014 was £470m compared to a profit in 2013 of £539m. The 2014 profit includes a gainthis report on sale of Mergermarket of £198m and the 2013 profit includes a gain on the sale of Penguin of £202m, as described above.
pagesEarnings per ordinary share
The basic earnings per ordinary share, which is defined as the profit for the financial year divided by the weighted average number of shares in issue, was 58.1p in 2014 compared to 66.6p in 2013 based on a weighted average number of shares in issue of 810.9m in 2014 and 807.8m in 2013. The decrease in earnings per share was due to the decrease in profit for 2014 described above and was not significantly affected by the movement in the weighted average number of shares.
The diluted earnings per ordinary share of 58.0p in 2014 and 66.5p in 2013 was not significantly different from the basic earnings per share in those years as the effect of dilutive share options was again not significant.
Exchange rate fluctuations
Currency movement reduced sales by £269m and reduced operating profit by £49m. See “Item 11. Quantitative and Qualitative Disclosures about Market Risk” for a discussion regarding our management of exchange rate risks.
Sales and operating profit by segment
The following tables summarize our sales and adjusted operating profit for each of Pearson’s business segments. Adjusted operating profit is a non-GAAP financial measure and is included as it is a key financial measure used by management to evaluate performance and allocate resources to business segments.
In our adjusted operating profit we have excluded other net gains and losses, acquisition costs and amortization and impairment of acquired intangibles. The intangible charges relate to intangible assets acquired through business combinations and acquisition costs are the direct costs of acquiring those businesses. Neither of these charges are considered to be fully reflective of the underlying performance of the Group. Other net gains and losses that represent profits and losses on the sale of subsidiaries, joint ventures, associates and other financial assets are also excluded from adjusted operating profit as they distort the performance of the Group.
Adjusted operating profit enables management to more easily track the underlying operational performance of the Group. A reconciliation of operating profit to adjusted operating profit for continuing operations is included in the tables below:
Year Ended December 31, 2014 | ||||||||||||||||||||||||||||
£m | North America | Core | Growth | PRH | Continuing | Discontinued | Total | |||||||||||||||||||||
Sales | 2,906 | 910 | 724 | — | 4,540 | 343 | 4,883 | |||||||||||||||||||||
64 | % | 20 | % | 16 | % | — | 100 | % | ||||||||||||||||||||
Total operating profit | 336 | 100 | (103 | ) | 15 | 348 | 325 | 673 | ||||||||||||||||||||
97 | % | 29 | % | (30 | %) | 4 | % | 100 | % | |||||||||||||||||||
Add back: | ||||||||||||||||||||||||||||
Other net gains and losses | (2 | ) | — | — | — | (2 | ) | (273 | ) | (275 | ) | |||||||||||||||||
Acquisition costs | 2 | 1 | 3 | — | 6 | — | 6 | |||||||||||||||||||||
Intangible charges | 108 | 21 | 132 | 54 | 315 | 3 | 318 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Adjusted operating profit: continuing operations | 444 | 122 | 32 | 69 | 667 | — | 667 | |||||||||||||||||||||
Adjusted operating profit: discontinued operations | — | — | — | — | — | 55 | 55 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total adjusted operating profit | 444 | 122 | 32 | 69 | 667 | 55 | 722 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
61 | % | 17 | % | 4 | % | 10 | % | 92 | % | 8 | % | 100 | % |
Year Ended December 31, 2013 | ||||||||||||||||||||||||||||
£m | North America | Core | Growth | PRH | Continuing | Discontinued | Total | |||||||||||||||||||||
Sales | 3,008 | 1,008 | 712 | — | 4,728 | 962 | 5,690 | |||||||||||||||||||||
64 | % | 21 | % | 15 | % | — | 100 | % | ||||||||||||||||||||
Total operating profit | 358 | 58 | (5 | ) | 20 | 431 | 79 | 510 | ||||||||||||||||||||
83 | % | 13 | % | (1 | %) | 5 | % | 100 | % | |||||||||||||||||||
Add back: | ||||||||||||||||||||||||||||
Other net gains and losses | — | 16 | — | — | 16 | — | 16 | |||||||||||||||||||||
Acquisition costs | 2 | 3 | 7 | — | 12 | — | 12 | |||||||||||||||||||||
Intangible charges | 104 | 26 | 33 | 30 | 193 | 5 | 198 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Adjusted operating profit: continuing operations | — | |||||||||||||||||||||||||||
Adjusted operating profit: discontinued operations | — | — | — | — | — | 84 | 84 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total adjusted operating profit | 464 | 103 | 35 | 50 | 652 | 84 | 736 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
63 | % | 14 | % | 5 | % | 7 | % | 89 | % | 11 | % | 100 | % |
North America
North America sales declined by £102m, or 3%, from £3,008m in 2013, to £2,906m in 2014 and adjusted operating profit decreased by £20m, or 4%, from £464m in 2013 to £444m in 2014. The decline in headline terms was a result of currency movements due to the strengthening of sterling against the US dollar. At constant exchange and after taking account of the contribution from acquisitions, sales grew by 2% and adjusted profits by 3% reflecting revenue mix, lower returns provision, reduced US pension costs and lower restructuring charges.
In our statutory results, we recognized a £38m loss on disposal of our 5% stake in Nook Media and a £40m gain on the disposal of our stakes in Safari Books Online and CourseSmart.
Overall adjusted operating margins in the North America business were consistent in 2014 at 15.3% compared to 15.4% in 2013.
North America — School
In school, good growth in Connections Education, our virtual schools business, was offset by declines in our State Assessments business due to the impact of legislative change in Texas and California, and in courseware due to some loss of market share, revenue deferral on blended programs and softness in the Open Territories.
Connections Education served over 62,000 Full Time Equivalent students in 2014 through full-time virtual and blended programs, up more than 15% from 2013. Three new full-time virtual public schools were launched in 2014 and an additional one will launch in 2015. At full-time virtual schools supported by Connections Education, virtual students consistently outperform their virtual school peers on state standardized tests. Students at College Park Academy, a blended school in Maryland using the Connections Education curriculum, scored significantly higher than their in-state peers in reading and math in the Maryland School Assessment (MSA) for 6th and 7th Grades.
In State and National Assessments, high stakes online test volumes grew strongly, up 40% on 2013 to 11 million, as customers transitioned to computer-based testing. Paper-based high stakes test volumes declined 17% to 32 million, in part due to the growth of computer-based testing, but also the impact of legislative changes in Texas and California. We were awarded contract to administer Partnership for Assessment of Readiness for College and Careers (PARCC) assessments in 11 states and extended our contracts to administer Virginia Standards of Learning (SOL) Assessments and the Maryland High School Assessment. We will continue to administer the Florida Comprehensive Assessment Test (FCAT) until summer 2016.
Clinical Assessment grew strongly, benefiting from the launch of the fifth edition of the Wechsler Intelligence Scale for Children (WISC-V) and strong growth in Q-Interactive, where early studies are showing good improvements in mental health professional productivity and student engagement levels.
Courseware revenues declined due to the impact of revenue deferrals from blended digital programs and a loss of market share, with a weaker performance in Grades 6-8 Science and Math in Texas, and Grades 6-12 Literature and Grades 6-8 Math in Florida only partly offset by a stronger performance in K-6 Math in Texas, Grades 6-12 Social Studies in Tennessee and Grades K-6 Math in California. We won an estimated 25% of the total new adoptions market (of $910m in 2014). enVisionMATH, which now has the largest installed base of elementary students in the US, continues to drive significant improvements in student computation and problem solving.
North America — Higher Education
In Higher Education, total college enrolments fell by 1.3%. Career enrolments in two-year public (community) and four-year-for-profit colleges declined 3%, with rising employment rates and regulatory change affecting the for-profit and developmental learning sectors.
Courseware grew modestly, primarily due to market share gains, continued growth in digital courseware registrations, a stronger new edition cycle and less pronounced seasonality. MyLab registrations in North America grew 3% to almost 11 million. Lecturer generated case studies indicate that the use of MyLab programs, as part of a broader course redesign, can support improvements in student test scores. We launched REVEL, which combines trusted content with interactive videos, quizzes, a mobile user interface, study tools, assignment calendar and performance dashboard for 17 humanities and social sciences subjects. The launch of REVEL is the first of numerous product lines taking advantage of our new cloud-based mobile-ready, and data analytics capabilities. New editions launched in 2014 included Tro,The Structures and Properties of Chemistry; Acemoglu, Laibson and List,Economics; and PearsonWriter, an application built for mobile devices that helps
students in developing writing skills. We published a range of digital titles for The Boy Scouts of America and implemented a new digital curriculum incorporating enhanced Merit Badge programs in subjects including Robotics, Digital Technology and First Aid for the organization’s 2.7 million youth members.
Pearson On Line Services, where we run fully online undergraduate and graduate learning programs and earn certain revenues based on the success of the students and the institution, grew course enrolments by 22% during the year with continued strong growth in programs at Arizona State University Online and University of Florida Online. We signed new programs with Bradley University, to create five online graduate degree programs in nursing and counselling, and University of Texas at Austin, Dana Center where we are partnering for the web delivery of math courses for its New Mathways Project (NMP), which will become part of a state-wide reform initiative in a collaboration between Dana Center and the Texas Association of Community Colleges. We expanded our collaboration with the American Health Information Management Association (AHIMA) to administer its online education business, which serves AHIMA’s 71,000 members including 10,000 higher education students each year. We now provide our learning management system hosting 100 courses based on AHIMA content; technical support; a next generation Virtual Lab Product; and are launching a Coding Basics course combining AHIMA and Pearson content.
North America — Professional
At VUE, global test volumes grew 9% year-on-year to almost 13 million boosted by continued growth in IT, State Regulatory and Professional certifications. New contracts include a deal to administer the Microsoft Certified Professional (MCP) Program globally, which significantly expands our existing partnership with Microsoft through Certiport’s Microsoft Office Specialist (MOS) and Microsoft Technology Associate (MTA) exams.
Core
Sales in our Core markets decreased by £98m, or 10%, from £1,008m in 2013 to £910m in 2014 while adjusted operating profit increased by £19m, or 19%, from £103m in 2013 to £122m in 2014. At constant exchange and after taking account of the contribution from acquisitions there was decline in sales of 6%. At constant exchange and after taking account of the contribution from acquisitions there was growth in profits of 24% driven by the benefits of restructuring actions taken over the last two years in all markets. Overall adjusted operating margins in the Core markets increased from 10.2% in 2013 to 13.4% in 2014.
Core — School
In the UK, qualifications have been impacted by government policy, where changes to accountability measures and a shift to end of course assessments in GCSE have led to a 21% decline in BTECs and 11% decline in General Qualifications in the year. We marked almost four million National Curriculum Tests (NCT), up 24% on 2013. Our contract to administer the NCT was extended to 2017. More than 4,600 schools, with almost 850,000 children, now subscribe to at least one of the Bug Club services, our primary school blended reading program.
In Australia, we benefited from a stronger adoption year and the launch of the locally standardized version of the Wechsler Pre and Primary Scales of Intelligence (fourth edition). In Italy, we gained share in both primary and secondary with new titles combined with professional development and online cross-curricula support. In primary, we developed Top Secret and adapted Our Discovery Island English Language Learning programs. In secondary, we extended our market leadership in the Humanities.
Revenues declined significantly in our partner markets due to challenging market conditions in Africa and Scandinavia and with the move to a distributor model in certain markets. We disposed of our local schools lists in the Caribbean as we continue to focus on our largest global geographic opportunities.
Core — Higher Education
In the UK, our courseware revenues declined, primarily due to enrolment contraction following policy changes in the vocational markets. We continue to invest to build Pearson College and graduated our first 32 students during the year. Pearson College was one of only four private colleges to pass Quality Assurance Agency review the first time.
In Australia, courseware revenues grew modestly benefiting from growth in core subjects, such as Biology, and direct-to-institution sales of digital learning products offset by our exit from vocational publishing. Monash Online, our collaboration with Monash University, continues to show good growth and will launch additional courses in the second half of 2015. In addition we collaborated with another leading university in Australia to provide course development, recruitment, enrolment, and student support services for post-graduate courses.
Core — Professional
At VUE, test volumes grew strongly following the successful launch of a new contract with CPA Australia to deliver Professional exams and continued good growth in the UK Driving Theory test volumes. We will continue to deliver our UK contract to administer the Driving Theory test for DVSA until September 2016. VUE entered into ten year partnerships with the Chartered Institute of Management Accountants (CIMA) and the Association of Chartered Certified Accountants (ACCA) in the UK to transform a selection of their exams from pen and paper to computer-based testing.
Growth
Growth sales increased by £12m, or 2%, to £724m in 2014 from £712m in 2013. Adjusted operating profit decreased by £3m or 9% to £32m in 2014, from £35m in 2013. This reflected a benefit from the acquisition of Grupo Multi offset by a slower adoption year in South Africa, launch costs associated with our new vocational colleges and a contract provision in Saudi Arabia, and weaker revenues and restructuring costs in Brazil.
In our statutory results we wrote down the balance sheet value of our Indian business by £77m largely reflecting the reduced value of online tutoring which was primarily focused on the US market.
Overall adjusted operating margins in the Growth markets were lower at 4.4% in 2014 compared to 4.9% in 2013.
Growth — School
In South Africa we performed well, competitively maintaining our market share of the School textbook market, but volumes declined significantly to more normal levels following a large adoption year, and significant share gains, in 2013.
In Brazil, enrolments in our sistemas were down 3% to 481,000 with growth in our public sistemas (NAME) offset by declines in our private sistemas as we combined our three sales forces into one. 72% of the municipalities that adopted NAME for lower secondary education showed improvement in their IDEB score, Brazil’s federally established measure of educational quality.
Growth — Higher Education
In South Africa student enrolments in CTI/MGI our private network of higher education institutions, grew by 15% to 13,400 across 13 campuses.
In Mexico, our fully accredited online university partnership, UTEL, increased the number of students enrolled from under 5,000 last year to more than 9,000 in 2014 as a result of improved consumer marketing efforts and better student retention.
In India, higher education revenues declined due to higher levels of returns.
Growth — Professional
In Pearson English, good growth in direct delivery in China and inside services in Brazil due to the acquisition of Grupo Multi was partly offset by declines in courseware in Brazil and Mexico. Global student registrations for MyEnglishLab grew 15% to more than 460,000 with strong growth in Latin America.
We launched the Global Scale of English, a new global standard for scoring English language proficiency on a precise, numeric, universal scale for businesses, governments and academic institutions. The scale is being embedded into all Pearson English products and services.
In China, English direct delivery enrolments grew at both Wall Street English (WSE), up 2% to 66,000 and Global Education, up 7% to 117,000. To support long-term growth, we consolidated our ERP systems in China and deployed a Salesforce.com CRM system in WSE. We divested our online vocational training operations.
In Brazil, we completed the acquisition of Grupo Multi, the largest provider of private language schools in Brazil. We successfully integrated the business despite challenging market conditions and disruption caused by the World Cup and Presidential elections.
Penguin Random House
In the twelve months to December 31, 2014 our share of Penguin Random House adjusted operating profits were £69m, compared with the six months from July 1, 2013 to December 31, 2013 of £50m.
Pearson owns 47% of Penguin Random House. Penguin Random House was reported post-tax for the full year in 2014 compared to only the second half in 2013 following the combination of Penguin with Random House on July 1, 2013, which resulted in a £7m reduction in the contribution to operating income with an equal benefit to our tax charge.
Penguin Random House performed well in 2014, benefiting particularly from a strong publishing performance in Children’s around the world and multi-million-copy film and television tie ins.
The US business published 760New York Times print and ebook bestsellers in 2014 (2013 full year pro forma: 790), enjoying exceptional success in children’s publishing with John Green’sThe Fault in Our Stars (29 weeks at number one on theNew York Times bestsellers list and nearly eight million copies sold) and four million copies of his backlist titles, tie-in titles from Disney’sFrozenfilm (more than 17 million copies sold), Dashner’sThe Maze Runner,Forman’sIf I Stay and continued strong sales of LEGO®F-81 movie tie-in titles. Notable Adult titles included Grisham’sGray Mountain, Child’sPersonal, Monk Kidd’sThe Invention of Wings, Follett’sEdge of Eternity,Bush’s41:A Portrait of My Father,along with strong film and television tie-ins such as Flynn’sGone Girl, Hillenbrand’sUnbroken, and Martins’Song of Fire and Icenovels.toF-151.
The UK business published 206Sunday Times bestsellers (2013 full year pro forma: 207), also enjoying outstanding sales of John Green, along with the continued strength of Kinney’sWimpy Kid franchise. Key Adult titles included Brown’sInferno,Oliver’sJamie’s Comfort Food andGirl Onlineby YouTube sensation Zoella, which became the fastest-selling debut UK novel ever.
Liquidity and capital resources
Cash flows and financing
Net cash generated from operations decreased by £186m£60m (or 26%11%) to £518m£462m in 20152017 from £704m£522m in 2014 reflecting2016, primarily due to higher special pension contributions (£227m in 2017 compared to £90m in 2016) and exchange
movements due to the impactstrengthening of sterling against the US dollar, with some offset from lower sales, higher returnsspend on restructuring (£71m in US Higher Education and increased debtor days, primarily2017 v £167m in North America.2016). Net cash generated from operations increased by £20m£4m (or 3%1%) to £704m£522m in 20142016 from £684m
£518m in 20132015 reflecting some stabilization in the underlying trading environment with some offset from continued product investment. Cash spend on restructuring was level with 2013. The averagelower cash incentive payments and tight working capital partially offset by restructuring spend and higher pension deficit payments.
Net interest paid increased by £18m (or 35%) to sales ratio increased£69m in 2017 from £51m in 2016 reflecting higher US interest rates and premiums incurred on the early redemption of bonds and associated swaps, as the Group sought to 15.4% in 2015 from 12.3% in 2014 and 13.4% in 2013 reflectingincrease the disposalefficiency of businesses with a lower working capital profile, higher returns, increased debtor days, increased product development investment, lower incentive accruals in 2015 and lower sales. Average working capital is the average month endits balance in the year of inventory (including pre-publication), receivables and payables (including deferred revenue).
sheet. Net interest paid in 20152016 was lower than 2014the same as 2015 at £51m reflecting lowerand reflects the similar interest on bonds (following repayments), lower average net debt and highercharge for the year after taking out theone-off release of accrued interest income on cash balances held in emerging markets. Net interest paid in 2014 was level with 2013 at £73m with higher average net debt levels and debt issue costs offset by currency translation gains.2015 following agreement of historical tax positions.
Capital expenditure on property, plant and equipment and software intangibles was £232m in 2017, £245m in 2016 and £247m in 2015, £182m2015. The expenditure in 2014all years on both tangible and £182m in 2013. The increase in 2015 was entirelyintangible capital is largely due to the continuing investment in software andenabling function technology, platforms as the Group soughtdesigned to harmonize and expand its technology capabilities.lower administrative costs.
The acquisition of subsidiaries, joint ventures and associates accounted for a cash outflow of £11m in 2017, £15m in 2016 and £20m in 2015 against £460m in 2014 and £58m in 2013.2015. There were no major acquisitions in either 2017, 2016 or 2015. The major acquisition in 2014 was of Grupo Multi for £437m. There were no major acquisitions in 2013, with the cash outflow relating to various minor acquisitions and costs associated with prior period acquisitions.
The sale of subsidiaries and associates produced a net cash inflow of £1,409m£430m in 20152017 compared to an outflow of £50m in 2016 and an inflow of £366m£1,409m in 20142015. The cash inflow in 2017 relates to the Group’s sale of a 22% stake in Penguin Random House to Bertelsmann for £413m and anthe sale of its test preparation business in China for £54m, less the associated costs and cash disposed. There were no significant disposals of subsidiaries and associates in 2016, with the cash outflow relating primarily to the disposal of £130mthe FT Group in 2013.2015. The cash inflow in 2015 relates to the proceeds on the sale of theFinancial Timesof £858m, the proceeds on the sale of The Economist Group of £377m and proceeds on the sale of PowerSchool £222m. The cash inflow in 2014 primarily relates to the proceeds on sale of Mergermarket of £375m, less associated costs.
The cash outflow from financing of £1,759m in 2013 primarily relates2017 reflects the early redemption of various bonds (and their associated swaps) and the partial completion of a share buyback program, offset in part by a lower dividend. In March and November 2017 respectively, the Group redeemed $500m 6.25% Global dollar bonds and $300 4.625% US dollar notes, both originally due in 2018. In addition, in August 2017, the Group redeemed $383m out of the $500m 3.75% US dollar notes due in 2022 and $406m out of the 3.25% US dollar notes due in 2023. In July 2017, the Group announced its intention to buy back £300m worth of its own shares. As at the end of 2017, the Group had spent £149m under this sharebuy-back program. The cash disposed with Penguin upon formationoutflow from financing of Penguin Random House.
£697m in 2016 reflects a broadly flat dividend payment compared to 2015 and the repayment of a $350m US Dollar note. The cash outflow from financing of £364m in 2015 reflects a further 7% increase in the dividend, the repayment of a £300m Sterling bond, offset in part by the proceeds from the issue of a €500m Euro note. The cash outflow from financing of £534m in 2014 reflects a 7% increase in the dividend, the repayment of a $400m US dollar bond and a £250m sterling bond, offset in part by proceeds from the issue of a €500m Euro note. The cash outflow from financing of £395m in 2013 reflects a 7% increase in the dividend, the repayment of a $350m US Dollar note during the year and the buy-out of various non-controlling interests, with some offset from the proceeds of a $500m US Dollar note issued in the year.
Capital resources
OurThe Group’s borrowings fluctuate by season due to the effect of the school year on the working capital requirements in the educational materials business. Assuming no acquisitions or disposals, ourthe Group’s maximum level of net debt normally occurs in July, and ourits minimum level of net debt normally occurs in December. Based on a review of historical trends in working capital requirements and of forecast monthly balance sheets for the next 12 months, we believethe Group believes that we haveit has sufficient funds available for the Group’s present requirements, with an appropriate level of headroom given ourits portfolio of businesses and current plans. OurThe Group’s ability to expand and grow ourits business in accordance with current plans and to meet long-term capital requirements beyond this12-month period will depend on many factors, including the rate, if any, at which ourits cash flow changes and the availability of public and private debt and equity financing, including ourits ability to secure bank lines of credit. WeThe Group cannot be certain that additional financing, if required, will be available on terms favorable to us,terms, if at all.
At December 31, 2015, our2017, the Group’s net debt was £654m£432m compared to net debt of £1,639m£1,092m at December 31, 20142016 reflecting the businessproceeds from disposals, completed during 2015.offset in part by special pension contributions. Net debt is defined as all
short-term, medium-term and long-term borrowing (including finance leases), less all cash, cash equivalents and liquid resources. Cash equivalents comprise short-term deposits with a maturity of up to 90 days, while liquid resources comprise short-
termshort-term deposits with maturities of more than 90 days and other marketable instruments which are readily realizable and held on a short-term basis. Total Short-term, medium-term and long-term borrowing amounted to £2,330m£1,085m at December 31, 2015,2017, compared to £2,225m£2,468m at December 31, 20142016 reflecting repayment of a £300m Sterling bond, offset by the issue of a €500m Euro note and exchange movements (primarilybonds repaid during the strengthening of the US dollar against Sterling).year.. At December 31, 2015,2017, total cash and liquid resources were £1,703m,£645m, compared to £530m£1,459m at December 31, 2014.2016. This increasedecrease reflects the proceeds fromutilization of cash to pay down long-term debt and create a more efficient balance sheet.
To ensure efficient use of the business disposals completed during 2015.cash balances, in January 2018, the Group executed market tenders to repurchase €250m out of its €500m euro 1.875% notes due May 2021 and €200m out of its €500m euro 1.375% notes due May 2025.
Contractual obligations
The following table summarizes the maturity of ourthe Group’s borrowings, ourits obligations undernon-cancelable leases, and pension funding obligations, exclusive of anticipated interest payments. Due to the variability of future interest payments, these have been excluded from the table below.
At December 31, 2015 | At December 31, 2017 | |||||||||||||||||||||||||||||||||||||||
Total | Less than one year | One to two years | Two to five years | After five years | Total | Less than one year | One to two years | Two to five years | After five years | |||||||||||||||||||||||||||||||
£m | £m | £m | £m | £m | £m | £m | £m | £m | £m | |||||||||||||||||||||||||||||||
Gross borrowings: | ||||||||||||||||||||||||||||||||||||||||
Bank loans, overdrafts and commercial paper | 38 | 38 | — | — | — | 15 | 15 | — | — | — | ||||||||||||||||||||||||||||||
Bonds | 2,284 | 240 | — | 621 | 1,423 | 1,062 | — | — | 548 | 514 | ||||||||||||||||||||||||||||||
Finance lease obligations……………… | 8 | 4 | 3 | 1 | — | |||||||||||||||||||||||||||||||||||
Finance lease obligations | 8 | 4 | 3 | 1 | — | |||||||||||||||||||||||||||||||||||
Operating lease obligations | 1,391 | 164 | 146 | 396 | 685 | 1,201 | 156 | 139 | 307 | 599 | ||||||||||||||||||||||||||||||
UK Pension funding obligations | 90 | 90 | — | — | — | 25 | 25 | — | — | — | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Total | 3,811 | 536 | 149 | 1,018 | 2,108 | 2,311 | 200 | 142 | 856 | 1,113 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
The UK pension funding obligation of £25m is subject to change upon completion of the latest actuarial valuation of the UK Group plan.
At December 31, 20152017 the Group had capital commitments for fixed assets, including finance leases already under contract, of £8m (2014: £13m)£nil (2016: £9m). There are contingent liabilities in respect of indemnities, warranties and guarantees in relation to former subsidiaries and in respect of guarantees in relation to subsidiaries and associates. In addition there are contingent liabilities in respect of legal and royalty claims. None of these claims or guarantees is expected to result in a material gain or loss.
In 2014, the Group negotiated a new $1,750m committed revolving credit facility with an initial maturity date of August 2019.2019, extended to August 2020 in 2015. During 2015,2016, the Group extended the maturity date of this facility by 1 year to August 2020.2021. The facility requires the Group to pay an annual commitment fee of 0.1225%0.1575%, payable quarterly, on the unused amount of the facility.
Off-Balance sheet arrangements
The Group does not have anyoff-balance sheet arrangements, as defined by the SEC for the purposes of From Form20-F, that have or are reasonably likely to have a material current or future effect on the Group’s financial position or results of operations.
Borrowings
The Group finances its operations by a mixture of cash flows from operations, short-term borrowings from banks and commercial paper markets, and longer term loans from banks and capital markets.
We haveThe Group has in place a committed revolving credit facility of $1.75bn, which matures in August 2020.2021. At December 31, 2015,2017, the full $1.75bn was available under this facility. This credit facility contains two key covenants measured for each 12 month period ending June 30 and December 31:
WeThe Group must maintain the ratio of ourits profit before interest, tax and amortization to ourits net interest payable at no less than 3:1; and
WeThe Group must maintain the ratio of ourits rolling 12 month average net debt to ourits EBITDA, which we explainexplained below, at no more than 4:1.
“EBITDA” refers to earnings before interest, taxes, depreciation and amortization. We areThe Group is currently in compliance with these covenants.
See note 18 of “Item 18. Financial Statements” for information on ourthe Group’s longer term loans from banks and capital markets.
Treasury policy
OurThe Group’s treasury policy is described in note 19 of “Item 18. Financial Statements”. For a more detailed discussion of ourthe Group’s borrowing and use of derivatives, see “Item 11. Quantitative and Qualitative Disclosures about Market Risk”.
Related parties
There were no significant or unusual related party transactions in 2015, 20142017, 2016 or 2013.2015. Refer to note 36 in “Item 18. Financial Statements”.
For a description of ourthe Group’s principal accounting policies used refer to note 1 in “Item 18. Financial Statements”.
ITEM 6. | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES |
Directors and senior management
We areThe Group is managed by a board of directors and a chief executive who reports to the board and manages through an executive committee. WeThe Groups refer to the board of directors, the chairman of the board of directors and the executive committee as ourits “senior management”.
The following table sets forth information concerning directors, as of February 29, 2016.28, 2018.
Name | Age | Position | ||||
Sidney Taurel | Chairman | |||||
John Fallon | Chief Executive | |||||
Elizabeth Corley, CBE | Non-executive Director | |||||
Vivienne Cox, CBE | Senior Independent Director | |||||
Josh Lewis | Non-executive Director | |||||
Linda Lorimer | Non-executive Director | |||||
Michael Lynton | 58 | Non-executive Director | ||||
Harish Manwani | Non-executive Director | |||||
Tim Score | Non-executive Director | |||||
Lincoln Wallen | Non-executive Director | |||||
Coram Williams | Chief Financial Officer |
Sidney Taurel
Appointed January 1, 2016. ChairmanMember of the nomination committee& governance and member of the remuneration committee.committees.
Sidney has over 4045 years of experience in business and finance, and is currently a board director and chairman of the Compensation Committeecompensation committee at IBM Corporation. He is also a director at McGraw Hill Financial, Inc., a role from which he will step down during 2016. Sidney is senior advisor at global investment bank Moelis & Co and an advisory board member at pharmaceutical firms Takeda Pharmaceutical andfirm Almirall. He was chief executive officer of global pharmaceutical firm Eli Lilly and Company from 1998 until 2008, chairman of the business from 1999 until 2008, and has been chairman emeritus since 2009. He was also a director at McGraw Hill Financial, Inc., a role which he held from 1996 until April 2016 and at ITT Industries from 1996 to 2001. Sidney has received three US presidential appointments: toappointments to: the Homeland Security Advisory Council, the President’s Export Council and the Advisory Committee for Trade Policy and Negotiations, and is an officer of the French Legion of Honor.Honour.
John Fallon
Appointed October 3, 2012.
John Fallon became Pearson’s chief executive on January 1, January 2013. Since 2008, he had been responsible for the company’s education businesses outside North America and a member of the Pearson management committee. He joined Pearson in 1997 as director of communications and was appointed president of Pearson Inc., in 2000. In 2003, he was appointed CEO of Pearson’s educational publishing businesses for Europe, Middle East & Africa. Prior to joining Pearson, John was director of corporate affairs at Powergen plc and was also a member of the company’s executive committee. Earlier in his career, John held senior public policy and communications roles in UK local government. He is an advisory board member of the Global Business Coalition for Education, and a member of the Council of the University of Hull.Hull, and trustee and director of the Oracle Cancer Trust.
Elizabeth Corley, CBE
Appointed May 1, 2014. Chairman of the remuneration committee and member of the audit and nomination committee.& governance committees.
Elizabeth is non-executive vice chairwas CEO of Allianz Global Investors, where she was chief executive officerinitially for Europe then globally, from 2005 to 2016.2016 and continues to act as a senior advisor to the firm as vice-chair. She was previously at Merrill Lynch Investment Managers (formerly Mercury Asset Management) and Coopers & Lybrand. In addition to Pearson, Elizabeth is acting-chairserves on two other company boards as anon-executive director — BAE Systems plc and Morgan Stanley. She has various financial services industry roles including as a member of the FICC Markets Standards Board, a member of the ESMA stakeholder group and an advisory council member of TheCityUK. She is a non-executive director of BAE Systems plc and the Financial ReportingTheCityUK Advisory Council. In addition,Additionally she is a member of FEAM’s management committee, the CFA Future of Finance Council, the Supervisory Board of Euler SA, a council member of the City of London IRSG and a member of the Committee of 200. She is200 and a fellowtrustee of the CFA andBritish Museum. Elizabeth currently chairs a group advising the Royal Society of Arts andUK government on social impact investing. She is also a crime fiction author.
Vivienne Cox, CBE
Appointed on January 1, 2012. Chairman of the reputationnomination & responsibilitygovernance committee and member of the audit nomination and remunerationreputation & responsibility committees.
Vivienne has wide experience in energy, natural resources and business innovation. She worked for BP plc for 28 years in Britain and Continental Europe, in postsglobal roles including executive vice president and chief executive of BP’s gas, power and renewables business and its alternative energy unit. She isnon-executive director of Stena International and chairman of the supervisory board of Vallourec, which supplies tubular systems fora leader in the energy industry.seamless steel pipe markets. She is also lead independentnon-executive director at the UK Department for International Development. Vivienne was appointed Commanderpharmaceutical company GlaxoSmithKline plc and an advisory board member of the Order of the British Empire (CBE) in the 2016 New Year Honours for services to the UK Economy and Sustainability.African Leadership Institute.
Josh Lewis
Appointed on March 1, 2011. Member of the nomination, remuneration and reputationnomination & responsibilitygovernance committees.
Josh’s experience spans finance, education and the development of digital enterprises. He is the founder of Salmon River Capital LLC, a New York-based private equity/venture capital firm focused on technology-enabled businesses in education, financial services and other sectors. Over a25-year career in active, principal investing, he has been involved in a broad range of successful companies, including several pioneering enterprises in the education sector. In addition, he has long been active in thenon-profit education sector, with associations including New Leaders, New Classrooms, and the Bill & Melinda Gates Foundation. He is also anon-executive director of several enterprises in thefin-tech/data, education and other sectors.
Linda Lorimer
Appointed July 1, 2013. MemberChairman of the reputation & responsibility committee and member of the audit nomination and reputation & responsibility committees.committee.
Linda has a deep backgroundspent almost 40 years serving higher education. She retired from Yale in education strategy, administration and public affairs. She isspring 2016 after 34 years at the university where she served in an array of senior counsellor to the president and provost of Yale University and until recently served aspositions including vice president for Global & Strategic Initiatives at Yale, where her duties included oversightInitiatives. She oversaw the development of Yale’s Officeburgeoning online education division and the expansion of International AffairsYale international programs and Office of Digital Dissemination. Over a 30-year career in higher education,centers. During her tenure, she has beenwas responsible for many of Yale’s administrative services, including the university’sranging from Yale’s public communications and alumni relations to sustainability, human resources and Office of Sustainability.the university press. Previously, Linda served aswas president of Randolph-Macon Woman’s College in Virginia and was chair of the board of the Association of American Colleges and Universities. She hasalso served on the boards of several public companies, including as presiding director of the McGraw-Hill Companies.companies. She is a member of the Trilateral Commission and the Council on Foreign Relations.
Michael Lynton
Appointed on February 1, 2018.
Michael served as CEO of Sony Entertainment from 2012 until 2017, overseeing Sony’s global entertainment businesses. He also served as Chairman and CEO of Sony Pictures Entertainment from 2004. Prior
to this, he held senior roles within Time Warner and AOL, and earlier served as Chairman and CEO of Penguin Group where he extended the Penguin brand to music and the internet. Michael is chairman of Snap, Inc., and currently serves on the boards of Pandora Media Inc., IEX and Ares Management, L.P. He is also a member on the Council on Foreign Relations, the Harvard Board of Overseers and serves on the boards of the Los Angeles County Museum of Art, the Tate, and the Rand Corporation. Michael holds a B.A. in History and Literature from Harvard College, where he also received his M.B.A.
Harish Manwani
Appointed October 1, 2013. Member of the nomination & governance and reputation & responsibility committees.
Harish has an extensive background in emerging markets and senior experience in a successful global organization. He was previously chief operating officer of consumer products company Unilever, having joined
the company in 1976 as a marketing management trainee in India, and held senior management roles around the world, including North America, Latin America, Europe, Africa and Asia. He isnon-executive chairman of Hindustan Unilever Limited in India, and serves on the boards of Whirlpool Corporation, Qualcomm Inc. and Nielsen Holdings. He is also on the board of the Indian School of Business and the Economic Development Board (EDB) of Singapore, and is global executive advisor at Blackstone Private Equity.
Tim Score
Appointed January 1, 2015. Chairman of the audit committee and member of the nomination & governance and remuneration committees.
Tim has extensive experience of the technology sector in both developed and emerging markets, having served as chief financial officer of ARM Holdings plc, the world’s leading semiconductor IP company, a position he held for 13 years. He is an experiencednon-executive director and currently sits on the boards of The British Land Company plc and HM Treasury.Treasury, in addition to being on the board of trustees of the Royal National Theatre and chairman of the group audit committee of the Football Association. He served on the board of National Express Group plc from 2005 to 2014, including time as interim chairman and six years as the senior independent director. Earlier in his career Tim held senior finance roles with Rebus Group, William Baird, BTRLucasVarity plc and others.BTR plc.
Lincoln Wallen
Appointed January 1, 2016. Member of the nomination committee.audit and reputation & responsibility committees.
Lincoln ishas extensive experience in the technology and media industries, having been CEO of DWA Nova, asoftware-as-a-service company spun out of DreamWorks Animation Studios in Los Angeles, a position he held until 2017. He worked at DreamWorks Animation for nine years in a variety of leadership roles including chief technology officer for DreamWorks Animation, the global family entertainment company, a position he has held since 2012, having joined the company asand head of research and development in 2008. Prior to this, Lincoln served as chief technology officer foranimation technology. He was formerly CTO at Electronic Arts Mobile, leading EA’s entry into the mobile gaming business internationally. He is currently a visiting associate in Computing and Mathematical Sciences at the California Institute of Electronic Arts, Inc.,Technology (Caltech). Lincoln is also a leading interactive entertainment software company. He has held senior positions at Criterion Software, MathEngine plc and is a non-executive director of the Smith Institute for Industrial Mathematics & Systemand Systems Engineering. Lincoln is also an advisory board memberLincoln’s early career involved 20 years of Hewlett Packard Enterpriseprofessional IT and mathematics research, including as a member of the STEM Advisory Committee of the National Academy foundation. Lincoln was formerly a lecturer and reader in computationComputer Science at the University of Oxford.
Coram Williams
Appointed August 1, 2015.
Coram joined Pearson in 2003 and has held a number of senior positions including finance and operations director for Pearson’s English Language Teaching business in Europe, Middle East and& Africa, interim president of Pearson Education Italia and head of financial planning and analysis for Pearson. In 2008, Coram became CFO
of The Penguin Group and was latterly appointed CFO of Penguin Random House in 2013.2013, where he oversaw the integration of the two businesses. Coram trained at Arthur Andersen, and subsequently worked in both the auditing and consulting practices of the firm. He is anon-executive director and chairman of the audit committee for the Guardian Media Group.
The following table sets forth information concerning the executive committee, as ofat February 29, 201628, 2018
Name | Position | |
| ||
Tim Bozik | President, Global | |
Rod Bristow | President, Core Markets | |
| President, North America | |
Jonathan Chocqueel-Mangan | Chief Strategy Officer | |
Giovanni Giovannelli | President, Growth Markets | |
Albert Hitchcock | Chief Technology and Operations Officer | |
Kate James | Chief Corporate Affairs and Global Marketing Officer | |
| ||
Anna Vikström Persson | Chief Human Resources Officer | |
Bob Whelan | President, Pearson Assessments | |
|
Sir Michael Barber
Sir Michael is Chief Education Advisor at Pearson and is a leading authority on education systems and reform. He leads Pearson’s worldwide program of research into education policy and efficacy, advising on and supporting the development of products and services that deliver efficacy and build on research findings. He leads Pearson’s strategy for developing innovative educational models for low-income families in the developing world. Sir Michael is a Distinguished Visiting Fellow at Harvard and holds an honorary doctorate from the University of Exeter. His publications include Oceans of Innovation and An Avalanche is Coming.
Tim Bozik
Tim is President, Global ProductsProduct at Pearson and has extensive knowledge of all aspects of higher education as well experience in moving Pearson towards being a more digital, dataproduct development and services-led business. Timhigher education. He joined Pearson in 1983 as a sales representative and has since held several leadership roles in product development and general management, including his most recent postposts as chief executivePresident of US higher education and global higher education. His work has included a focus on the role of technology, datadigital products and analytics to improve access, achievementservices, smart design, personalized learning, improving outcomes and affordability.bringing education and employment closer together.
Rod Bristow
Rod Bristow is President, UK & Core Markets for Pearson. Core Markets include those 100+ countries with, in general, developed economies and education systems. In 2010, Rod became President for Pearson UK and was appointed to lead all other Core Markets for Pearson in January 2014. Rod has wide-ranging expertiseworked in K-12education, publishing and assessment for 30 years in universities, schools, higher andcolleges, professional education, assessment, qualifications,training and learning technology having been involvedtechnologies in education throughout his career.the UK and internationally. He was previouslyis a Trustee for the President of Pearson UK. Rod isEducation and Employers Taskforce, a Fellow of the Royal Society offor Arts, a formerGovernor for Sir Charles Kao University Technical College and past President of the Publishers Association, a trusteeAssociation. He is also Chair of the Educationjudging panel for the National Teaching Awards. Rod is a graduate of University College London.
Kevin Capitani
Kevin is President of North America at Pearson. Kevin’s background is in developing collaborative teams and Employers Taskforcefostering growth in customer-focused businesses. He has worked, managed and led in global, highly matrixed, technology organizations. Prior to Pearson, Kevin was general manager and chief operating officer for the enterprise software company, SAP. Throughout his career he has worked with Fortune 500 companies across multiple geographies and industries.
Jonathan Chocqueel-Mangan
Jonathan Chocqueel-Mangan is Chief Strategy Officer at Pearson. He was formerly chief strategy and transformation officer at Kantar Consumer Insights. Jonathan has professional qualifications in Consulting and Coaching for Change, from the Said Business School (Oxford University) and a memberDoctor of Business Administration (DBA) in organizational Behavior, from the President’s CommitteeSchool of Management at the ConfederationUniversity of British Industry.Surrey.
GioGiovanni Giovannelli
Gio is President, Growth Markets having joined Pearson as Managing Director of Pearson Brazil. Gio was previously CEO of Grupo Multi, Brazil’s leading English language learning business, which was acquired by Pearson in December, 2013. Prior to Multi, he held CEO positions in Brazil across a number of sectors, including energy, mining and HR services. Gio is a Boardboard member of Natura (cosmetics and beauty products) and CVC (travel and vacation operator), both listed in the Sao Paulo Stock Exchange BOVESPA. Gio earned his undergraduate degree in Italy’s Bocconi University, holds a Ph.D. in Economics from the American University in Washington DC and is an OPM graduate of Harvard Business School.
Albert Hitchcock
Albert Hitchcock is Chief Technology and Operations Officer for Pearson, where he joined Pearsonthe Executive team in March 2014 as Chief Information Officer. He2014. Albert is responsible for the Technology & Operations organization within Pearson. In this role Albert leads the IT organization across Pearson globallydigital product development, enterprise technology and has overall responsibility for implementing the group’s technology strategy to enable competitive advantage.operations encompassing supply chain, procurement, customer service and real estate. He previously held the position of Group Chief Information Officer at Vodafone and prior to this was Global CIO at Nortel. Albert is a Fellow of the Institute of Engineering and Technology and a Chartered Engineer.
Kate James
Kate joined Pearson in January 20142014. A member of the Pearson Executive, as Chief Corporate Affairs Officer. She has a background in internationaland Global Marketing Officer she oversees communications, marketing and the Pearson brand, government and regulatory relations, corporate communications, brand managementinvestor relations and sustainability.the company’s social impact work. Prior to joining Pearson, Kate was Chief Communications Officer atfor the Bill & Melinda Gates Foundation. Kate is a memberFoundation, leveraging the Foundation’s voice in support of the boardorganization’s global and domestic initiatives. Before that, she held senior leadership roles in the financial services industry including heading communications globally at Citibank and leading the advocacy and sustainability practice at Standard Chartered Bank.
Bjarne Tellmann
Bjarne is General Counsel and Chief Legal Officer of Vital Voices.
Don Kilburn
Don is President, North AmericaPearson. He previously worked across Europe, Asia and the United States in various capacities with The Coca-Cola Company, most recently as Associate General Counsel. He has also held various legal positions at Kimberly-Clark and the law firms of Sullivan & Cromwell LLP and White & Case LLP. He holds a J.D. with honors from the University of Chicago, a M.Sc. (Econ.) from The London School of Economics, and has broad product-service experiencecompleted Harvard Law School’s Leadership in Higher Ed and K-12. He is responsible for accelerating shift-to-services and digital and transforming North American business by putting
Anna Vikström Persson
learner outcomes at the center of Pearson. Previously, he was vice chairman of Pearson Higher Education North America and chief executive of Pearson Learning Solutions. DonAnna Vikström Persson joined Pearson in 1998 andFebruary 2018 as Chief Human Resources Officer. She has extensive general-managerover 20 years of international HR experience, inhaving led human resources teams for major global companies across a variety of companiesbusiness sectors, including Viacomtelecommunications, manufacturing and Xerox.engineering. Most recently, Anna served as executive vice president and head of group human resources for the global engineering company Sandvik, and similarly for SSAB, a global steel company. Prior to this, Anna was VP, HR & Organization for global telecom company Ericsson. She has a certificate in German and a Masters in Law, as well as professional HR qualifications from both London Business School and Michigan Business School.
Bob Whelan
Bob is President, Pearson AssessmentsAssessment and has significant expertise in assessment and growing businesses. As presidentPresident and chief executive officerChief Executive Officer of Pearson VUE since January 2000, Bob led Pearson’s growth as a
global leader in computer-based assessments. He now leads Pearson’s combined assessments businesses including K12K-12 and clinical assessment as well as Pearson VUE. Bob received his BA from the University of Alabama in finance and economics.
Melinda Wolfe
Melinda is Chief Human Resources Officer, having joined Pearson in September 2013. Her extensive human resources expertise includes business alignment, talent management, succession planning, diversity, leadership, change management, culture, employee engagement, team building, health and wellness and non-profit leadership. Melinda previously worked in Human Resources at Bloomberg LP and served as an adjunct professor at Columbia University’s School of International and Public Affairs, on Mayor Bloomberg’s Commission on Women as well as Planned Parenthood of NTC, the National Council for Research on Women, Auburn Seminary, the Dalton School and the advisory boards of Barnard, Duke University and Washington University.
Compensation of senior management
It is the role of the remuneration committee (the committee) to approve the remuneration and benefits packages of the executive directors and other members of the Pearson Executive.
The principal duties of the remuneration committee (the committee) are to:
Determine and regularly review the remuneration |
Regularly review the implementation and operation of the remuneration policy for |
Approve the design of, and determine targets for, any performance-related pay plans operated by the |
Review the design of the company’s long-term incentive and other share plans operated by the group and where relevant recommend such plans for approval by the board and shareholders. |
Advise and decide on general and specific arrangements in connection with the termination of employment of executive directors. |
Review and approve corporate goals and objectives relevant to |
Ensure the company maintains an appropriate level of engagement with its shareholders and shareholder representative bodies in relation to the remuneration policy and its implementation. |
i) | Appoint and set the terms of engagement for any remuneration consultants who advise the committee and monitor the cost of such advice. |
The committee also takes note of the remuneration arrangements for the company’s senior leadership group representing approximately 100 executives and managers.
Remuneration policy
OurThe directors’ remuneration policy described below was approved by shareholders at the Annual General Meeting held on May 5, 2017. The intention of the committee is that the policy will remain in place for three years from the date of its approval.
The committee’s starting point continues to be that total remuneration should reward both short and long-term results, delivering competitive rewards for target performance, but outstanding rewards for exceptional performance.
Total remuneration is made up of fixed and performance-linked elements, with each element supporting different objectives. Base salary helps to recruit, reward and retain people and reflects competitive market level, role, skills, experience and individual contribution. Allowances and benefits help to recruit and retain people and reflect the local competitive market. Retirement benefits help to recruit and retain people and recognize their long-term commitment to the company. Annual incentives motivate the achievement of annual strategic goals and personal objectives, provide focus on key financial metrics and reward individual contribution to the success of the company. Long-term incentives help to recruit, reward and retain people, drive long-term earnings, share
price growth and value creation, align interests of executives and shareholders, encourage long-term shareholding and commitment to the company and link management’s long-term reward and wealth to corporate performance in a flexible way.
For Executive Director benchmarking purposes, we reviewthe committee reviews remuneration by reference to different comparator groups. We lookIt looks at survey data from: select UK human capital-intensive businesses and UK and US media convergence companies with a focus on media, information services and technology (and cross-referenced withfrom FTSE 100 companies with significant international exposure). These companies are of a range of sizes relative to Pearson, but the method our independent advisers, Willis Towers Watson, use to make comparisons on remuneration takes this variation insimilar size into account. We also look at publicly disclosed and proxy data for global media convergence comparators with a focus on media and technology. We use these companies because they represent the wider executive talent pool from which we might expect to recruit externally and the pay market to which we might be vulnerable if our remuneration was not competitive.scope, excluding financial services companies.
Consistent with its policy, the committee places considerable emphasis on the performance-linked elements i.e. annual and long-term incentives. The committee will continue to review the mix of fixed and performance-linkedperformance- linked remuneration on an annual basis, consistent with its overall philosophy.
Base salary
Base salaries are set to provide the appropriate rate of remuneration for the job, taking into account relevant recruitment markets, business sectors and geographic regions. Base salaries may be set in sterling or the local currency of the country in which the director is based.
Base salaries are normally reviewed annually for the following year taking into accountaccount: general economic and market conditions,conditions; the level of increases made across the company as a whole,whole; particular circumstances such as changes in role, responsibilities or organization,organization; the remuneration and level of increases for executives in similar positions in comparable companiescompanies; and individual performance.
Base salaries are paid in cash via the regular employee payroll (monthly in the UK and every two weeks in the US) and are subject to all necessary withholdings.
No malus or claw back provisions apply to base salary.
Base salary increases for executive directors will not ordinarily exceed 10% per annum and will take account of the base salary increases elsewhere within the company.
The committee will retain the discretion to deliver base salary increases up to 25% over the normal maximum limit in specific individual situations including internal promotions and material changes to the business or the role. This discretion will be exercised only in exceptional circumstances and the committee would consult with major shareholders before doing so, proceeding only where there was clear consensus in favor among those consulted.
Allowances and benefits
Allowances and benefits includeinter aliacomprise cash allowances andnon-cash benefits and inter alia include: travel-related benefits (comprising company car, car allowance and private use of a driver); health-related benefits (comprising health care, health assessment and gym subsidy); and risk benefits (comprising additional life cover and long-term disability insurance that are not covered by the company’s retirement plans). Allowances may also include, where appropriate, location and market premium and housing allowance although no continuing director is in receipt of such allowances.
Allowances and benefits received in 2017 are set out in the annual remuneration report.
Directors are also covered by the company’s directors’ and officers’ liability insurance and an indemnity in respect of certain third-party liabilities.
Other benefits may be offered on the same terms as health, welfare and car benefits.to other employees. Allowances and benefits do not form part of pensionable earnings.
No malus or claw back provisions apply to allowances and benefits.
The provision and level of cash allowances andnon-cash benefits are competitive and appropriate in the context of the local market.
The total value of cash allowances andnon-cash benefits for executive directors will not ordinarily exceed 15% of base salary in any year, other than in the case of increases in the cost of benefits that are outside Pearson’s control and changes in benefit providers. The committee will retain the further discretion to deliver a total value of benefits up to 25% above the normal limit in specific individual situations including changes in individual circumstances such as health status and changes in the role such as relocation. This discretion will be exercised only in exceptional circumstances and the committee would consult with major shareholders before doing so, proceeding only where there was clear consensus in favor among those consulted.
Executive directors are also eligible to participate in savings-related share acquisition programs which are not subject to any performance conditions, on the same terms as other employees.
Retirement benefits
New employees in the UK are eligible to join the Money Purchase 2003 section of the Pearson Group Pension plan. New employees in the US are eligible to join the 401(k) plan.Plan.
Under the Money Purchase 2003 section of the Pearson Group Pension Plan, in the UK, normal retirement age is age 62, but, subject to company consent, retirement is currently possible from age 55 or earlier in the event of
ill-health. During service, the company and the employee makemakes contributions into a pension fund. Company contributions amount to up to 16% of pensionable salary (double the amount of the employee contribution, which is limited according to certain age bands). Account balances are used to provide benefits at retirement. Pensions for a member’s spouse, dependent children and/or nominated financial dependents are payable on death.
UnderIn the 401(k) plan inUK, company contributions for eligible employees to the US,Money Purchase 2003 section of the Pearson Group Pension Plan amount up to 16% of pensionable salary (double the amount of the employee contribution, which is a defined contribution plan, account balances will be usedlimited according to provide benefits at retirement. Company contributions amount to 100% of the first 3% of eligible compensation contributed by the employee and 50% of the next 3%, plus a basic annual company contribution of 1.25% of eligible compensation. Pearson Inc. Pension Plan participants who were at leastcertain age 40 at December 31, 2001 can receive an additional 0.5% — 1.5% of pay. In the event of death before retirement, the account balances will be used to provide benefits for designated beneficiaries.bands).
Depending on when they joined the company, directors may participate in the defined benefit Pearson Inc. Pension Plan in the US or the Final Pay section of the Pearson Group Pension Plan, in the UK, both of which areis closed to new members.
Under the Final Pay section of the Pearson Group Pension Plan, in the UK, normal retirement age is 62, but, subject to company consent, retirement is currently possible from age 55 or earlier in the event ofill-health. During service, the employee makes a contribution of 5% of pensionable salary and the pension fund builds up based on final pensionable salary and pensionable service. The accrued pension is reduced on retirement prior to age 60. Pensions for a member’s spouse, dependent children and/or nominated financial dependents are payable on death.
In the US, the defined benefit Pearson Inc. Pension Plan provides a lump sum benefit that is convertibleExecutive directors may be entitled to an annuity on retirement. The lump sum benefit accrued at an age dependent percentage of capped compensation until December 31, 2001 when further benefit accruals ceased for most employees. Employees who satisfied criteria of age and service as of November 30, 1998 continueadditional pension benefits to earn benefits under an alternative formula that provides for 1.5% of final average earnings, adjusted for US Social Security. The benefit paid to these employees is the maximumtake account of the lump sum benefit converted to an annuity andcap on the benefit earned underamount of benefits that can be provided from the alternative final average earnings formula.all-employee pension arrangements in the UK.
Members of the Pearson Group Pension Plan who joined after May 1989 are subject to an upper limit of earnings that can be used for pension purposes, known as the earnings cap. This limit, £108,600 as at April 6, 2006, was abolished by the Finance Act 2004. However, the Pearson Group Pension Plan has retained its own ‘cap’, which will increase annually in line with the UK Government’s Index of Retail Prices (All Items). The cap was £145,800 effective£154,200 as at April 6, 2014,2017 and £149,400 effectivewill rise to £160,800 as at April 6, 2015, and £150,600 effective April 6, 2016.2018.
As a result of the UK Government’s A-Day changes effective from April 2006, UK executive directors and other members of the Pearson Group Pension Plan who are, or become, affected by the lifetime allowance areor new hires who opt out of membership of the Plan may be provided with a cash supplement of normally up to 26% of salary as an alternative to further accrual of pension benefits on a basis that is broadly cost neutral to the company. Effectivebenefits. With effect from April 6, 2011, the annual allowance (i.e.2018, the maximum amount of pension saving that benefits from tax relief each year) wascash allowance for any future Executive Director external appointments will be reduced from £255,00026% to £50,000. Since April 6, 2012,16% of salary.
No malus or claw back provisions apply to retirement benefits.
If any executive director is from, or works, outside the lifetime allowance (i.e.UK, the committee retains a discretion to put in place retirement benefit arrangements for that director in line with local market practice including defined benefit pension arrangements operated by Pearson locally. The maximum amountvalue of pension and/such arrangement will reflect local market practice at the relevant time.
The committee will also honor allpre-existing retirement benefit obligations, commitments or lump sumother entitlements that can benefit from tax relief) has been £1.5m and was reduced to £1.25m on April 6, 2014.were entered into by a member of the Pearson Group before that person became a director.
The pension entitlements of each director are as follows:
John Fallon | Member of the Pearson Group Pension | |
| ||
| ||
Coram Williams | Member of the Pearson Group Pension Plan with an accrual rate of 1/60th of pensionable salary per annum, restricted to the plan earnings cap (£154,200 per annum in 2017/2018), with continuous service with a service gap. There are no enhanced early retirement benefits. |
Annual incentives
The purposeAnnual incentive does not form part of annual incentives is to motivate the achievement of annual strategic goals and personal objectives, provide a focus on key financial metrics, and reward individual contribution to the success of the company.pensionable earnings.
Measures and performance targets are set by the committee at the start of the year with payment made after year endyear-end following the committee’s assessment of performance relative to targets.
The plans areplan is designed to incentivize and reward underlying performance and actualperformance. Actual results are adjusted forto remove the effect of foreign exchange and for portfolio changes (acquisitions and disposals) and other relevant factors that the committee considers relevantdo not reflect the underlying performance of the business in the performance year.
Annual incentive plans are discretionary. The committee reserves the right to adjust payments up or down before they are made if it believes exceptional factors warrant doing so. The committee may in exceptional circumstances make a special award where it is satisfied that the normal operation of the annual incentive does not provide an appropriate incentive or reward to participants.
The committee also reserves the right as a form of malus to adjust payments before they are made if special circumstances exist that warrant this, such as financial misstatement, individual misconduct or reputational damage to the company.
The committee also reserves, in the same special circumstances, a right to reclaim or claw back payments or awards that have already been made.
Annual incentives will not exceed 200% of base salary.
For the chief executive officer, the individual maximum incentive opportunity that will apply for 2016 is 180% of base salary and 170% for the chief financial officer (which isare the same opportunities as applied for 2015)under the previous policy).
For other executive directors and other members of the Pearson Executive, individual incentive opportunities take into account their membership of that committee and the relative contribution of their businesses or roles to the company’s overall goals. The individual maximum opportunity that will apply for 2016 varies by individual but will be no more than 170% of base salary.
For the chief executive, other executive directors and other members of the Pearson Executive, there is normally no pay-out for performance at threshold.
The committee has the discretion to select the performance measures, targets and relative weightings from year to year to ensure continuing alignment with strategy and to ensure targets are sufficiently stretching.
The committee establishes a threshold below which nopay-out is achieved and a maximum at or above which the annual incentive pays out in full.
For 2015, theThe funding of annual incentives waswill normally be related to the performance against targets for Pearson’s adjusted earnings per share, sales,financial and operating cash flow.
Individualstrategic imperatives performance targets. Working within its existing policy, to simplify the annual incentive plan (AIP) structure for 2018, and reflecting shareholder feedback, the committee has reduced the number of performance measures from five to four. It has replaced the two profit based measures previously included (Operating Profit and EPS) with a single Operating Profit measure, which will determine 40% of the outcome of the plan. This provides a greater focus on the metric used by management on aday-to-day basis to manage the business, whilst reducing the prominence of EPS in the overall remuneration framework. The committee has also made minor adjustments to the weightings of the other performance measures (cash flow 20%, revenue 20% and strategic measures 20%). The committee believes this creates an AIP that is appropriately balanced between key metrics and objectives for 2018. Each performance measure will operate independently. There will be no changes to the maximum annual incentive opportunities for 2018.
Strategic measures will be measured, using third party data or externally audited internal data (where third party data is not available or applicable). Performance metrics linked to strategic imperatives can be selected annually to support the Group’s transformation strategy.
Apay-out will only be made if a minimum level of performance has been achieved under the financial metrics, as determined by the committee each year.
Annual incentivepay-outs will also take into account individual performance against personal objectives. Personal objectives are agreed with the chief executive (or, in the case of the chief executive, the chairman) and may be functional, operational, strategic andnon-financial and includeinter alia objectives relating to environmental, social and governance issues.
Details of performance measures, weightings and targets will be disclosed in the annual remuneration report for the relevant financial year if and to the extent that the committee deems them to be no longer commercially sensitive.
The performance period is one year.
Long-term incentives
The purpose of long-term incentives is to help to recruit, reward and retain, drive long-term earnings, share price growth and value creation, align the interests of executives and shareholders, encourage long-term shareholding and commitment to the company, and link management’s long-term reward and wealth to corporate performance in a flexible way.
Awards of restricted shares are made on an annual basis.
Awards of restricted shares for executive directors and other members of the Pearson Executive vest on a sliding scale based on performance against stretching corporate performance targets measured at the end of the three-year performance period.
For performance-related awards for members of the Pearson Executive, performancePerformance will continue to be tested over 3three years and 75% of the vested shares will continue to be released at that point. Starting with awards made in 2014,However, there is a mandatory restriction on participants’ ability to dispose of the 75% of the vested shares (other than to meet personal tax liabilities) for a further 2two years. Furthermore, participants’ rights to the release of the 25% of the vested shares arewill be subject to continued employment over the same period.
Where shares vest, participants also receive additional shares representing the gross value of dividends that would have been paid on these shares during the performance period and reinvested.
The plan permits awards of restricted shares to be made that are not subject to performance conditions to satisfy reward and retention objectives.
However, other than in exceptionalthe circumstances ondescribed in the recruitment section of this policy below, it is the company’s policy not to award restricted shares to executive directors and other members of the Pearson Executive without performance conditions.
The long-term incentive plan also provides for the grant of stock options. Whilst it is not the committee’s intention to grant stock options in 20162018 or the foreseeable future, the committee believes that it should retain the flexibility of granting stock options in addition to, or instead of, restricted stock awards in the right circumstances. Any decision by the committee to grant stock options in the future would take account of best practice prevailing at the time. The committee would consult with shareholders before granting stock options to executive directors.
Pearson’sThe Group’s reported financial results for the relevant periods are used to measure performance.
The committee reserves the right to adjustpay-outs up or down before they are released taking into account exceptional factors that distort underlying business performance or if it believes exceptional factors warrant doing so. In making such adjustments, the committee is guided by the principle of aligning shareholder and management interests.
The committee also reserves the right as a form of malus to adjustpay-outs before they are released if exceptional circumstances exist that warrant this, such as financial misstatement, individual misconduct or reputational damage to the company.
The committee also reserves, in the same special circumstances, a right to reclaim or claw back pay-outspayouts or awards that have already been released.
We setThe committee sets the level of individual awards by taking into account:
the face value of individual awards at the time of grant, assuming that performance targets are met in full;
market practice for comparable companies and market assessments of total remuneration from ourits independent advisers;
individual roles and responsibilities; and
company and individual performance.
Restricted share awards to executive directors may normally be made up to a maximum face value of 400% of base salary. Awards in excess of 400% of base salary (and up to 25% over the normal maximum limit) may be made in exceptional circumstances, for example, for retention purposes or to reflect particular business situations. This discretion will be exercised only in exceptional circumstances and the committee would consult with major shareholders before doing so, proceeding only where there was clear consensus in favor among those consulted. In 2017, the committee reduced actual LTIP awards granted to executive directors by approximately 30% from prior levels, whilst retaining stretching performance targets. It has also reduced the proportion of these awards that will vest for threshold performance from 25% to 18% of the award. The committee will adopt the same approach for the 2018 awards by maintaining the 2017 award levels. Therefore, the 2018 awards will be made with the same face value as a % of salary as those in 2017 – 275% of salary for the CEO and 245% of salary for the CFO.
The committee has the discretion towill determine the performance measures, weightings and targets governing an award of restricted shares prior to grant to ensure continuing alignment with strategy and to ensure that targets are sufficiently stretching.
The committee establishes a threshold below which nopay-out is achieved and a maximum at or above which the award pays out in full. The proportion of the award that vests at threshold level of performance under each performance condition is 25% for relative TSR and 15% for financial measures.
Responding to shareholder feedback, the committee is rebalancing the performance measures for 2018 awards. One third of any award will vest based on each of Earnings Per Share (EPS), gross Return On Invested
Capital (ROIC) and relative Total Shareholder Return (TSR) measured over three years. Awards will also be subject to a further two year holding period. The eventual value of the awards will depend on the Group’s share price performance and dividends paid to shareholders over a five year period. The targets have been set as follows:
EPS Vesting schedule (% max) | EPS for FY20 | ROIC Vesting schedule (% max) | ROIC for FY20 | Relative TSR Vesting schedule (% max) | Ranked position vs FTSE 100 | |||||||||||||
15 | % | 65p | 15 | % | 5 | % | 25 | % | Median | |||||||||
65 | % | 68p | 65 | % | 6 | % | ||||||||||||
100 | % | 80p | 100 | % | 8 | % | 100 | % | Upper quartile |
As with restricted shares, the committee will determine the performance conditions that apply to any awards of stock options prior to grant. The intention would be that these conditions would be the same as apply to restricted shares.
Total shareholder return (TSR) is the return to shareholders from any growth in Pearson’s share price and reinvested dividends over the performance period. For long-term incentive awards made in 2018 and onwards, TSR will be measured relative to the constituents of the FTSE 100 over a three-year period. Companies that drop out of the index are normally excluded i.e. only companies in the index for the entire period are counted. Share price is averaged over three months at the start and end of the performance period. Dividends are treated as reinvested on theex-dividend date, in line with the Datastream methodology. The vesting of shares based on relative TSR is subject to the achievementcommittee satisfying itself that the recorded TSR is a genuine reflection of targets for growth inthe underlying financial performance of the business.
Gross Return on invested capital (ROIC) is adjusted operating profit less cash tax expressed as a percentage of gross invested capital (net operating assets plus gross goodwill).
Adjusted earnings per share return on invested capital(EPS) is calculated by dividing the adjusted earnings attributable to equity shareholders of the company by the weighted average number of ordinary shares in issue during the year, excluding any ordinary shares purchased by the company and relative total shareholder return.held in trust.
All employees (including executive directors) are also eligible to participate in savings-related share acquisition programs in the UK, US and rest of world, which are not subject to anyThe performance conditions.
There are limits on the amount of new-issue equity we can use. In any rolling ten-year period no more than 10% of Pearson equity will be issued, or be capable of being issued, under all Pearson’s share plans, and no more than 5% of Pearson equity will be issued, or be capable of being issued, under executive or discretionary plans.is three years.
Shareholding policy
Executive directors are expected to build up a substantial shareholding in the company in line with the policy of encouraging widespread employee ownership.ownership and to align further the interests of executives and shareholders. With effect from 2014, target holding is 300% of salary for the chief executive and 200% of salary for the other executive directors. Shares that count towards these guidelines include any shares held unencumbered by the executive, their spouse and/or dependent children plus any shares vested but held pending release under a restricted share plan. InExecutive directors have five years from the date of appointment to reach the guideline. With effect from 2014, the target holding was increased to 300% of salary for the chief executive and 200% of salary for the other executive directors. Mandatorythese guidelines were also extended to otherinclude all members of the Pearson Executiveexecutive management at 100% of salary. Details
Once met, the guideline is notre-tested, other than when shares are sold.
The shareholding guidelines do not apply to the chairman andnon-executive directors. However, a minimum of individual25% of the basicnon-executive directors’ shareholding are set out atfee is paid in Pearson shares that the endnon-executive directors have committed to retain for the period of this section.their directorships.
Service agreements
In accordance with long established policy, all executive directors have service agreements under which, other than by termination in accordance with the terms of these agreements, employment continues indefinitely.
There are no special provisions for notice or compensation in the event of a change of control of Pearson.
It is the company’s policy that the company may terminate the chairman’s and executive directors’ service agreements by giving no more than 12 months’ notice.
As an alternative, for executive directors the company may, at its discretion, pay in lieu of that notice.Payment-in-lieu of notice may be made in equal monthly installmentsinstalments from the date of termination to the end of any unexpired notice period. In the case of the CEO, payment-in-lieuPayment-in-lieu of notice in installmentsinstalments may also be subject to mitigation and reduced taking into account earnings from alternative employment.
For executive directors, pay in lieu of notice comprises 100% of the annual salary at the date of termination and the annual cost to the company of providing pension and all other benefits. For the chairman, pay in lieu of notice comprises 100% of the annual fees at the date of termination. In limited circumstances, in addition to making a full payment in lieu of notice, the company may permit an executive director to stay employed after the announcement of his or her departure for a limited period to ensure an effective hand-overhandover and/or allow time for a successor to be appointed.
The companyGroup may, depending on the circumstances of the termination, determine that it will not pay the director in lieu of notice and may instead terminate a director’s contract in breach and make a damages payment, taking into account as appropriate hethe director’s ability to mitigate his or her loss. The Group may also pay an amount considered reasonable by the remuneration committee in respect of fees for legal and tax advice and outplacement support for the departing director.
On cessation of employment, save as otherwise provided for under the rules of Pearson’s discretionary share plans, executive directors’ entitlements to any unvested awards lapse automatically. In the case of injury, disability,ill-health or redundancy (as determined by the committee), where a participant’s employing company ceases to be part of Pearson, or any other reason if the committee so decides in its absolute discretion:
awards that are subject to performance conditions will stay in force as if the participant had not ceased employment and shall vest on the original vesting date
date; awards that are not subject to a performance condition will be released onas soon as practicable following cessation of employment
employment; the number of shares that are released shall be prorated for the period of the participant’s service in the restricted period (although the committee may in its absolute discretion waive or vary the prorating).
In determining whether and how to exercise its discretion under Pearson’s discretionary share plans, the committee will have regard to all relevant circumstances distinguishing between different types of leaver, the circumstances at the time the award was originally made, the director’s performance and the circumstances in which the director left employment.
On cessation of employment, executive directors, having been notified of participation in an annual incentive plan for the relevant financial year, may, at the committee’s discretion, retain entitlement to a pro rata annual incentive for their period of service in the financial year prior to their leaving date. Such pay-outpayout will normally be calculated in good faith on the same terms and paid at the same time as for continuing executive directors.
Eligibility for allowances and benefits including retirement benefits normally ceases on retirement or on the termination of employment for any other reason.
The rules of Pearson’s discretionary share plans make provision for the treatment of awards in respect of corporate activity, including a change of control of Pearson. The committee would act in accordance with the
terms of the awards in these circumstances, which includes terms as to the assessment of performance conditions and time apportionment.
Details of each individual’s service agreement are outlined in the table below. Employment agreements for other employees are determined according to local labor law and market practice.
Executive directors’non-executive directorships
OurThe Group’s policy is that executive directors may, by agreement with the board, serve asnon-executives of other companies and retain any fees payable for their services.
Where executive directors servedCoram Williams is engaged as anon-executive directors elsewhere, they either waived or did not receive director of Guardian Media Group plc. He received fees of £37,750 during 2017 in respect of this role. His current remuneration is at the rate of £39,000 per annum since April 1, 2017 when he became chair of the audit committee. In accordance with the Group’s policy, Coram is permitted to retain these fees.
Chairman’s andnon-executive directors’ remuneration
The committee’s policychairman is that thepaid a single fee for all of his responsibilities.
The chairman’s pay should befee is set at a level that is competitive with those of chairmen in similar positions in comparable companies. HeThe chairman is not entitled to any annual or long-term incentive, retirement or other employee benefits.
Thenon-executive directors are paid a basic fee. The committee chairmen and members of the main board committees and the senior independent director are paid an additional fee to reflect their extra responsibilities.
Following a review of the structure of the fees paid tonon-executive directors, the board has determined that it would be appropriate to introduce additional fees for membership and chairmanship of the nomination and governance committee. Having taken independent advice from Deloitte, the fee that has been set by the board reflects the median level within the FTSE 100.
The chairman and thenon-executive directors are covered by the company’s normal arrangements for directors’ and officers’ liability insurance and an indemnity in respect of certain third-party liabilities.
The company reimburses the chairman’s andnon-executive directors’ travel and other business expenses and any tax incurred thereon, if applicable.
A minimum of 25% of the chairman’s andnon-executive directors’ basic fee is paid in Pearson shares that thenon-executive directors have committed to retain for the period of their directorships. Shares are acquired quarterly at the prevailing market price with the individualafter-tax fee payments.
Fees fornon-executive directors are determined by the full board having regard to market practice and within the restrictions contained in Pearson’sthe company’s Articles of Association. Non-executiveThe chairman andnon-executive directors receive no other pay or benefits (other than reimbursement for expenses incurred in connection with their directorship of Pearson)the company) and do not participate in Pearson’sthe company’s equity-based incentive plans.
Non-executive directors serve Pearson under letters of appointment which are renewed annually and do not have service contracts. Fornon-executive directors, there is no notice period or entitlement to compensation on the termination of their directorships.
The chairman’s and non-executive directors’ fees were last reviewed in 20142017 and have not been increased with effect from May 1, 2014 with a commitment to review again in 2017.since his appointment. Fees for thenon-executive directors were last increased with effect from May 1, 2014. Following a review of fees paid to
non-executive directors, the board has determined that most fees will remain unchanged, other than a small increase to apply to membership and chairmanship of the reputation and responsibility committee. A fee has also been introduced for the newly formed nomination & governance committee. These changes took effect from the AGM on 5 May 2017.
The structure ofnon-executive directors’ fees is as follows:
With effect from May | ||||
Non-executive director | £ | 70,000 | ||
Chairmanship of audit committee | £ | 27,500 | ||
Chairmanship of remuneration committee | £ | 22,000 | ||
Chairmanship of nomination and governance committee | £ | 15,000 | ||
Chairmanship of reputation and responsibility committee | £ | |||
Membership of audit committee | £ | 15,000 | ||
Membership of remuneration committee | £ | 10,000 | ||
Membership of nomination and governance committee | £ | 8,000 | ||
Membership of reputation and responsibility committee | £ | |||
Senior independent director | £ | 22,000 |
Notes:
(1) | The fee paid to the chairman remains unchanged at £500,000. |
(2) | A minimum of 25% of the basic fee is paid in Pearson shares that the chairman andnon-executive directors have committed to retain for the period of their directorships. |
(3) | Non-executive directors serve Pearson under letters of appointment and do not have service contracts. There is no entitlement to compensation on the termination of their directorships. |
Remuneration of senior management
The remuneration received by the chairman and executive directors in respect of the financial year ending December 31, 20152017 was as follows:
Base Salary/ Fees | Allowances & Benefits(1) | Annual Incentives | Long-term Incentives | Retirement Benefits | Total | Base Salary/ Fees | Allowances & Benefits(1) | Annual Incentives | Long-term Incentives | Retirement Benefits | Total | |||||||||||||||||||||||||||||||||||||
£000 | £000 | £000 | £000 | £000 | £000 | £000 | £000 | £000 | £000 | £000 | £000 | |||||||||||||||||||||||||||||||||||||
Chairman | ||||||||||||||||||||||||||||||||||||||||||||||||
Glen Moreno | 500 | — | — | — | — | 500 | ||||||||||||||||||||||||||||||||||||||||||
Sidney Taurel | 500 | 12 | — | — | — | 512 | ||||||||||||||||||||||||||||||||||||||||||
Executive directors | ||||||||||||||||||||||||||||||||||||||||||||||||
John Fallon | 776 | 62 | 0 | 54 | 371 | 1,263 | 780 | 45 | 624 | — | 309 | 1,758 | ||||||||||||||||||||||||||||||||||||
Coram Williams | 258 | 0 | 0 | 0 | 18 | 276 | 515 | 39 | 412 | — | 52 | 1,018 | ||||||||||||||||||||||||||||||||||||
Robin Freestone (stepped down | 417 | 13 | 0 | 41 | 126 | 597 | ||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||
Senior management as a group | 1,951 | 75 | 0 | 95 | 515 | 2,636 | 1,795 | 96 | 1,036 | — | 361 | 3,288 | ||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Notes:
(1) | Benefits include company car, car allowance, private use of a driver, healthcare, additional life cover, |
Share options for senior management
This table sets forth for each director the number ofThere are no share options held as of December 31, 2015 as well as the exercise price, rounded to the nearest whole pence/cent, and the range of expiration dates of these options.outstanding for senior management.
| ||||||||||||||||
| ||||||||||||||||
|
Notes:
Share ownership of senior management
The table overleafbelow shows the number of ordinary shares and conditional shares held by directors and their connected persons as at December 31, 2015.
Ordinary shares include both ordinary shares listed on the London Stock Exchange and American Depositary Receipts (ADRs) listed on the New York Stock Exchange. The figures include both shares and ADRs acquired by individuals investing part of their own after-tax annual bonus in Pearson shares under the annual bonus share matching plan.
Conditional shares means shares which have vested but remain held subject to continuing employment for a pre-defined holding period.
2017. Additional information with respect to share options held by, and
bonus awards for, these persons is set out above in “Remuneration of Senior Management” and “Share Options of Senior Management”. The total number of ordinary shares held by senior management as of December 31, 20152017 was 503,066.487,669.
As at 31 December 2017 | Ordinary Shares(1) | Conditional Shares(2) | ||||||
Sidney Taurel | 78,677 | — | ||||||
John Fallon | 326,784 | 749,000 | ||||||
Coram Williams | 15,010 | 437,000 | ||||||
Elizabeth Corley | 8,066 | — | ||||||
Vivienne Cox | 5,263 | — | ||||||
Josh Lewis | 11,033 | — | ||||||
Linda Lorimer | 6,977 | — | ||||||
Harish Manwani | 14,151 | — | ||||||
Tim Score | 17,285 | — | ||||||
Lincoln Wallen | 4,423 | — | ||||||
Michael Lynton | — | — |
Notes: | ||||||||
| ||||||||
| ||||||||
| ||||||||
| ||||||||
| ||||||||
| ||||||||
| ||||||||
| ||||||||
| ||||||||
| ||||||||
| ||||||||
|
Notes:
(1) | Ordinary shares include both ordinary shares listed on the London Stock Exchange and American Depositary Receipts (ADRs) listed on the New York Stock Exchange. The figures include both shares and ADRs acquired by individuals |
(2) | Conditional shares means unvested shares which remain subject to performance conditions and continuing employment for apre-defined period. |
(2) | The register of directors’ interests (which is open to inspection during normal office hours) contains full details of directors’ shareholdings and options to subscribe for shares. The market price on December 31, |
(3) | Ordinary shares do not include any shares vested but held pending release under a restricted share plan. |
The total remuneration of the executive committee is set out in the table below:
All figures in £ millions | ||||
Short-term employee benefits | ||||
Retirement benefits | 1 | |||
Share-based payment costs | ||||
|
| |||
Total | ||||
|
|
Employee share ownership plans
In 1998, wethe Group introduced a worldwide save for shares plan. Under this plan, our employees around the world have the option to save a portion of their monthly salary over periods of three or five years. At the end of this period, the employee has the option to purchase ordinary shares with the accumulated funds at a purchase price equal to 80% of the market price prevailing at the commencement of the employee’s participation in the plan.
In 2014, shareholders approved the renewal and extension of the life of the UK plan by a further ten years, until 2024 and the renewal of the directors’ authority to continue to operate equivalent arrangements fornon-UK employees. As part of this renewal, the savings limit for the UK HMRC-approved part of the plan (which forms the basis of the plan in the rest of the world outside the US) was increased from £250 to £500 per month.
In the United States, this plan operates as a stock purchase plan under Section 423 of the US Internal Revenue Code of 1986. This plan was introduced in 2000 following Pearson’s listing on the New York Stock
Exchange. Under it, participants save a portion of their monthly salary over six month periods, at the end of which they have the option to purchase ADRs with their accumulated funds at a purchase price equal to 85% of the lower of the market price prevailing at the beginning or end of the period. The maximum employee contribution under the plan is $1,000 per month.
OurAs at February 28, 2018, the Group’s board currently comprises the chairman, two executive directors and seven eightnon-executive directors. OurThe articles of association provide that at every annual general meeting,one-third of the board of directors, or the number nearest toone-third, shall retire from office. The directors to retire each year are the directors who have been longest in office since their last election or appointment. A retiring director is eligible forre-election. If at any annual general meeting, the place of a retiring director is not filled, the retiring director, if willing, is deemed to have beenre-elected, unless at or prior to such meeting it is expressly resolved not to fill the vacated office, or unless a resolution for there-election of that director has been put to the meeting and lost. OurThe articles of association also provide that every director be subject tore-appointment by shareholders at the next annual general meeting following their appointment.
However in accordance with the UK Corporate Governance Code, the board has resolved that all directors should offer themselves forre-election on an annual basis at the company’s annual general meeting. Accordingly, with the exception of Harish Manwani, who will retire from the Board at the 2018 annual general meeting, all of the directors will offer themselves forre-election, (or re-appointmentelection in the case of directorsMichael Lynton, who werewas appointed since the last meeting)on February 1, 2018), at the forthcoming annual general meeting on April 29, 2016.May 4, 2018.
Pearson is listed on the New York Stock Exchange (“NYSE”). As a listednon-US issuer, we arethe Group is required to comply with some of the NYSE’s corporate governance rules, and otherwise must disclose on ourits website any significant ways in which ourits corporate governance practices differ from those followed by US companies under the NYSE listing standards. At this time, the CompanyGroup believes that it is in compliance in all material respects with all the NYSE rules except that the Remuneration Committee and the Nomination & Governance Committee isare not composed entirely of independent directors and that itas the Chairman, who is the full board, not the Nomination Committee, that develops and recommends corporate governance principles.considered independent under NYSE rules, is a member of each committee in addition to independent directors.
The board of directors has established the following formal committees, all of which report to the board. Each committee has its own written terms of reference setting out its authority and duties. These can be found on ourthe Group’s website (www.pearson.com/ (https://www.pearson.com/governance).
Audit committee
This committee providesappraises the board with a vehicle to appraise ourGroup’s financial management and reporting and to assessassesses the integrity of ourits accounting procedures and financial controls.control. Tim Score chairs this committee and its other members are Elizabeth Corley, Vivienne Cox, Linda Lorimer and Linda Lorimer. Lincoln Wallen will join the committee on March 1, 2016.Wallen. Tim Score is also the designated audit committee financial expert within the meaning of the applicable rules and regulations of the US Securities and Exchange Commission. OurThe Group’s internal and external auditors have direct access to the committee to raise any matter of concern and to report the results of work directed by the committee.
Remuneration committee
This committee meets regularly to decidedetermine the remuneration and benefits of the executive directors and oversees remuneration arrangements for the executive committee.Pearson Executive. The committee also recommends the chairman’s remuneration to the board of directors for its decision and reviews management development and succession plans.decision. Elizabeth Corley chairs this committee and its other members are Vivienne Cox, Josh Lewis, Tim Score and Sidney Taurel.
Nomination & governance committee
This committee meets from time to time as necessary to considerreviews corporate governance matters including UK Corporate Governance Code compliance and board evaluation, considers the appointment of new directors.directors, board experience and diversity, and reviews board induction and succession plans. The committee is chaired by Vivienne Cox and its other members are Elizabeth Corley, Josh Lewis, Harish Manwani, Tim Score and Sidney Taurel and comprises all of the non-executive directors.Taurel.
Reputation and& responsibility committee
This committee meets regularlyconsiders the Group’s impact on society and the communities in which the Group operates, including to oversee Pearson’s strategyensure strategies are in place to manage and plans to build and protect its corporateimprove the Group’s reputation. It provides advice and guidance to management on these plans. Vivienne CoxLinda Lorimer chairs this committee and its other members are Josh Lewis, Linda LorimerVivienne Cox, Harish Manwani and Harish Manwani.Lincoln Wallen.
The average number of persons employed by usthe Group in continuing operations during each of the three fiscal years ended 20152017 were as follows:
37,26530,339 in fiscal 2015,2017,
38,65432,719 in fiscal 2014,2016, and
39,88637,265 in fiscal 2013.2015.
We, through ourThrough its subsidiaries, havethe Group has entered into collective bargaining agreements with employees in various locations. OurThe Group’s management has no reason to believe that weit would not be able to renegotiate any such agreements on satisfactory terms. We encourageThe Group encourages employees to contribute actively to the business in the context of their particular job roles and believebelieves that the relations with ourits employees are generally good.
The table set forth below shows for 2015, 20142017, 2016 and 20132015 the average number of persons employed in each of ourthe Group’s segments.
Average number employed | 2015 | 2014 | 2013 | 2017 | 2016 | 2015 | ||||||||||||||||||
North America | 19,951 | 20,927 | 21,856 | 16,295 | 16,841 | 19,951 | ||||||||||||||||||
Core | 5,936 | 6,139 | 7,075 | 5,291 | 5,664 | 5,936 | ||||||||||||||||||
Growth | 11,114 | 11,406 | 10,768 | 8,268 | 9,868 | 11,114 | ||||||||||||||||||
Other | 264 | 182 | 187 | 485 | 364 | 264 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Continuing operations | 37,265 | 38,654 | 39,886 | 30,339 | 32,719 | 37,265 | ||||||||||||||||||
|
|
|
|
|
|
The average number employed in discontinued operations was nil in 2017, nil in 2016, and 2,282 in 2015, 2,295 in 2014, and 5,821 in 2013.2015.
ITEM 7. | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS |
As at February 29, 2016,28, 2018, the company had been notified under the Financial Conduct Authority’s Disclosure and Transparency Rules of the following significant voting rights in its shares:
Name of shareholder | Number of ordinary shares held | % of outstanding ordinary shares represented by number of shares held | Number of ordinary shares held | % of outstanding ordinary shares represented by number of shares held | ||||||||||||
Schroders plc | 42,151,560 | 5.13 | % | 108,921,950 | 13.91 | |||||||||||
BlackRock, Inc. | 42,201,515 | 5.14 | % | |||||||||||||
Silchester International Investors LLP | 88,951,732 | 11.14 | ||||||||||||||
Lindsell Train Limited | 41,393,237 | 5.035 | ||||||||||||||
Ameriprise Financial Inc and its group | 41,236,375 | 5.019 |
The shareholders listed above have no special voting rights.
On February 29, 2016,28, 2018, record holders with registered addresses in the United States held 36,106,012 ADRs,24,322,555ADRs, which represented 4.4%3.1% of ourthe Group’s outstanding ordinary shares. Some of these ADRs are held by nominees and so these numbers may not accurately represent the number of beneficial ownersshares beneficially owned in the United States.
Loans and equity advanced to joint ventures and associates during the year and as at December 31, 20152017 are shown in note 12 in “Item 18. Financial Statements.” Dividends receivable from joint ventures and associates are set out in note 12 in “Item 18. Financial Statements”. There were no other related party transactions in 2015.
ITEM 8. | FINANCIAL INFORMATION |
The financial statements filed as part of this Annual Report are included on pagesF-1 through F-71F-151 hereof.
Other than those events described in note 37 in “Item 18. Financial Statements” of this Form20-F and seasonal fluctuations in borrowings, there has been no significant change to ourthe Group’s financial condition or results of operations since December 31, 2015. Our2017. The Group’s borrowings fluctuate by season due to the effect of the school year on the working capital requirements of the educational book business. Assuming no acquisitions or disposals, ourthe maximum level of net debt normally occurs in July, and ourthe minimum level of net debt normally occurs in December.
OurThe Group’s policy with respect to dividend distributions is described in response to “Item 3. Key Information” above.
See “Item 4. Information on the Company — Legal Proceedings” for information with respect to legal proceedings to which wethe Group may be subject from time to time.
ITEM 9. | THE OFFER AND LISTING |
The principal trading market for ourthe Group’s ordinary shares is the London Stock Exchange. OurIts ordinary shares also trade in the United States in the form of ADSs evidenced by ADRs under a sponsored ADR facility with The Bank of New York Mellon, as depositary. WeThe Group established this facility in March 1995 and most recently amended it in August 2014 in connection with ourits New York Stock Exchange listing. Each ADS represents one ordinary share.
The ADSs trade on the New York Stock Exchange under the symbol “PSO”.
The following table sets forth the highest and lowest middle market quotations, which represent the average of closing bid and asked prices, for the ordinary shares, as derived from the Daily Official List of the London Stock Exchange and the average daily trading volume on the London Stock Exchange:
on an annual basis for ourthe five most recent fiscal years,
on a quarterly basis for ourthe most recent quarter and two most recent fiscal years, and
on a monthly basis for the six most recent months.
Ordinary shares | Average daily trading volume | |||||||||||
Reference period | High | Low | ||||||||||
(In pence) | (Ordinary shares) | |||||||||||
Five most recent fiscal years | ||||||||||||
2015 | 1508 | 695 | 2,928,500 | |||||||||
2014 | 1341 | 998 | 2,499,900 | |||||||||
2013 | 1365 | 1119 | 2,065,900 | |||||||||
2012 | 1294 | 1111 | 2,174,000 | |||||||||
2011 | 1222 | 983 | 2,012,900 | |||||||||
Most recent quarter and two most recent fiscal years | ||||||||||||
2015 Fourth quarter | 1224 | 695 | 3,376,500 | |||||||||
Third quarter | 1275 | 1074 | 2,849,300 | |||||||||
Second quarter | 1471 | 1205 | 2,673,500 | |||||||||
First quarter | 1508 | 1140 | 2,802,000 | |||||||||
2014 Fourth quarter | 1241 | 1113 | 2,255,400 | |||||||||
Third quarter | 1240 | 1087 | 2,242,500 | |||||||||
Second quarter | 1175 | 1008 | 2,424,400 | |||||||||
First quarter | 1341 | 998 | 3,086,800 | |||||||||
Most recent six months | ||||||||||||
February 2016 | 859 | 719.5 | 3,337,500 | |||||||||
January 2016 | 789 | 657.5 | 4,341,200 | |||||||||
December 2015 | 823.5 | 695 | 2,764,700 | |||||||||
November 2015 | 867.5 | 765 | 3,714,000 | |||||||||
October 2015 | 1224 | 861.5 | 3,638,200 | |||||||||
September 2015 | 1161 | 1082 | 2,225,900 |
Ordinary shares | Average daily trading volume | |||||||||||
Reference period | High | Low | ||||||||||
(In pence) | (Ordinary shares) | |||||||||||
Five most recent fiscal years | ||||||||||||
2017 | 818.5 | 566.5 | 4,146,100 | |||||||||
2016 | 975 | 657.5 | 3,515,000 | |||||||||
2015 | 1,508 | 695 | 2,928,500 | |||||||||
2014 | 1,341 | 998 | 2,499,900 | |||||||||
Most recent quarter and two most recent fiscal years | ||||||||||||
2017 Fourth quarter | 750 | 607 | 4,128,900 | |||||||||
Third quarter. | 691.5 | 566.5 | 3,256,100 | |||||||||
Second quarter | 739.5 | 616 | 4,008,000 | |||||||||
First quarter | 818.5 | 573 | 4,549,000 | |||||||||
2016 Fourth quarter | 832.5 | 726 | 3,898,200 | |||||||||
Third quarter | 975 | 726 | 3,652,000 | |||||||||
Second quarter | 967 | 784.5 | 2.931,300 | |||||||||
First quarter | 913 | 657.5 | 3,575,100 | |||||||||
Most recent six months | ||||||||||||
February 2018 | 732.4 | 653 | 5,423,100 | |||||||||
January 2018 | 738.2 | 679.2 | 5,062,600 | |||||||||
December 2017 | 750 | 713.5 | 3,927,600 | |||||||||
November 2017 | 709.5 | 693 | 3,976,300 | |||||||||
October 2017 | 719.5 | 607 | 4,455,300 | |||||||||
September 2017 | 612 | 566.5 | 3,187,700 |
ITEM 10. | ADDITIONAL INFORMATION |
We summarizeThe Group summarizes below the material provisions of ourits articles of association, as amended, which have been filed as an exhibit to ourits annual report onForm 20-F for the year ended December 31, 2015.2017. The summary below is qualified entirely by reference to the Articles of Association. We haveThe Group has multiple business objectives and purposes and areis authorized to do such things as the board may consider fit to further ourits interests or incidental or conducive to the attainment of ourits objectives and purposes.
Directors’ powers
OurThe Group’s business shall be managed by the board of directors and the board may exercise all such of ourits powers as are not required by law or by the Articles of Association or by any directions given by the Company by special resolution, to be exercised in a general meeting.
Interested directors
For the purposes of section 175 of the Companies Act 2006, the board may authorize any matter proposed to it which would, if not so authorized, involve a breach of duty by a Director under that section, including, without limitation, any matter which relates to a situation in which a Director has, or can have, an interest which conflicts, or possibly may conflict, with the interests of the Company. Any such authorization will be effective only if:
(a) | any requirement as to quorum at the meeting at which the matter is considered is met without counting the Director in question or any other interested Director; and |
(b) | the matter was agreed to without their voting or would have been agreed to if their votes had not been counted. |
The board may (whether at the time of the giving of the authorization or subsequently) make any such authorization subject to any limits or conditions it expressly imposes but such authorization is otherwise given to the fullest extent permitted. The board may vary or terminate any such authorization at any time.
Provided that he has disclosed to the board the nature and extent of his interest, a Director notwithstanding his office:
(a) | may be a party to, or otherwise interested in, any transaction or arrangement with the Company or in which the Company is otherwise (directly or indirectly) interested; |
(b) | may act by himself or his firm in a professional capacity for the Company (otherwise than as auditor) and he or his firm shall be entitled to remuneration for professional services as if he were not a Director; |
(c) | may be a director or other officer of, or employed by, or a party to a transaction or arrangement with, or otherwise interested in, any body corporate in which the Company is otherwise (directly or indirectly) interested. |
A Director shall not, by reason of his office, be accountable to the Company for any remuneration or other benefit which he derives from any office or employment or from any transaction or arrangement or from any interest in any body corporate:
(a) | the acceptance, entry into or existence of which has been approved by the board (subject, in any such case, to any limits or conditions to which such approval was subject); or |
(b) | which he is permitted to hold or enter into by virtue of paragraph (a), (b) or (c) above; |
nor shall the receipt of any such remuneration or other benefit constitute a breach of his duty under section 176 of the Act.
A Director shall be under no duty to the Company with respect to any information which he obtains or has obtained otherwise than as a Director of the Company and in respect of which he owes a duty of confidentiality to another person. However, to the extent that his relationship with that other person gives rise to a conflict of interest or possible conflict of interest, whichthe preceding sentence only applies if the existence of such relationship has been approved by the board:board. In such circumstances, the Director shall not be in breach of the general duties he owes to the Company by virtue of sections 171 to 177 of the Act because he fails:
(a) | to disclose any such information to the board or to any Director or other officer or employee of the Company; and/or |
(b) | to use or apply any such information in performing his duties as a Director of the Company. |
Where the existence of a Director’s relationship with another person has been approved by the board and his relationship with that person gives rise to a conflict of interest or possible conflict of interest, the Director shall not be in breach of the general duties he owes to the Company by virtue of sections 171 to 177 of the Act because he:
(a) | absents himself from meetings of the board at which any matter relating to the conflict of interest or possible conflict of interest will or may be discussed or from the discussion of any such matter at a meeting or otherwise; and/or |
(b) | makes arrangements not to receive documents and information relating to any matter which gives rise to the conflict of interest or possible conflict of interest sent or supplied by the Company and/or for such documents and information to be received and read by a professional adviser, for so long as he reasonably believes such conflict of interest or possible conflict of interest subsists. |
Except as stated below, a Director shall not vote in respect of any contract or arrangement or any other proposal whatsoever in which he has an interest which is, to his knowledge, a material interest, otherwise than by virtue of his interests in shares or debentures or other securities of or otherwise in or through the Company. A Director shall not be counted in the quorum at a meeting of the Board in relation to any resolution on which he is debarred from voting.
Notwithstanding the foregoing, a Director will be entitled to vote, and be counted in the quorum, on any resolution concerning any of the following matters:
the giving of any guarantee, security or indemnity in respect of money lent or obligations incurred by him or by any other person at the request of or for the benefit of the Company or any of its subsidiaries;
the giving of any guarantee, security or indemnity to a third party in respect of a debt or obligation of the Company or any of its subsidiaries for which he himself has assumed responsibility in whole or in part and whether alone or jointly with others under a guarantee or indemnity or by the giving of security;
any proposal relating to the Company or any of its subsidiary undertakings where it is offering securities in which offer a Director is or may be entitled to participate as a holder of securities or in the underwriting orsub-underwriting of which a Director is to participate;
any proposal relating to another company in which he and any persons connected with him do not to his knowledge hold an interest in shares (as that term is used in sections 820 to 825 of the Companies Act 2006) representing one per cent or more of either any class of the equity share capital, or the voting rights, in such company;
any proposal relating to an arrangement for the benefit of the employees of the Company or any of its subsidiary undertakings which does not award him any privilege or benefit not generally awarded to the employees to whom such arrangement relates; and
any proposal concerning insurance that we proposethe Company proposes to maintain or purchase for the benefit of directors or for the benefit of persons, including Directors.
Where proposals are under consideration concerning the appointment of two or more Directors to offices or employment with us or any company in which we arethe Group is interested, these proposals may be divided and considered separately and each of these directors, if not prohibited from voting under the provisions of the eighth paragraph before this one, will be entitled to vote and be counted in the quorum with respect to each resolution except that concerning his or her own appointment.
Borrowing powers
The board of Directors may exercise all powers to borrow money and to mortgage or charge ourthe Group’s undertaking, property and uncalled capital and to issue debentures and other securities, whether outright or as
collateral security for any of ourits or any third party’s debts, liabilities or obligations. The board of directors must restrict the borrowings in order to secure that the aggregate amount of undischarged monies borrowed by usthe Group (and any of ourits subsidiaries), but excluding any intra-group debts, shall not at any time (without the previous sanction of the Company in the form of an ordinary resolution) exceed a sum equal to twice the aggregate of the adjusted capital and reserves.
Other provisions relating to directors
Under the articles of association, directors are paid out of ourthe Group’s funds for their services as weit may from time to time determine by ordinary resolution and, in the case ofnon-executive directors, up to an aggregate of £750,000 or such other amounts as resolved by the shareholders at a general meeting. Any Director who is not an Executive Director and who performs special services which in the opinion of the Board are outside the scope of
the ordinary duties of a Director, may be paid such extra remuneration by way of additional fee, salary, commission or otherwise as the Board may determine in accordance with ourthe Group’s remuneration policy. Under the articles of association, Directors currently are not required to hold any share qualification. However, ourthe remuneration policy mandates a shareholding guideline for executive directors which they are expected to build towards over a specified period.
Annual general meetings
Pursuant to the Companies Act 2006, the Company must hold an annual general meeting (‘AGM’) (within six months beginning with the day following its accounting reference date) at a place and time determined by the board. The following matters are usually considered at an annual general meeting:
approving final dividends;
consideration of the accounts and balance sheet;
ordinary reports of the board of directors and auditors and any other documents required to be annexed to the balance sheet;
as holders of ordinary shares vote for the election of one-third of the members of the board of directors at every annual general meeting, the appointment or election of directors in the place of those retiring by rotation or otherwise. Notwithstanding the provisions of the Articles, the board has resolved that all directors should offer themselves forre-election annually, in accordance with the UK Corporate Governance Code;
appointment or reappointment of, and determination of the remuneration of, the auditors; and
the renewal, limitation, extension, variation or grant of any authority to the board in relation to the allotment of securities.
The board may call a general meeting whenever it thinks fit. If at any time there are not within the United Kingdom sufficient directors capable of acting to form a quorum, any director or any two members may convene a general meeting in the same manner as nearly as possible as that in which meetings may be convened by the board.
No business shall be dealt with at any general meeting unless a quorum is present when the meeting proceeds to business. Three members present in person and entitled to vote shall be a quorum for all purposes. A corporation being a member shall be deemed to be personally present if represented by its duly authorized representative.
If a quorum for a meeting convened at the request of shareholders is not present within fifteen minutes of the appointed time, the meeting will be dissolved. In any other case, the general meeting will be adjourned to the same day in the next week, at the same time and place, or to a time and place that the chairman fixes. If at that rescheduled meeting a quorum is not present within fifteen minutes from the time appointed for holding the
meeting, the shareholders present in person or by proxy will be a quorum. The chairman or, in his absence, the deputy chairman or any other director nominated by the board, will preside as chairman at every general meeting. If no director is present at the general meeting or no director consents to act as chairman, the shareholders present shall elect one of their number to be chairman of the meeting.
Share Certificates
Every person whose name is entered as a member in the Company’s Register of Members shall be entitled to one certificate in respect of each class of shares held(theheld (the law regarding this does not apply to stock exchange nominees). Subject to the terms of issue of the shares, certificates are issued following allotment or receipt of the form of transfer bearing the appropriate stamp duty by ourthe Group’s registrar, Equiniti, Aspect House, Spencer Road, Lancing, West Sussex, BN99 6DA, United Kingdom, telephone number +44121-415-7062.
Share capital
Any share may be issued with such preferred, deferred or other special rights or other restrictions as may be determined by way of a shareholders’ vote in general meeting. Subject to the Companies Act 2006, any shares may be issued which are to be redeemed or are liable to be redeemed at the option of the Company or the shareholders.
There are no provisions in the Articles of Association which discriminate against any existing or prospective shareholder as a result of such shareholder owning a substantial number of shares.
Subject to the terms of the shares which have been issued, the directors may from time to time make calls upon the shareholders in respect of any moneys unpaid on their shares, provided that (subject to the terms of the shares so issued) no call on any share shall be payable at less than fourteen clear days from the last call. The directors may, if they see fit, receive from any shareholder willing to advance the same, all and any part of the moneys uncalled and unpaid upon any shares held by him.
Changes in capital
WeThe Group may, from time to time by ordinary resolution subject to the Companies Act 2006:
consolidate and divide all or any of ourits share capital into shares of a larger nominal amount than its existing shares; or
sub-divide all of or any of ourits existing shares into shares of smaller nominal amounts.
WeThe Group may, from time to time increase ourits share capital by allotting new shares in accordance with the prescribed threshold authorized by shareholders at the last annual general meeting and subject to the consents and procedures required by the Companies Act 2006, may by special resolution reduce ourits share capital.
Voting rights
Every holder of ordinary shares present in person or by proxy at a meeting of shareholders has one vote on a vote taken by a show of hands. On a poll, every holder of ordinary shares who is present in person or by proxy has one vote for every ordinary share of which he or she is the holder. Voting at any meeting of shareholders is usually on a poll rather than by a show of hands unlesshands. Voting on a poll is properly demanded beforemore transparent and equitable because it includes the declarationvotes of all shareholders, including those cast by proxies, rather than just the resultsvotes of a show of hands.those shareholders who attend the meeting. A poll may be also demanded by:
the chairman of the meeting;
at least three shareholders present in person or by proxy and entitled to vote;
any shareholder or shareholders present in person or by proxy representing not less thanone-tenth of the total voting rights of all shareholders having the right to vote at the meeting; or
any shareholder or shareholders present in person or by proxy holding shares conferring a right to vote at the meeting being shares on which the aggregate sum paid up is equal to not less thanone-tenth of the total sum paid up on all shares conferring that right.
Dividends
Holders of ordinary shares are entitled to receive dividends out of ourGroup profits that are available by law for distribution, as wethe Group may declare by ordinary resolution, subject to the terms of issue thereof. However, no dividends may be declared in excess of an amount recommended by the board of directors. The board may pay interim dividends on the shares of any class as it deems fit. WeIt may invest or otherwise use all dividends left unclaimed for six months after having been declared for ourits benefit, until claimed. All dividends unclaimed for a period of twelve years after having been declared will be forfeited and revert to us.the Group.
The directors may, with the sanction of an ordinary resolution of the shareholders, offer any holders of ordinary shares the right to elect to receive ordinary shares credited as fully paid, in whole or in part, instead of cash in respect of such dividend.
The directors may deduct from any dividend payable to any shareholder all sums of money (if any) presently payable by that shareholder to usthe Group on account of calls or otherwise in relation to ourits shares.
Liquidation rights
In the event of ourthe Group’s liquidation, after payment of all liabilities, ourits remaining assets would be used to repay the holders of ordinary shares the amount they paid for their ordinary shares. Any balance would be divided among the holders of ordinary shares in proportion to the nominal amount of the ordinary shares held by them.
Other provisions of the articles of association
Whenever ourthe Group’s capital is divided into different classes of shares, the special rights attached to any class may, unless otherwise provided by the terms of the issue of the shares of that class, be varied or abrogated, either with the written consent of the holders of three-fourths of the issued shares of the class or with the sanction of a special resolution passed at a separate meeting of these holders. In the event that a shareholder or other person appearing to the board of directors to be interested in ordinary shares fails to comply with a notice requiring him or her to provide information with respect to their interest in voting shares pursuant to section 793 of the Companies Act 2006, wethe board may serve that shareholder with a notice of default. After service of a default notice, that shareholder shall not be entitled to attend or vote at any general meeting or at a separate meeting of holders of a class of shares or on a poll until he or she has complied in full with ourthe Group’s information request.
If the shares described in the default notice represent at leastone-fourth of 1% in nominal value of the issued ordinary shares, then the default notice may additionally direct that in respect of those shares:
wethe Group will not pay dividends (or issue shares in lieu of dividends); and
wethe Group will not register transfers of shares unless the shareholder is not himself in default as regards supplying the information requested and the transfer, when presented for registration, is in such form as the board of directors may require to the effect that after due and careful inquiry, the shareholder is satisfied that no person in default is interested in any of the ordinary shares which are being transferred or the transfer is an approved transfer, as defined in ourthe Group’s articles of association.
No provision of ourthe articles of association expressly governs the ordinary share ownership threshold above which shareholder ownership must be disclosed. Under the Disclosure and Transparency Rules of the Financial Conduct Authority, any person who acquires, either alone or, in specified circumstances, with others an interest in ourthe Group’s voting share capital equal to or in excess of 3% comes under an obligation to disclose prescribed
particulars to usthe Group in respect of those ordinary shares. A disclosure obligation also arises where a person’s notifiable interests fall below 3%, or where, at or above 3%, the percentage of ourthe Group’s voting share capital in which a person has a notifiable interest increases or decreases by 1% or more.
Limitations affecting holders of ordinary shares or ADSs
Under English law and our memorandum and articles of association, persons who are neither UK residents nor UK nationals may freely hold, vote and transfer ordinary shares in the same manner as UK residents or nationals.
With respect to the items discussed above, applicable UK law is not materially different from applicable US law.
PearsonThe Group has not entered into any contracts outside the ordinary course of business during the two yeartwo-year period immediately preceding the date of this annual report. The Trust Deed entered into in 2014 with respect to €500.0 million aggregate principal amount of 1.875% guaranteed notes due 2021 and the Trust Deed entered into in 2015 with respect to €500.0
€500.0 million aggregate principal amount of 1.375% guaranteed notes due 2025, in each case, issued by a subsidiary and guaranteed by Pearson, areis filed as Exhibits 2.9 and 2.10Exhibit 2.6 of this report, respectively.report.
Executive employment contracts
We haveThe Group has entered into agreements with each of ourits executive directors pursuant to which such executive director is employed by us.the Group. These agreements describe the duties of such executive director and the compensation to be paid by us. See “Item 6. Directors, Senior Management and Employees — Compensation of Senior Management”.
It is the company’sGroup’s policy that the companyit may terminate the executive directors’ service agreements by giving no more than 12 months’ notice. As an alternative, the companyGroup may at its discretion pay in lieu of that notice.Payment-in-lieu of notice may be made in equal monthly installments from the date of termination to the end of any unexpired notice period. In the case of the CEO,payment-in-lieu of notice in installments may also be subject to mitigation and reduced taking into account earnings from alternative employment. For executive directors, pay in lieu of notice comprises 100% of the annual salary at the date of termination and the annual cost to the company of providing pension and all other benefits. In limited circumstances, in addition to making a full payment in lieu of notice, the companyGroup may permit an executive director to stay employed after the announcement of his or her departure for a limited period to ensure an effective hand-over and/or allow time for a successor to be appointed. The companyGroup may, depending on the circumstances of the termination, determine that it will not pay the director in lieu of notice and may instead terminate a director’s contract in breach and make a damages payment, taking into account as appropriate hethe director’s ability to mitigate his or her loss.
There are no UK government laws, decrees, regulations or other legislation which restrict or which may affect the import or export of capital, including the availability of cash and cash equivalents for use by us or the remittance of dividends, interest or other payments to nonresident holders of ourthe Group’s securities, except as otherwise described under “— Tax Considerations” below.
The following is a discussion of the material US federal income tax considerations and UK tax considerations arising from the acquisition, ownership and disposition of ordinary shares and ADSs by a US holder. A US holder is:
an individual citizen or resident of the US, or
a corporation created or organized in or under the laws of the US or any of its political subdivisions, or
an estate or trust the income of which is subject to US federal income taxation regardless of its source.
This discussion deals only with ordinary shares and ADSs that are held as capital assets by a US holder, and does not address tax considerations applicable to US holders that may be subject to special tax rules, such as:
dealers or traders in securities or currencies,
financial institutions or other US holders that treat income in respect of the ordinary shares or ADSs as financial services income,
insurance companies,
tax-exempt entities,
persons acquiring shares or ADSs in connection with employment,
US holders that hold the ordinary shares or ADSs as a part of a straddle or conversion transaction or other arrangement involving more than one position,
US holders that own, or are deemed for US tax purposes to own, 10% or more of the total combined voting power of all classes of ourthe Group’s voting stock,
US holders that have a principal place of business or “tax home” outside the United States, or
US holders whose “functional currency” is not the US dollar.
For US federal income tax purposes, holders of ADSs will be treated as the owners of the ordinary shares represented by those ADSs. In practice, HM Revenue & Customs (HMRC) will also regard holders of ADSs as the beneficial owners of the ordinary shares represented by those ADSs, although case law has cast some doubt on this. The discussion below assumes that HMRC’s position is followed.
In addition, the following discussion assumes that The Bank of New York Mellon will perform its obligations as depositary in accordance with the terms of the depositary agreement and any related agreements.
Because US and UK tax consequences may differ from one holder to the next, the discussion set out below does not purport to describe all of the tax considerations that may be relevant to you and your particular situation. Accordingly, you are advised to consult your own tax advisor as to the US federal, state and local, UK and other, including foreign, tax consequences of investing in the ordinary shares or ADSs. Except where otherwise indicated, the statements of US and UK tax law set out below are based on the laws, interpretations and tax authority practice in force or applicable as of February 29, 2016, being28, 2018, including without limitation the last practicable date beforelegislation commonly referred to as the date of this Annual Report,US Tax Cuts and Jobs Act signed into law on December 22, 2017 and are subject to any changes occurring after that date, possibly with retroactive effect.
UK income taxation of distributions
The UK does not impose dividend withholding tax on dividends paid by the Company.
A US holder that is not resident in the UK for UK tax purposes and does not carry on a trade, profession or vocation in the UK through a branch or agency (or in the case of a company a permanent establishment) to which the ordinary shares or ADSs are attributable will not generally be liable to pay UK tax on dividends paid by the Company.
US income taxation of distributions
Distributions that we makethe Group makes with respect to the ordinary shares or ADSs, other than distributions in liquidation and distributions in redemption of stock that are treated as exchanges, will be taxed to US holders as ordinary dividend income to the extent that the distributions do not exceed ourthe Group’s current and accumulated earnings and profits. The amount of any distribution will equal the amount of the cash distribution. Distributions, if any, in excess of ourthe Group’s current and accumulated earnings and profits will constitute anon-taxable return of capital to a US holder and will be applied against and reduce the US holder’s tax basis in its ordinary shares or ADSs. To the extent that these distributions exceed the tax basis of the US holder in its ordinary shares or ADSs, the excess generally will be treated as capital gain.
Dividends that we paythe Group pays will not be eligible for the dividends received deduction generally allowed to US corporations under Section 243 of the Code.
In the case of distributions in pounds sterling, the amount of the distributions generally will equal the US dollar value of the pounds sterling distributed, determined by reference to the spot currency exchange rate on the date of receipt of the distribution by the US holder in the case of shares or by The Bank of New York Mellon in the case of ADSs, regardless of whether the US holder reports income on a cash basis or an accrual basis. The US holder will realize separate foreign currency gain or loss only to the extent that this gain or loss arises on the actual disposition of pounds sterling received. For US holders claiming tax credits on a cash basis, taxes withheld
from the distribution are translated into US dollars at the spot rate on the date of the distribution; for US holders claiming tax credits on an accrual basis, taxes withheld from the distribution are translated into US dollars at the average rate for the taxable year.
A distribution by the Company to noncorporatenon-corporate shareholders will be taxed as net capital gain at a maximum rate of 20%, provided certain holding periods are met, to the extent such distribution is treated as a dividend under US federal income tax principles. In addition, a 3.8% Medicare tax will generally be imposed on the net investment income, which generally would include distributions treated as dividends under US federal income tax principles, of noncorporatenon-corporate taxpayers whose adjusted gross income exceeds a threshold amount.
UK taxation of capital gains
A US holder that is not resident in the UK for UK tax purposes and who does not carry on a trade, profession or vocation in the UK through a branch or agency (or in the case of a company a permanent establishment) to which the ordinary shares or ADSs are attributable will not generally be liable for UK taxation on capital gains or eligible for relief for allowable losses, realized on the sale or other disposal of the ordinary shares or ADSs.
A US holder who is an individual who has been resident for tax purposes in the UK but who ceases to be so resident or becomes regarded as resident outside the UK for the purposes of any double tax treaty (“TreatyNon-resident”) and continues to not be resident in the UK, or continues to be TreatyNon-resident, for a period of five years or less (or, for departures before 6 April 2013, ceases to be resident or ordinarily resident or becomes TreatyNon-resident for a period of less than five tax years) and who disposes of his ordinary shares or ADSs during that period may also be liable on his return to the UK to UK tax on capital gains, subject to any available exemption or relief, even though he is not resident in the UK, or is TreatyNon-resident, at the time of the disposal.
US income taxation of capital gains
Upon a sale or exchange of ordinary shares or ADSs to a person other than Pearson, a US holder will recognize gain or loss in an amount equal to the difference between the amount realized on the sale or exchange and the US holder’s adjusted tax basis in the ordinary shares or ADSs. Any gain or loss recognized will be capital gain or loss and will be long-term capital gain or loss if the US holder has held the ordinary shares or ADSs for
more than one year. Long-term capital gain of a noncorporatenon-corporate US holder is generally taxed at a maximum rate of 20%. In addition, a 3.8% Medicare tax will generally be imposed on the net investment income, which generally would include capital gains, of noncorporatenon-corporate taxpayers whose adjusted gross income exceeds a threshold amount.
Gain or loss realized by a US holder on the sale or exchange of ordinary shares or ADSs generally will be treated asUS-source gain or loss for US foreign tax credit purposes.
Estate and gift tax
The current Estate and Gift Tax Convention, or the Convention, between the US and the UK generally relieves from UK Inheritance Tax (the equivalent of US Estate and Gift Tax) the transfer of ordinary shares or of ADSs where the transferor is domiciled in the US for the purposes of the Convention. This relief will not apply if the ordinary shares or ADSs are part of the business property of an individual’s permanent establishment in the UK or pertain to the fixed base in the UK of a person providing independent personal services. If no relief is given under the Convention, inheritance tax may be charged on death and also on the amount by which the value of an individual’s estate is reduced as a result of any transfer made by way of gift or other gratuitous or undervalue transfer, in general within seven years of death, and in certain other circumstances. In the unusual case where ordinary shares or ADSs are subject to both UK Inheritance Tax and US Estate or Gift Tax, the Convention generally provides for tax paid in the UK to be credited against tax payable in the US or for tax paid in the US to be credited against tax payable in the UK based on priority rules set forth in the Convention.
Stamp duty
No stamp duty or stamp duty reserve tax (SDRT) will generally be payable in the UK on the purchase or transfer of an ADS, provided that the ADS, and any separate instrument or written agreement of transfer, remain at all times outside the UK and that the instrument or written agreement of transfer is not executed in the UK. Subject to the following paragraph, UK legislation does however provide for SDRT or (in the case of transfers) stamp duty to be chargeable at the rate of 1.5% of the amount or value of the consideration or, in some circumstances, the value of the ordinary shares (rounded up to the next multiple of £5 in the case of stamp duty), where ordinary shares are issued or transferred to a person whose business is or includes issuing depositary receipts, or to a nominee or agent for such a person, or issued or transferred to a person whose business is or includes the provision of clearance services or to a nominee or agent for such a person.
Following litigation, HM Revenue & Customs (HMRC) has accepted that it will no longer seek to apply the 1.5% SDRT charge when new shares are issued to a clearance service or depositary receipt system on the basis that the charge is not compatible with EU law. The UK Government have announced their intention to continue with this approach following the UK’s departure from the EU. HMRC’s view is that the 1.5% SDRT or stamp duty charge will continue to apply to transfers of shares into a clearance service or depositary receipt system, unless they are an integral part of an issue of share capital. This view is currently being challenged inHowever, further litigation.litigation indicates that certain other transfers are also not chargeable under EU Law.Accordingly,specific professional advice should be sought before paying the 1.5% SDRT or stamp duty charge in any circumstances.
A transfer for value of the underlying ordinary shares will generally be subject to either stamp duty or SDRT, normally at the rate of 0.5% of the amount or value of the consideration (rounded up to the next multiple of £5 in the case of stamp duty). A transfer of ordinary shares from a nominee to its beneficial owner, including the transfer of underlying ordinary shares from the Depositary to an ADS holder, under which no beneficial interest passes will not be subject to stamp duty or SDRT.
Close company status
We believeThe Group believes that the close company provisions of the UK Corporation Tax Act 2010 do not apply to us.it.
Copies of ourthe Group’s Memorandum and Articles of Association and filed as exhibits to this Annual Report and certain other documents referred to in this Annual Report are available for inspection at ourits registered office at 80 Strand, London WC2R 0RL (c/o the Company Secretary), or, in the US, at the registered office of Pearson Inc. at 330 Hudson Street, New York, New York, during usual business hours upon reasonable prior request.
ITEM 11. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Our principal marketPearson’s treasury function has primary responsibility for managing certain financial risks to which the Group is exposed. The Group’s treasury policies are changes in interest ratesapproved by the board of Directors annually and currency exchange rates. Following an evaluation of these positions, we selectivelythe audit committee receives regular reports on the Group’s treasury activities, policies and procedures. Pearson’s treasury function is not run as a profit center and does not enter into derivative financial instrumentsany transactions for speculative purposes. The treasury function is permitted to manage ouruse derivatives for risk exposure. For this purpose, we primarily usemanagement purposes which may include interest rate swaps, interest rate caps and collars, forwardcurrency rate agreements, currency swaps and forward foreign exchange contracts. Managing market riskscontracts, of which interest rate swaps and forward foreign exchange swaps are the most commonly used.
The Group’s objectives when managing capital are:
to safeguard the Group’s ability to continue as a going concern and retain financial flexibility by maintaining a strong balance sheet;
to provide returns for shareholders;
to maintain a solid investment grade credit rating.
The Group is currently rated BBB (negative outlook) with Standard and Poor’s and Baa2 (negative outlook) with Moody’s.
Interest and foreign exchange rate management
The Group’s principal currency exposure is to the responsibilityUS dollar which represents more than 60% of the Group’s sales. The Group’s long-term bond debt is primarily held in US dollars to provide a natural hedge of this exposure. Pearson has balanced fixed float interest rate mix which is managed within Treasury policy limits.
It is achieved in two ways:
1. Issuing fixed rate US dollar bonds;
2. Issuing fixed rate euro bonds which are swapped to US dollar using interest rate and cross currency swaps.
A floating rate exposure is created in the first instance. Pearson has subsequently layered on several overlay floating to fixed hedges with a tenor matching the maturity of the 2021 and 2025 bond. This is in line with the Group’s interest rate hedging policy, which requires a proportion of the Group’s gross debt to be fixed. At December 31, 2017, the group had contracts to fix $579m of debt for the next 12 months (2016: $800m).
Overseas profits are converted to sterling to satisfy sterling expenses such as dividends at the prevailing spot rate at the time of the transaction. To the extent the Group has sufficient sterling, US dollars may be held as dollar cash to provide a natural offset to the Group’s debt or to satisfy future US dollar cash outflows.
The group does not have significant cross border foreign exchange transactional exposures.
Liquidity andre-financing risk management
The Group regularly reviews the level of cash and debt facilities required to fund its activities. This involves preparing a prudent cash flow forecast for the next three to five years, determining the level of debt facilities required to fund the business, planning for repayments of debt at its maturity and identifying an appropriate amount of headroom to provide a reserve against unexpected outflows.
At December 31, 2017, the Group had cash of £0.6 billion and an undrawn US dollar denominated revolving credit facility due 2021 of $1.75 billion (£1.3 billion). At December 31, 2016 the Group had cash of £1.5 billion and an undrawn US dollar denominated revolving credit facility due 2021 of $1.75 billion (£1.4 billion). The $1.75 billion facility contains interest cover and leverage covenants which the Group has complied with for the year ended December 31, 2017.
Financial counterparty risk management
Counterparty credit limits, which take published credit rating and other factors into account, are set to cover the Group’s total aggregate exposure to a single financial institution. The limits applicable to published credit ratings bands are approved by the chief financial officer who acts pursuant to policieswithin guidelines approved by the board of directors. The Audit Committee receives regular reports on our treasury activities.
We have a policy of not undertaking any speculative transactions,board. Exposures and we do not hold our derivative and otherlimits applicable to each financial instruments for trading purposes.
We have formulated policies for hedging exposures to interest rate and foreign exchange risk, and have used derivatives to ensure compliance with these policies. Although a proportion of our derivative contracts were transacted without regard to existing IFRS requirements on hedge accounting, during 2015 and 2014 we qualified for hedge accounting under IFRSinstitution are reviewed on a number of our key derivative contracts.regular basis.
The following discussion addresses market risk only and does not present other risks that we face in the normal course of business, including country risk, credit risk and legal risk.
The Group’s financial exposure to interest rates arises primarily from its borrowings. The Group manages its exposure by borrowing at fixed and variable rates of interest, and by entering into derivative transactions. Objectives approved by the board concerning the proportion of debt outstanding at fixed rates govern the use of these financial instruments.
The Group’s objectives are applied to core net debt, which is measured at the year-end and comprises borrowings net of cash and other liquid funds. Our objective is to maintain a proportion of forecast core net debt in fixed or capped form for the next four years, subject to a maximum of 65% and a minimum that starts at 40% and falls by 10% each year.
The principal method of hedging interest rate risk is to enter into an agreement with a bank counterparty to pay a fixed rate and receive a variable rate, known as a swap. Under interest rate swaps, the Group agrees with other parties to exchange, at specified intervals, the difference between fixed-rate and variable-rate amounts calculated by reference to an agreed notional principal amount. The majority of the Group’s swap contracts are US dollar denominated, and some of them have deferred start dates, in order to maintain the desired risk profile as other contracts mature. The variable rates received are normally based on three-month or six-month LIBOR, and the dates on which these rates are set do not necessarily exactly match those of the hedged borrowings. Management believes that our portfolio of these types of swaps is an efficient hedge of our portfolio of variable rate borrowings.
In addition, from time to time, the Group issues bonds or other capital market instruments to refinance existing debt. To avoid the fixed rate on a single transaction unduly influencing our overall net interest expense, our typical practice has been to enter into a related derivative contract effectively converting the interest rate profile of the bond transaction to a variable interest rate. In some cases, the bond issue is denominated in a different currency to the Group’s desired borrowing risk profile and the Group enters into a related cross currency interest rate swap in order to maintain this risk profile, which is predominantly borrowings denominated in US dollars.
The Group’s accounting objective in its use of interest rate derivatives is to minimize the impact on the income statement of changes in the mark-to-market value of its derivative portfolio as a whole. It uses duration
calculations to estimate the sensitivity of the derivatives to movements in market rates. The Group also identifies which derivatives are eligible for fair value hedge accounting (which reduces significantly the income statement impact of changes in the market value of a derivative). The Group then divides the total portfolio between hedge-accounted and pooled segments, so that the expected movement on the pooled segment is minimized.
Although the Group is based in the UK, it has significant investments in overseas operations. The most significant currency in which the Group trades is the US dollar.
The Group’s policy is to align approximately the currency composition of its core net borrowings with its forecast operating profit before depreciation and amortization. This policy aims to soften the impact of changes in foreign exchange rates on consolidated interest cover and earnings. This policy applies only to currencies that account for more than 15% of group operating profit, which currently only includes the US dollar. However, the Group still borrows small amounts in other currencies, typically for seasonal working capital needs. In addition, the Group’s policy does not require existing currency debt to be terminated to match declines in that currency’s share of Group operating profit. Also, the chief financial officer may request the inclusion of currencies that account for less than 15% of Group operating profit before depreciation and amortization in the above hedging process. Only one hedging transaction, denominated in South African rand, has been undertaken under that authority. The South African rand transaction matured in 2014.
At December 31, 2015 the Group’s net borrowings/(cash) in our main currencies (taking into account the effect of cross currency rate swaps) were: US dollar £1,345m and sterling £(385)m.
The Group uses both currency denominated debt and derivative instruments to implement the above policy. Its intention is that gains/losses on the derivatives and debt offset the losses/gains on the foreign currency assets and income. Each quarter the value of hedging instruments is monitored against the assets in the relevant currency and, where practical, a decision is made whether to treat the debt or derivative as a net investment hedge (permitting foreign exchange movements on it to be taken to reserves) for the purposes of reporting under IFRS.
Investments in overseas operations are consolidated for accounting purposes by translating values in one currency to another currency, in particular from US dollars to sterling. Fluctuations in currency exchange rates affect the currency values recorded in our accounts, although they do not give rise to any realized gain or loss, nor to any currency cash flows.
The Group is also exposed to currency exchange rates in its cash transactions and its investments in overseas operations. Cash transactions — typically for purchases, sales, interest or dividends — require cash conversions between currencies. Fluctuations in currency exchange rates affect the cash amounts that the Group pays or receives.
Forward foreign exchange contracts
The Group sometimes uses forward foreign exchange contracts where a specific major project or forecasted cash flow, including acquisitions and disposals, arises from a business decision that has used a specific foreign exchange rate. The Group’s policy is to effect routine transactional conversions between currencies, for example to collect receivables or settle payables, at the relevant spot exchange rate.
The Group seeks to offset purchases and sales in the same currency, even if they do not occur simultaneously. In addition, its debt and cash portfolios management gives rise to temporary currency shortfalls and surpluses. Both of these activities require using short-dated foreign exchange swaps between currencies.
Although the Group prepares its consolidated financial statements in sterling, significant sums have been invested in overseas assets, particularly in the US. Therefore, fluctuations in currency exchange rates, particularly between the US dollar and sterling, and to a lesser extent between the euro and sterling, are likely to affect shareholders’ funds and other accounting values.
Under IFRS, the Group is required to record all derivative instruments on the balance sheet at fair value. Derivatives not classified as hedges are adjusted to fair value through earnings. Changes in the fair value of derivatives that the Group has designated and that qualify as effective hedges are either recorded in reserves or are offset in earnings by the corresponding movement in the fair value of the underlying hedged item. Any ineffective portion of derivatives that are classified as hedges is immediately recognized in earnings.
In 2015 and 2014 the Group met the prescribed designation requirements and hedge effectiveness tests under IFRS for some of its derivative contracts. As a result, the movements in the fair value of the effective portion of fair value hedges and net investment hedges have been offset in earnings and reserves respectively by the corresponding movement in the fair value of the underlying hedged item.
In line with the Group’s treasury policy, none of these instruments were considered trading instruments and each instrument was transacted solely to match an underlying financial exposure.
Quantitative information about market risk
The sensitivity of the Group’s derivative portfolio to changes in interest rates is found in note 19 of “Item 18. Financial Statements”.
ITEM 12. | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES |
OurThe Group’s ordinary shares trade in the United States under a sponsored ADR facility with The Bank of New York Mellon as depositary.
The depositary collects its fees for delivery and surrender of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal, or from intermediaries acting for them. The depositary collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. The depositary may collect its annual fee for depositary services by deductions from cash distributions or by directly billing investors or by charging the book-entry system accounts of participants acting for them. The depositary may generally refuse to providefee-attracting services until its fees for those services are paid.
The following table summarizes various fees currently charged by The Bank of New York Mellon:
Person depositing or withdrawing shares must pay to the depositary: | For: | |
$5.00 (or less) per 100 ADSs (or portion of 100 ADSs) | • Issuance of ADSs, including issuances resulting from a distribution of shares or rights or other property
• Cancellation of ADSs for the purpose of withdrawal, including if the deposit agreement terminates | |
$.05 (or less) per ADS | • Any cash distribution to ADS registered holders | |
A fee equivalent to the fee that would be payable if securities distributed had been shares and the shares had been deposited for issuance of ADSs | • Distribution of securities by the depositary to ADS registered holders of deposited securities | |
$.05 (or less) per ADS per calendar year | • Depositary services | |
Registration of transfer fees | • Transfer and registration of shares on the share register to or from the name of the depositary or its agent when shares are deposited or withdrawn | |
Expenses of the depositary | • Cable, telex and facsimile transmissions (when expressly provided in the deposit agreement)
• Converting foreign currency to US dollars | |
Taxes and other governmental charges the depositary or the custodian have to pay on any ADS or share underlying an ADS, for example, stock transfer taxes, stamp duty or withholding taxes | • As necessary | |
Any charges incurred by the depositary or its agents for servicing the deposited securities | • As necessary |
Fees incurred in past annual period and fees to be paid in the future
The Company received payments$355,554 as reimbursement from the depositary with respect to 2015 of $350,0002017 for standardout-of-pocket maintenance costs for the ADRs (consisting of the expenses of postage and envelopes for mailing the annualproxy voting materials, and interim financial of reports, printing and distributing dividend cheques, electronic filing of US Federal tax information, mailing requiredtabulation for the forms, stationery, postage, facsimile and telephone calls),non-registered holders, any applicable performance indicators relating to the ADR facility, underwriting fees and legal fees.fees).
The depositary has agreed to reimburse the Company for expenses they incur that are related to establishment and maintenance expenses of the ADS program. The depositary has agreed to reimburse the Company for its continuing annual stock exchange listing fees. The depositary has also agreedagrees to pay the standardout-of-pocket maintenance costs for the ADRs,registered ADR holders , which consists of the expenses of postage and envelopes for mailing annual and interim financial reports,proxy voting materials , printing and distributing dividend cheques, electronic filing of US Federal tax information, mailing required tax forms, stationery, postage, facsimile and telephone calls. It has also agreed to reimburse the Company annually for certain investor relationship programs or special investor relations promotional activities. In certain instances, the depositary has agreed to provide additional payments to the Company based on any applicable performance indicators relating to the ADR facility. There are limits on the amount of expenses for which the depositary will reimburse the Company, but the amount of reimbursement available to the Company is not necessarily tied to the amount of fees the depositary collects from investors.
The depositary collects its fees for delivery and surrender of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal, or from intermediaries acting for them. The depositary collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. The depositary may collect its annual fee for depositary services by deduction from cash distributions or by directly billing investors or by charging the book-entry system accounts of participants acting for them. The depositary may generally refuse to provide fee-attracting services until its fees for those services are paid.
ITEM 13. | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES |
None.
ITEM 14. | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS |
None.
ITEM 15. | CONTROLS AND PROCEDURES |
Disclosure controls and procedures
An evaluation of the effectiveness ourthe Group’s disclosure controls and procedures as of December 31, 20152017 was carried out by management, under the supervision and with the participation of ourthe Chief Executive Officer and Chief Financial Officer. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures (as defined in Rules13a- 15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended) were effective as at December 31, 20152017 at a reasonable assurance level. A controls system, no matter how well designed and operated, cannot provide absolute assurance to achieve its objectives.
Management’s annual report on internal control over financial reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting is a process designed by, or under the supervision of, ourthe Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, and effected by the Company’ board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Management has assessed the effectiveness of internal control over financial reporting as of December 31, 20152017 based on the framework inInternal Control — Integrated Framework(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this evaluation, management has concluded that the Company’s internal control over financial reporting was effective as a December 31, 20152017 based on criteria inInternal Control — Integrated Framework(2013) issued by the COSO.
PricewaterhouseCoopers LLP, an independent registered public accounting firm, has audited the effectiveness of the Company’s internal control over financial reporting as of December 31, 2015,2017, as stated in their report which appears on pageF-2.
Change in internal control over financial reporting
During the period covered by this Annual Report on Form 20-F, the Company has madeThere have been no changes to its internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. During the period covered by this Annual Report on Form20-F, the Company has embarked on a program of work to deliver a single Pearson-wide solution to integrate data, systems and processes across human resources, finance, procurement and supply chain. This program went live in the UK in 2016 with a resulting change in some aspects of the control environment.
ITEM 16A. | AUDIT COMMITTEE FINANCIAL EXPERT |
The members of the Board of Directors of Pearson plc have determined that Tim Score is an audit committee financial expert within the meaning of the applicable rules and regulations of the US Securities and Exchange Commission.
ITEM 16B. | CODE OF ETHICS |
Pearson has adopted a code of ethics (the Pearson code of conduct) which applies to all employees including the chief executive officer and chief financial officer and other senior financial management. This code of ethics is available on ourthe Group’s website (www.pearson.com/(www.pearson.com/code-of-conduct.html). The information on ourthis website is not incorporated by reference into this report.
ITEM 16C. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
In line with best practice, ourthe Group’s relationship with PricewaterhouseCoopers LLP (PwC) is governed by ourits external auditor policy, which is reviewed and approved annually by the audit committee. The policy establishes procedures to ensure the auditors’ independence is not compromised as well as defining thosenon-audit services that PwC may or may not provide to Pearson. These allowable services are in accordance with relevant UK and US legislation.
The audit committee approves all audit andnon-audit services provided by PwC. Certain categories of allowable non-audit services have been pre-approved by the audit committee subject to the authorities below:
Pre-approved non-audit services can be authorized by the chief financial officer up to £100,000 per project, subject to a cumulative limit of £500,000 per annum;
Tax compliance and related activities up to the greater of £1,000,000 per annum or 50% of the external audit fee; and
For tax advisory services we use the most appropriate advisor, usually after a tender process. Where we decide to use our independent auditor, authority, up to £100,000 per project subject to a cumulative limit of £500,000 per annum, has been delegated by the audit committee to management.
Services provided by PwC above these limits and all other allowablenon-audit services, such as due diligence, irrespective of value, must be approved by the audit committee. Where appropriate, services will be tendered prior to awarding this work to the auditor.
The following table sets forth remuneration paid to PwC for 20142017 and 2015:2016:
Auditors’ Remuneration | 2015 | 2014 | 2017 | 2016 | ||||||||||||
£m | £m | £m | £m | |||||||||||||
Audit fees | 6 | 7 | 6 | 7 | ||||||||||||
Tax fees | 1 | 1 | — | — | ||||||||||||
All other fees | 3 | 1 | 2 | 2 |
Audit fees include £35,000 (2014:(2016: £35,000) of audit fees relating to the audit of the parent company.
Fees for the audit of the effectiveness of the Group’s internal control over financial reporting are allocated to audit fees paid.
Tax services include services related to tax compliance and advisory services.
ITEM 16D. | EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES |
Not applicable.
ITEM 16E. | PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASES |
Period | Total number of shares purchased | Average price paid per share | Total number of units purchased as part of publicly announced plans or programs | Maximum number of shares that may yet be purchased under the plans or programs | ||||||||||||
February 1, 2013 – February 28, 2013 | 1,000,000 | £ | 11.64 | N/A | N/A | |||||||||||
April 1, 2013 – April 30, 2013 | 1,000,000 | £ | 11.53 | N/A | N/A | |||||||||||
June 1, 2013 – June 30, 2013 | 1,972,725 | £ | 11.61 | N/A | N/A | |||||||||||
September 1, 2013 – September 30, 2013 | 139,192 | £ | 12.57 | N/A | N/A | |||||||||||
April 1, 2014 – April 30, 2014 | 906,892 | £ | 10.18 | N/A | N/A | |||||||||||
July 1, 2015 – July 31, 2015 | 1,974,362 | £ | 11.81 | N/A | N/A |
Period | Total number of shares purchased | Average price paid per share | Total number of units purchased as part of publicly announced plans or programs | Approximate maximum value of shares that may yet be purchased under the plans or programs | ||||||||||||
July 1, 2015 – July 31, 2015 | 1,974,362 | £11.81 | n/a | n/a | ||||||||||||
August 1, 2016 – August 31, 2016 | 3,000,000 | £8.92 | n/a | n/a | ||||||||||||
October 1, 2017 – October 31, 2017 | 4,846,809 | £7.03 | 4,846,809 | £ | 266m | |||||||||||
November 1, 2017 – November 30, 2017 | 11,210,922 | £6.99 | 11,210,922 | £ | 187m | |||||||||||
December 1, 2017 – December 31, 2017 | 4,938,170 | £7.23 | 4,938,170 | £ | 151m | |||||||||||
January 1, 2018 – January 31, 2018 | 9,895,690 | £7.03 | 9,895,690 | £81m | ||||||||||||
February 1, 2018 – February 28, 2018 | 11,943,986 | £6.77 | 11,943,986 | £nil |
Purchases of shares in 2015 and 2016 were made to satisfy obligations under Pearson employee share award programs. All purchases were made in open-market transactions. None
In October 2017, The Group announced a £300m share buyback program. In 2017, the Group’s brokers purchased 21m shares at a total value of £153m of which £149m had been cancelled at December 31, 2017. Cash payments of £149m had been made in respect of the foregoing share purchases with the outstanding £4m settlement made at the beginning of January 2018. This £4m together with the remaining value of the buyback program of £147m was maderecorded as parta liability at December 31, 2017. A further 22m shares were purchased under the program in 2018. The shares bought back were cancelled and the nominal value of these shares was transferred to a publicly announced plan or program.capital redemption reserve. The nominal value of shares cancelled at December 31, 2017 was £5m.
ITEM 16F. | CHANGE IN REGISTRANT’S CERTIFYING AUDITOR |
Not applicable.
ITEM 16G. | CORPORATE GOVERNANCE |
Pearson is listed on the New York Stock Exchange (“NYSE”). As a listednon-US issuer, we arethe Group is required to comply with some of the NYSE’s corporate governance rules, and otherwise must disclose on ourits website any significant ways in which ourits corporate governance practices differ from those followed by US companies under the NYSE listing standards. At this time, the Company believes that it is in compliance in all material respects with all the NYSE rules except that the Remuneration Committee and the Nomination & Governance Committee isare not composed entirely of independent directors and that itas the Chairman, who is the full board, not the Nomination Committee, that develops and recommends corporate governance principles.considered independent under NYSE rules, is a member of each committee in addition to independent directors.
ITEM 16H. | MINE SAFETY DISCLOSURE |
Not applicable.
ITEM 17. | FINANCIAL STATEMENTS |
Not applicable.
ITEM 18. | FINANCIAL STATEMENTS |
The financial statements filed as part of this Annual Report are included on pagesF-1 through F-71F-151 hereof.
ITEM 19. | EXHIBITS |
* | Incorporated by reference from the Form20-F of Pearson plc for the year ended December 31, 2003 and filed May 7, 2004. |
Incorporated by reference from the Form20-F of Pearson plc for the year ended December 31, |
f | Incorporated by reference from the Form20-F of Pearson plc for the year ended December 31, 2012 and filed March 22, 2013. |
q | Incorporated by reference from the Form20-F of Pearson plc for the year ended December 31, 2013 and filed March 27, 2014. |
¥ | Incorporated by reference from the Form20-F of Pearson plc for the year ended December 31, 2014 and filed March 26, 2015. |
l | Incorporated by reference from the Form20-F of Pearson plc for the year ended December 31, 2015 and filed March 23, 2016. |
FINANCIAL STATEMENTS: CONTENTS
Pearson plc Consolidated Financial Statements | ||||
F-2 | ||||
Consolidated Income Statement for the year ended December 31, | ||||
Consolidated Balance Sheet as at December 31, | ||||
Consolidated Cash Flow Statement for the year ended December 31, | ||||
Penguin Random House Venture Combined Financial Statements | ||||
F-82 | ||||
Combined Income Statement for the year ended December 31, 2017, 2016 and 2015 | F-84 | |||
Combined Statement of Comprehensive Income for the year ended December 31, 2017, | F-85 | |||
Combined Balance Sheet as at December 31 2017, 2016 and 2015 | F-86 | |||
Combined Cash Flow Statement for the year ended December 31, 2017, 2016 and 2015 | F-87 | |||
Combined Statement of Changes in Equity for the year ended December 31, 2017, 2016 and 2015 | F-88 | |||
F-89 |
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Pearson plc
In our opinion,Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Pearson plc and its subsidiaries as of December 31, 2017 and 2016, and the related consolidated income statements, consolidated statements of comprehensive income, consolidated statements of changes in equity and consolidated cash flow statements for each of the three years in the period ended December 31, 2017 including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established inInternal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Pearson plc and its subsidiaries atthe Company as of December 31, 20152017 and December 31, 20142016, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2015,2017 in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board and in conformity with International Financial Reporting Standards as adopted by the European Union. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015,2017, based on criteria established in “InternalInternal Control — Integrated Framework”Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). COSO.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in “Management’sManagement’s Annual Report on Internal Control Over Financial Reporting”Reporting appearing under Item 15item 15. of this Form 20-F.20-F”. Our responsibility is to express opinions on thesethe Company’s consolidated financial statements and on the Group’sCompany’s internal control over financial reporting based on our integrated audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States) and International Standards on Auditing.PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the consolidated financial statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, andas well as evaluating the overall presentation of the consolidated financial statement presentation.statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control basebased on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/PricewaterhouseCoopers LLP
London
United Kingdom
March 23, 2016April 4, 2018
We have served as the Company’s auditor since 1996.
Pearson plc Consolidated Financial Statements
Year ended 31 December 20152017
All figures in £ millions | Notes | 2015 | 2014 restated | 2013 restated | Notes | 2017 | 2016 | 2015 | ||||||||||||||||||||||||
Continuing operations | ||||||||||||||||||||||||||||||||
Sales | 2 | 4,468 | 4,540 | 4,728 | 2 | 4,513 | 4,552 | 4,468 | ||||||||||||||||||||||||
Cost of goods sold | 4 | (1,981 | ) | (2,021 | ) | (2,123 | ) | 4 | (2,066 | ) | (2,093 | ) | (1,981 | ) | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||
Gross profit | �� | 2,487 | 2,519 | 2,605 | 2,447 | 2,459 | 2,487 | |||||||||||||||||||||||||
Operating expenses | 4 | (2,094 | ) | (2,125 | ) | (2,202 | ) | 4 | (2,202 | ) | (2,480 | ) | (2,107 | ) | ||||||||||||||||||
Other net gains and losses | 4 | 128 | (25 | ) | 13 | |||||||||||||||||||||||||||
Impairment of intangible assets | 11 | (849 | ) | (77 | ) | — | 11 | — | (2,548 | ) | (849 | ) | ||||||||||||||||||||
Share of results of joint ventures and associates | 12 | 52 | 31 | 28 | 12 | 78 | 97 | 52 | ||||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||
Operating (loss)/profit | 2 | (404 | ) | 348 | 431 | |||||||||||||||||||||||||||
Operating profit/(loss) | 2 | 451 | (2,497 | ) | (404 | ) | ||||||||||||||||||||||||||
Finance costs | 6 | (100 | ) | (140 | ) | (110 | ) | 6 | (110 | ) | (97 | ) | (100 | ) | ||||||||||||||||||
Finance income | 6 | 71 | 47 | 37 | 6 | 80 | 37 | 71 | ||||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||
(Loss)/profit before tax | (433 | ) | 255 | 358 | ||||||||||||||||||||||||||||
Profit/(loss) before tax | 421 | (2,557 | ) | (433 | ) | |||||||||||||||||||||||||||
Income tax | 7 | 81 | (56 | ) | (88 | ) | 7 | (13 | ) | 222 | 81 | |||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||
(Loss)/profit for the year from continuing operations | (352 | ) | 199 | 270 | ||||||||||||||||||||||||||||
Profit/(loss) for the year from continuing operations | 408 | (2,335 | ) | (352 | ) | |||||||||||||||||||||||||||
|
|
| ||||||||||||||||||||||||||||||
Profit for the year from discontinued operations | 3 | 1,175 | 271 | 269 | — | — | 1,175 | |||||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||
Profit for the year | 823 | 470 | 539 | |||||||||||||||||||||||||||||
Profit/(loss) for the year | 408 | (2,335 | ) | 823 | ||||||||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||
Attributable to: | ||||||||||||||||||||||||||||||||
Equity holders of the company | 823 | 471 | 538 | 406 | (2,337 | ) | 823 | |||||||||||||||||||||||||
Non-controlling interest | — | (1 | ) | 1 | 2 | 2 | — | |||||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||
Earnings per share for profit from continuing and discontinued operations attributable to equity holders of the company during the year(expressed in pence per share) | ||||||||||||||||||||||||||||||||
Earnings per share/(loss) from continuing and discontinued operations attributable to equity holders of the company during the year(expressed in pence per share) | ||||||||||||||||||||||||||||||||
– basic | 8 | 101.2p | 58.1p | 66.6p | 8 | 49.9p | (286.8 | )p | 101.2p | |||||||||||||||||||||||
– diluted | 8 | 101.2p | 58.0p | 66.5p | 8 | 49.9p | (286.8 | )p | 101.2p | |||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||
(Loss)/earnings per share for (loss)/profit from continuing operations attributable to equity holders of the company during the year(expressed in pence per share) | ||||||||||||||||||||||||||||||||
Earnings per share/(loss) from continuing operations attributable to equity holders of the company during the year(expressed in pence per share) | ||||||||||||||||||||||||||||||||
– basic | 8 | (43.3 | )p | 24.7p | 33.3p | 8 | 49.9p | (286.8 | )p | (43.3 | )p | |||||||||||||||||||||
– diluted | 8 | (43.3 | )p | 24.6p | 33.3p | 8 | 49.9p | (286.8 | )p | (43.3 | )p | |||||||||||||||||||||
|
|
|
|
|
|
Pearson plc Consolidated Financial Statements
Consolidated statement of comprehensive income
Year ended 31 December 20152017
All figures in £ millions | Notes | 2015 | 2014 | 2013 | Notes | 2017 | 2016 | 2015 | ||||||||||||||||||||||||
Profit for the year | 823 | 470 | 539 | |||||||||||||||||||||||||||||
Profit/(loss) for the year | 408 | (2,335 | ) | 823 | ||||||||||||||||||||||||||||
Items that may be reclassified to the income statement | ||||||||||||||||||||||||||||||||
Net exchange differences on translation of foreign operations – Group | (85 | ) | 150 | (206 | ) | (158 | ) | 910 | (85 | ) | ||||||||||||||||||||||
Net exchange differences on translation of foreign operations – associates | 16 | 25 | (11 | ) | (104 | ) | 3 | 16 | ||||||||||||||||||||||||
Currency translation adjustment disposed – Group | (10 | ) | (2 | ) | (18 | ) | ||||||||||||||||||||||||||
Currency translation adjustment disposed | (51 | ) | — | (10 | ) | |||||||||||||||||||||||||||
Attributable tax | 7 | 9 | (5 | ) | 5 | |||||||||||||||||||||||||||
Fair value gain on other financial assets | 13 | — | — | |||||||||||||||||||||||||||||
Attributable tax | 7 | 5 | (6 | ) | 6 | 7 | (4 | ) | — | — | ||||||||||||||||||||||
Items that are not reclassified to the income statement | ||||||||||||||||||||||||||||||||
Remeasurement of retirement benefit obligations – Group | 25 | 110 | 23 | 79 | 25 | 175 | (268 | ) | 110 | |||||||||||||||||||||||
Remeasurement of retirement benefit obligations – associates | 8 | (15 | ) | — | 7 | (8 | ) | 8 | ||||||||||||||||||||||||
Attributable tax | 7 | (24 | ) | (1 | ) | (23 | ) | 7 | (42 | ) | 58 | (24 | ) | |||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||
Other comprehensive income for the year | 20 | 174 | (173 | ) | ||||||||||||||||||||||||||||
Other comprehensive (expense)/income for the year | 29 | (155 | ) | 690 | 20 | |||||||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||
Total comprehensive income for the year | 843 | 644 | 366 | |||||||||||||||||||||||||||||
Total comprehensive income/(expense) for the year | 253 | (1,645 | ) | 843 | ||||||||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||
Attributable to: | ||||||||||||||||||||||||||||||||
Equity holders of the company | 845 | 645 | 369 | 251 | (1,648 | ) | 845 | |||||||||||||||||||||||||
Non-controlling interest | (2 | ) | (1 | ) | (3 | ) | 2 | 3 | (2 | ) | ||||||||||||||||||||||
|
|
|
|
|
|
Pearson plc Consolidated Financial Statements
As at 31 December 20152017
All figures in £ millions | Notes | 2015 | 2014 | Notes | 2017 | 2016 | ||||||||||||||||||
Assets | ||||||||||||||||||||||||
Non-current assets | ||||||||||||||||||||||||
Property, plant and equipment | 10 | 320 | 334 | 10 | 281 | 343 | ||||||||||||||||||
Intangible assets | 11 | 5,164 | 6,310 | 11 | 2,964 | 3,442 | ||||||||||||||||||
Investments in joint ventures and associates | 12 | 1,103 | 1,118 | 12 | 398 | 1,247 | ||||||||||||||||||
Deferred income tax assets | 13 | 276 | 295 | 13 | 95 | 451 | ||||||||||||||||||
Financial assets – derivative financial instruments | 16 | 78 | 90 | 16 | 140 | 171 | ||||||||||||||||||
Retirement benefit assets | 25 | 337 | 190 | 25 | 545 | 158 | ||||||||||||||||||
Other financial assets | 15 | 143 | 54 | 15 | 77 | 65 | ||||||||||||||||||
Trade and other receivables | 22 | 115 | 82 | 22 | 103 | 104 | ||||||||||||||||||
|
|
|
| |||||||||||||||||||||
7,536 | 8,473 | 4,603 | 5,981 | |||||||||||||||||||||
Current assets | ||||||||||||||||||||||||
Intangible assets – pre-publication | 20 | 841 | 820 | 20 | 741 | 1,024 | ||||||||||||||||||
Inventories | 21 | 211 | 224 | 21 | 148 | 235 | ||||||||||||||||||
Trade and other receivables | 22 | 1,284 | 1,310 | 22 | 1,110 | 1,357 | ||||||||||||||||||
Financial assets – derivative financial instruments | 16 | 32 | 24 | |||||||||||||||||||||
Financial assets – marketable securities | 14 | 28 | 16 | 14 | 8 | 10 | ||||||||||||||||||
Cash and cash equivalents (excluding overdrafts) | 17 | 1,703 | 530 | 17 | 518 | 1,459 | ||||||||||||||||||
|
|
|
| |||||||||||||||||||||
4,099 | 2,924 | 2,525 | 4,085 | |||||||||||||||||||||
|
| |||||||||||||||||||||||
Assets classified as held for sale | 32 | 760 | — | |||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Total assets | 11,635 | 11,397 | 7,888 | 10,066 | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||
Non-current liabilities | ||||||||||||||||||||||||
Financial liabilities – borrowings | 18 | (2,048 | ) | (1,883 | ) | 18 | (1,066 | ) | (2,424 | ) | ||||||||||||||
Financial liabilities – derivative financial instruments | 16 | (136 | ) | (73 | ) | 16 | (140 | ) | (264 | ) | ||||||||||||||
Deferred income tax liabilities | 13 | (560 | ) | (714 | ) | 13 | (164 | ) | (466 | ) | ||||||||||||||
Retirement benefit obligations | 25 | (139 | ) | (163 | ) | 25 | (104 | ) | (139 | ) | ||||||||||||||
Provisions for other liabilities and charges | 23 | (71 | ) | (82 | ) | 23 | (55 | ) | (79 | ) | ||||||||||||||
Other liabilities | 24 | (356 | ) | (310 | ) | 24 | (133 | ) | (422 | ) | ||||||||||||||
|
|
|
| |||||||||||||||||||||
(3,310 | ) | (3,225 | ) | (1,662 | ) | (3,794 | ) | |||||||||||||||||
|
|
|
| |||||||||||||||||||||
Current liabilities | ||||||||||||||||||||||||
Trade and other liabilities | 24 | (1,390 | ) | (1,601 | ) | 24 | (1,342 | ) | (1,629 | ) | ||||||||||||||
Financial liabilities – borrowings | 18 | (282 | ) | (342 | ) | 18 | (19 | ) | (44 | ) | ||||||||||||||
Financial liabilities – derivative financial instruments | 16 | (29 | ) | (1 | ) | |||||||||||||||||||
Current income tax liabilities | (164 | ) | (190 | ) | (231 | ) | (224 | ) | ||||||||||||||||
Provisions for other liabilities and charges | 23 | (42 | ) | (53 | ) | 23 | (25 | ) | (27 | ) | ||||||||||||||
|
|
|
| |||||||||||||||||||||
(1,907 | ) | (2,187 | ) | (1,617 | ) | (1,924 | ) | |||||||||||||||||
|
|
|
| |||||||||||||||||||||
Liabilities classified as held for sale | 32 | (588 | ) | — | ||||||||||||||||||||
|
| |||||||||||||||||||||||
Total liabilities | (5,217 | ) | (5,412 | ) | (3,867 | ) | (5,718 | ) | ||||||||||||||||
|
|
|
| |||||||||||||||||||||
Net assets | 6,418 | 5,985 | 4,021 | 4,348 | ||||||||||||||||||||
|
|
|
|
All figures in £ millions Equity Share capital Share premium Treasury shares Translation reserve Retained earnings Total equity attributable to equity holders of the company Non-controlling interest Total equity Notes 2015 2014 27 205 205 27 2,590 2,579 28 (72 ) (75 ) (7 ) 70 3,698 3,200 6,414 5,979 4 6 6,418 5,985
All figures in £ millions | Notes | 2017 | 2016 | |||||||||
Equity | ||||||||||||
Share capital | 27 | 200 | 205 | |||||||||
Share premium | 27 | 2,602 | 2,597 | |||||||||
Treasury shares | 28 | (61 | ) | (79 | ) | |||||||
Capital redemption reserve | 5 | — | ||||||||||
Fair value reserve | 13 | — | ||||||||||
Translation reserve | 592 | 905 | ||||||||||
Retained earnings | 662 | 716 | ||||||||||
|
|
|
| |||||||||
Total equity attributable to equity holders of the company | 4,013 | 4,344 | ||||||||||
Non-controlling interest | 8 | 4 | ||||||||||
|
|
|
| |||||||||
Total equity | 4,021 | 4,348 | ||||||||||
|
|
|
|
These financial statements have been approved for issue by the boardBoard of directorsDirectors on 414 March 20162018 and signed on its behalf by
Coram Williams
Chief financial officerFinancial Officer
Pearson plc Consolidated Financial Statements
Consolidated statement of changes in equity
Year ended 31 December 20152017
Equity attributable to equity holders of the company | Equity attributable to equity holders of the company | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
All figures in £ millions | Share capital | Share premium | Treasury shares | Translation reserve | Retained earnings | Total | Non- controlling interest | Total equity | Share capital | Share premium | Treasury shares | Capital redemption reserve | Fair value reserve | Translation reserve | Retained earnings | Total | Non- controlling interest | Total equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
At 1 January 2015 | 205 | 2,579 | (75 | ) | 70 | 3,200 | 5,979 | 6 | 5,985 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
At 1 January 2017 | 205 | 2,597 | (79 | ) | — | — | 905 | 716 | 4,344 | 4 | 4,348 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Profit for the year | — | — | — | — | 823 | 823 | — | 823 | — | — | — | — | — | — | 406 | 406 | 2 | 408 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income | — | — | — | (77 | ) | 99 | 22 | (2 | ) | 20 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total comprehensive income | — | — | — | (77 | ) | 922 | 845 | (2 | ) | 843 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income/(expense) | — | — | — | — | 13 | (313 | ) | 145 | (155 | ) | — | (155 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total comprehensive income/(expense) | — | — | — | — | 13 | (313 | ) | 551 | 251 | 2 | 253 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity-settled transactions | — | — | — | — | 26 | 26 | — | 26 | — | — | — | — | — | — | 33 | 33 | — | 33 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Tax on equity-settled transactions | — | — | — | — | (1 | ) | (1 | ) | — | (1 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issue of ordinary shares under share option schemes | — | 11 | — | — | — | 11 | — | 11 | — | 5 | — | — | — | — | — | 5 | — | 5 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Buyback of equity | (5 | ) | — | — | 5 | — | — | (300 | ) | (300 | ) | — | (300 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Purchase of treasury shares | — | — | (23 | ) | — | — | (23 | ) | — | (23 | ) | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
Release of treasury shares | — | — | 26 | — | (26 | ) | — | — | — | — | — | 18 | — | — | — | (18 | ) | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Changes in non-controlling interest | — | — | — | — | — | — | — | — | — | — | — | — | — | — | (2 | ) | (2 | ) | 2 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends | — | — | — | — | (423 | ) | (423 | ) | — | (423 | ) | — | — | — | — | — | — | (318 | ) | (318 | ) | — | (318 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||
At 31 December 2015 | 205 | 2,590 | (72 | ) | (7 | ) | 3,698 | 6,414 | 4 | 6,418 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
At 31 December 2017 | 200 | 2,602 | (61 | ) | 5 | 13 | 592 | 662 | 4,013 | 8 | 4,021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity attributable to equity holders of the company | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
All figures in £ millions | Share capital | Share premium | Treasury shares | Capital redemption reserve | Fair value reserve | Translation reserve | Retained earnings | Total | Non- controlling interest | Total equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
At 1 January 2016 | 205 | 2,590 | (72 | ) | — | — | (7 | ) | 3,698 | 6,414 | 4 | 6,418 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Loss for the year | — | — | — | — | — | — | (2,337 | ) | (2,337 | ) | 2 | (2,335 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income/(expense) | — | — | — | — | — | 912 | (223 | ) | 689 | 1 | 690 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total comprehensive income/(expense) | — | — | — | — | — | 912 | (2,560 | ) | (1,648 | ) | 3 | (1,645 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity-settled transactions | — | — | — | — | — | — | 22 | 22 | — | 22 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issue of ordinary shares under share option schemes | — | 7 | — | — | — | — | — | 7 | — | 7 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Buyback of equity | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Purchase of treasury shares | — | — | (27 | ) | — | — | — | — | (27 | ) | — | (27 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Release of treasury shares | — | — | 20 | — | — | — | (20 | ) | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Changes in non-controlling interest | — | — | — | — | — | — | — | — | (3 | ) | (3 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends | — | — | — | — | — | — | (424 | ) | (424 | ) | — | (424 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
At 31 December 2016 | 205 | 2,597 | (79 | ) | — | — | 905 | 716 | 4,344 | 4 | 4,348 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
Equity attributable to equity holders of the company | ||||||||||||||||||||||||||||||||
All figures in £ millions | Share capital | Share premium | Treasury shares | Translation reserve | Retained earnings | Total | Non- controlling interest | Total equity | ||||||||||||||||||||||||
At 1 January 2014 | 205 | 2,568 | (98 | ) | (103 | ) | 3,128 | 5,700 | 6 | 5,706 | ||||||||||||||||||||||
Profit for the year | — | — | — | — | 471 | 471 | (1 | ) | 470 | |||||||||||||||||||||||
Other comprehensive income | — | — | — | 173 | 1 | 174 | — | 174 | ||||||||||||||||||||||||
Total comprehensive income | — | — | — | 173 | 472 | 645 | (1 | ) | 644 | |||||||||||||||||||||||
Equity-settled transactions | — | — | — | — | 32 | 32 | — | 32 | ||||||||||||||||||||||||
Tax on equity-settled transactions | — | — | — | — | (3 | ) | (3 | ) | — | (3 | ) | |||||||||||||||||||||
Issue of ordinary shares under share option schemes | — | 11 | — | — | — | 11 | — | 11 | ||||||||||||||||||||||||
Purchase of treasury shares | — | — | (9 | ) | — | — | (9 | ) | — | (9 | ) | |||||||||||||||||||||
Release of treasury shares | — | — | 32 | — | (32 | ) | — | — | — | |||||||||||||||||||||||
Changes in non-controlling interest | — | — | — | — | — | — | 2 | 2 | ||||||||||||||||||||||||
Dividends | — | — | — | — | (397 | ) | (397 | ) | (1 | ) | (398 | ) | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
At 31 December 2014 | 205 | 2,579 | (75 | ) | 70 | 3,200 | 5,979 | 6 | 5,985 | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All figures in £ millions At 1 January 2013 Profit for the year Other comprehensive expense Total comprehensive income Equity-settled transactions Tax on equity-settled transactions Issue of ordinary shares under share option schemes Purchase of treasury shares Release of treasury shares Changes in non-controlling interest Dividends At 31 December 2013 Equity attributable to equity holders of the company Share
capital Share
premium Treasury
shares Translation
reserve Retained
earnings Total Non-
controlling
interest Total
equity 204 2,555 (103 ) 128 2,902 5,686 24 5,710 — — — — 538 538 1 539 — — — (231 ) 62 (169 ) (4 ) (173 ) — — — (231 ) 600 369 (3 ) 366 — — — — 37 37 — 37 — — — — — — — — 1 13 — — — 14 — 14 — — (47 ) — — (47 ) — (47 ) — — 52 — (52 ) — — — — — — — 13 13 (15 ) (2 ) — — — — (372 ) (372 ) — (372 ) 205 2,568 (98 ) (103 ) 3,128 5,700 6 5,706
The capital redemption reserve reflects the nominal value of shares cancelled in the Group’s share buyback programme. The fair value reserve arises on revaluation of other financial assets. The translation reserve includes exchange differences arising from the translation of the net investment in foreign operations and of borrowings and other currency instruments designated as hedges of such investments. Changes in non-controlling interest in 2014 relate to the disposal of a non-controlling interest in a Chinese business.
Equity attributable to equity holders of the company | ||||||||||||||||||||||||||||||||||||||||
All figures in £ millions | Share capital | Share premium | Treasury shares | Capital redemption reserve | Fair value reserve | Translation reserve | Retained earnings | Total | Non- controlling interest | Total equity | ||||||||||||||||||||||||||||||
At 1 January 2015 | 205 | 2,579 | (75 | ) | — | — | 70 | 3,200 | 5,979 | 6 | 5,985 | |||||||||||||||||||||||||||||
Profit for the year | — | — | — | — | — | — | 823 | 823 | — | 823 | ||||||||||||||||||||||||||||||
Other comprehensive income | — | — | — | — | — | (77 | ) | 99 | 22 | (2 | ) | 20 | ||||||||||||||||||||||||||||
Total comprehensive income | — | — | — | — | — | (77 | ) | 922 | 845 | (2 | ) | 843 | ||||||||||||||||||||||||||||
Equity-settled transactions | — | — | — | — | — | — | 26 | 26 | — | 26 | ||||||||||||||||||||||||||||||
Tax on equity-settled transactions | — | — | — | — | — | — | (1 | ) | (1 | ) | — | (1 | ) | |||||||||||||||||||||||||||
Issue of ordinary shares under share option schemes | — | 11 | — | — | — | — | — | 11 | — | 11 | ||||||||||||||||||||||||||||||
Purchase of treasury shares | — | — | (23 | ) | — | — | — | — | (23 | ) | — | (23 | ) | |||||||||||||||||||||||||||
Release of treasury shares | — | — | 26 | — | — | — | (26 | ) | — | — | — | |||||||||||||||||||||||||||||
Changes innon-controlling interest | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
Dividends | — | — | — | — | — | — | (423 | ) | (423 | ) | — | (423 | ) | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
At 31 December 2015 | 205 | 2,590 | (72 | ) | — | — | (7 | ) | 3,698 | 6,414 | 4 | 6,418 | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pearson plc Consolidated Financial Statements
Consolidated cash flow statement
Year ended 31 December 20152017
All figures in £ millions | Notes | 2015 | 2014 | 2013 | ||||||||||||
Cash flows from operating activities | ||||||||||||||||
Net cash generated from operations | 32 | 518 | 704 | 684 | ||||||||||||
Interest paid | (75 | ) | (86 | ) | (82 | ) | ||||||||||
Tax paid | (232 | ) | (163 | ) | (246 | ) | ||||||||||
|
|
|
|
|
| |||||||||||
Net cash generated from operating activities | 211 | 455 | 356 | |||||||||||||
Cash flows from investing activities | ||||||||||||||||
Acquisition of subsidiaries, net of cash acquired | 30 | (9 | ) | (448 | ) | (48 | ) | |||||||||
Acquisition of joint ventures and associates | (11 | ) | (12 | ) | (10 | ) | ||||||||||
Purchase of investments | (7 | ) | (3 | ) | (64 | ) | ||||||||||
Purchase of property, plant and equipment | (86 | ) | (75 | ) | (118 | ) | ||||||||||
Purchase of intangible assets | (161 | ) | (107 | ) | (64 | ) | ||||||||||
Disposal of subsidiaries, net of cash disposed | 31 | 1,030 | 327 | (132 | ) | |||||||||||
Proceeds from sale of associates | 379 | 39 | 2 | |||||||||||||
Proceeds from sale of investments | 13 | 9 | 2 | |||||||||||||
Proceeds from sale of property, plant and equipment | 32 | 2 | 9 | 28 | ||||||||||||
Proceeds from sale of intangible assets | 1 | 2 | 2 | |||||||||||||
Proceeds from sale of liquid resources | 17 | 12 | 13 | |||||||||||||
Loans repaid by/(advanced to) related parties | 7 | (10 | ) | (44 | ) | |||||||||||
Loans advanced | — | (2 | ) | (5 | ) | |||||||||||
Investment in liquid resources | (29 | ) | (22 | ) | (14 | ) | ||||||||||
Interest received | 24 | 13 | 9 | |||||||||||||
Dividends received from joint ventures and associates | 162 | 120 | 64 | |||||||||||||
|
|
|
|
|
| |||||||||||
Net cash received from/(used in) investing activities | 1,332 | (148 | ) | (379 | ) | |||||||||||
Cash flows from financing activities | ||||||||||||||||
Proceeds from issue of ordinary shares | 27 | 11 | 11 | 14 | ||||||||||||
Purchase of treasury shares | 28 | (23 | ) | (9 | ) | (47 | ) | |||||||||
Proceeds from borrowings | 372 | 404 | 319 | |||||||||||||
Repayment of borrowings | (300 | ) | (538 | ) | (225 | ) | ||||||||||
Finance lease principal payments | (1 | ) | (4 | ) | (8 | ) | ||||||||||
Dividends paid to company’s shareholders | 9 | (423 | ) | (397 | ) | (372 | ) | |||||||||
Dividends paid to non-controlling interest | — | (1 | ) | — | ||||||||||||
Purchase of non-controlling interest | 33 | — | — | (76 | ) | |||||||||||
|
|
|
|
|
| |||||||||||
Net cash used in financing activities | (364 | ) | (534 | ) | (395 | ) | ||||||||||
Effects of exchange rate changes on cash and cash equivalents | (19 | ) | (2 | ) | 21 | |||||||||||
|
|
|
|
|
| |||||||||||
Net increase/(decrease) in cash and cash equivalents | 1,160 | (229 | ) | (397 | ) | |||||||||||
Cash and cash equivalents at beginning of year | 511 | 740 | 1,137 | |||||||||||||
|
|
|
|
|
| |||||||||||
Cash and cash equivalents at end of year | 17 | 1,671 | 511 | 740 | ||||||||||||
|
|
|
|
|
|
The consolidated cash flow statement includes discontinued operations (see note 3).
All figures in £ millions | Notes | 2017 | 2016 | 2015 | ||||||||||||
Cash flows from operating activities | ||||||||||||||||
Net cash generated from operations | 33 | 462 | 522 | 518 | ||||||||||||
Interest paid | (89 | ) | (67 | ) | (75 | ) | ||||||||||
Tax paid | (75 | ) | (45 | ) | (232 | ) | ||||||||||
|
|
|
|
|
| |||||||||||
Net cash generated from operating activities | 298 | 410 | 211 | |||||||||||||
Cash flows from investing activities | ||||||||||||||||
Acquisition of subsidiaries, net of cash acquired | 30 | (11 | ) | (15 | ) | (9 | ) | |||||||||
Acquisition of joint ventures and associates | — | — | (11 | ) | ||||||||||||
Purchase of investments | (3 | ) | (6 | ) | (7 | ) | ||||||||||
Purchase of property, plant and equipment | (82 | ) | (88 | ) | (86 | ) | ||||||||||
Purchase of intangible assets | (150 | ) | (157 | ) | (161 | ) | ||||||||||
Disposal of subsidiaries, net of cash disposed | 31 | 19 | (54 | ) | 1,030 | |||||||||||
Proceeds from sale of associates | 31 | 411 | 4 | 379 | ||||||||||||
Proceeds from sale of investments | — | 92 | 13 | |||||||||||||
Proceeds from sale of property, plant and equipment | 33 | — | 4 | 2 | ||||||||||||
Proceeds from sale of intangible assets | — | — | 1 | |||||||||||||
Proceeds from sale of liquid resources | 20 | 42 | 17 | |||||||||||||
Loans (advanced)/repaid by related parties | (13 | ) | 14 | 7 | ||||||||||||
Investment in liquid resources | (18 | ) | (24 | ) | (29 | ) | ||||||||||
Interest received | 20 | 16 | 24 | |||||||||||||
Dividends received from joint ventures and associates | 458 | 131 | 162 | |||||||||||||
|
|
|
|
|
| |||||||||||
Net cash generated from/(used in) investing activities | 651 | (41 | ) | 1,332 | ||||||||||||
Cash flows from financing activities | ||||||||||||||||
Proceeds from issue of ordinary shares | 27 | 5 | 7 | 11 | ||||||||||||
Buyback of equity | 27 | (149 | ) | — | — | |||||||||||
Purchase of treasury shares | 28 | — | (27 | ) | (23 | ) | ||||||||||
Proceeds from borrowings | 2 | 4 | 372 | |||||||||||||
Repayment of borrowings | (1,294 | ) | (249 | ) | (300 | ) | ||||||||||
Finance lease principal payments | (5 | ) | (6 | ) | (1 | ) | ||||||||||
Transactions with non-controlling interest | — | (2 | ) | — | ||||||||||||
Dividends paid to company’s shareholders | 9 | (318 | ) | (424 | ) | (423 | ) | |||||||||
|
|
|
|
|
| |||||||||||
Net cash used in financing activities | (1,759 | ) | (697 | ) | (364 | ) | ||||||||||
Effects of exchange rate changes on cash and cash equivalents | 16 | 81 | (19 | ) | ||||||||||||
|
|
|
|
|
| |||||||||||
Net decrease in cash and cash equivalents | (794 | ) | (247 | ) | 1,160 | |||||||||||
Cash and cash equivalents at beginning of year | 1,424 | 1,671 | 511 | |||||||||||||
|
|
|
|
|
| |||||||||||
Cash and cash equivalents at end of year | 17 | 630 | 1,424 | 1,671 | ||||||||||||
|
|
|
|
|
|
Pearson plc Consolidated Financial Statements
Notes to the consolidated financial statements
General information
Pearson plc (the company), its subsidiaries and associates (together the Group) are international businesses covering educational courseware, assessentsassessments and services, and consumer publishing through its associate interest in Penguin Random House.
The company is a public limited company incorporated and domiciled in England. The address of its registered office is 80 Strand, London WC2R 0RL.
The company has its primary listing on the London Stock Exchange and is also listed on the New York Stock Exchange.
These consolidated financial statements were approved for issue by the boardBoard of directorsDirectors on 414 March 2016.2018.
1. Accounting policies
The principal accounting policies applied in the preparation of these consolidated financial statements are set out below.
a. Basis of preparation
These consolidated financial statements have been prepared on the going concern basis and in accordance with International Financial Reporting Standards (IFRS) and IFRS Interpretations Committee (IFRS IC) interpretations as issued by the IASB and in conformity with IFRS as adopted by the European Union (EU) and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS. In respect of the accounting standards applicable to the Group there is no difference between EU-adopted and IASB-adopted IFRS.EU.
These consolidated financial statements have been prepared under the historical cost convention as modified by the revaluation of financial assets and liabilities (including derivative financial instruments) toat fair value through profit or loss.
The prior year financial statements have been restated to reflect the classification of FT Group as a discontinued operation.
1. Interpretations and amendments to published standards effective 20152017The following amendments and interpretations were adopted in 2015: Amendments to IAS 19 ‘Employee Benefits: Defined Benefit Plans – Employee Contributions’2017:
Amendments to IFRS 2 ‘Share based Payment: Definition12 Disclosure of vesting conditions’
Amendments to IFRS 3 ‘Business Combinations: Accounting for contingent considerationInterests in a business combination and scope exemptions for joint ventures’
Amendments to IFRS 8 ‘Operating Segments: Aggregation of operating segments and reconciliation of segment assets to entity’s assets’Other Entities – Annual Improvements 2014-2016 cycle
Amendments to IAS 24 ‘Related Party Disclosures: Key management personnel’7 Statement of Cash Flows – Disclosure Initiative
Amendments to IFRS 13 ‘Fair Value Measurement: Short term receivables and payables’IAS 12 Income Taxes – Recognition of Deferred Tax Assets for Unrealised Losses
The adoption of these new pronouncements from 1 January 20152017 does not have a material impact on the consolidated financial statements.
2. Standards, interpretations and amendments to published standards that are not yet effectiveNew accounting standards and interpretations have been published that are not mandatory for the year ended 31 December 2017. The Group has elected not to early-adopt these new standards and interpretations. The Group’s assessment of the impact of these new standards is set out below.
IFRS 9 ‘Financial Instruments’, effective for annual reporting periods beginning on or after 1 January 2018. The standard, which replaces IAS 39 ‘Financial Instruments: Recognition and Measurement’, addresses the classification, measurement and derecognition of financial assets and financial liabilities, introduces new hedge accounting rules and a new impairment model for financial assets. The Group will adopt IFRS 9 as at 1 January
Pearson plc Consolidated Financial Statements
Notes to the consolidated financial statements continued
1. Accounting policies continued
a. Basis of preparation continued
2. Standards, interpretations2018 and amendments to published standards that areapply the new rules retrospectively, with the practical expedients permitted in the standard. Comparatives for 2017 will not yet effectivebe restated. The Group has not early adoptedassessed the impact of adopting IFRS 9 and is expecting the following impact:
Classification and measurement: The Group has reviewed its financial assets and liabilities and does not expect any changes in classification or measurement as a result of adopting IFRS 9. Trade receivables will continue to be measured at amortised cost as they are held to collect contractual cash flows which represent solely payments of principal and interest, in accordance with the business model. There will be no impact on classification and measurement of financial liabilities as the new pronouncementsrequirements only affect the accounting for financial liabilities which are designated at fair value through the profit and loss account, and the Group does not have any such liabilities. Derivative assets and liabilities will continue to be recognised at fair value with movements recognised in finance income or costs, unless the hedging strategy determines otherwise. The Group’s equity financial investments will continue to be recognised at fair value and the Group has elected the option to recognise all movements in fair value in other comprehensive income (FVOCI). Gains or losses realised on the subsequent sale of these financial assets will no longer be recycled through the profit and loss account, but instead reclassified from the FVOCI reserve to retained earnings. During 2017, £nil of such gains/losses were recycled to the profit and loss account in relation to the disposal of available-for-sale assets.
Impairment: IFRS 9 introduces a new impairment model which requires the recognition of impairment provisions based on expected credit losses rather than only incurred credit losses, as is the case under IAS 39. The Group expects this new impairment model will lead to a small increase in its provision for losses against trade debtors, representing anticipated losses (evidenced by both historical recovery rates and forward-looking indicators) where there has been no triggering event to suggest any impairment incurred to date. The Group expects its provision for losses against trade debtors as at 1 January 2018 to increase by an amount approximating 1% of gross trade debtors as a result of adopting the expected credit loss model for impairments. The Group does not anticipate the expected credit loss model having a material impact on profit before tax for 2018 unless market conditions or other factors change the outlook for credit losses.
Hedge accounting: IFRS 9 introduces a new, simpler hedge accounting model with a principles-based approach designed to align the accounting result with the economic hedging strategy. The group currently uses fair value hedge relationships to hedge interest rate risk and currency risk on its bond borrowings and also uses net investment hedging relationships to hedge currency re-translation risk on its overseas assets. The Group has confirmed that areits current hedge relationships will continue to qualify as hedges upon the adoption of IFRS 9. The Group does not yet effective:currently undertake any cash flow hedging, but is reviewing its strategy with regard to currency risk. Should the Group decide to expand its hedging strategy in this area, changes in fair value relating to forward points or currency basis may, subject to hedge designation, be deferred in a cost of hedging reserve and recognised against the related hedge transaction when it occurs.
IFRS 9 ‘Financial Instruments’, effective foralso requires additional disclosure which will be incorporated in the 2018 annual reporting periods beginning on or after 1 January 2018. The new standard details the requirements for the classification, measurement and recognition of financial assets and liabilities. The Group is yet to assess the full impact of IFRS 9.report.
IFRS 15 ‘Revenue’Revenue from Contracts with Customers’, effective for annual reporting periods beginning on or after 1 January 2018. The standard, which replaces IAS 18 covering contracts for goods and services, and IAS 11 covering construction contracts, addresses the recognition of revenue. The new standard specifies how and whenis based on the principle that revenue is recognised to depict the transfer of promised goods or services to customers in an entityamount that reflects the consideration to which the Group expects to be entitled in exchange for those goods or services. The Group will recognise revenue, and requires more detailed disclosure. Adoption ofadopt the new standard as at 1 January 2018 and apply the modified retrospective approach.
Pearson plc Consolidated Financial Statements
Notes to the consolidated financial statements continued
1. Accounting policies continued
a. Basis of preparation continued
Comparatives for 2017 will not be restated and the cumulative impact of adoption will be recognised in retained earnings as at 1 January 2018.
The Group has reviewed the impact of adopting IFRS 15 across its various geographies and lines of business, with reference to underlying contractual terms and business practices, and has identified four areas of impact, as follows:
Unexercised customer rights (or breakage): The Group sells rights to future performance to customers which may go unexercised. While the customer has paid for future performance, usage is likelyat the customer’s discretion and those rights may expire prior to usage, or never be used. The Group maintains historical customer data to understand usage patterns over time (i.e. redemption rates). Where the Group expects to have no future obligation (based on these redemption rates), revenue has historically been recognised immediately for this portion of the sale. Under IFRS 15, where the Group currently recognises this breakage element on subscriptions, revenue instead will be recognised evenly over the period of use. Where breakage relates to sales of tests or vouchers, revenue will be recognised when the underlying tests are delivered. This revised treatment in respect of breakage primarily affects the school and higher education businesses in North America and will result in higher deferred revenue upon adoption on 1 January 2018.
Online Program Management (OPM) marketing: Historically the OPM (Embanet) business recognised revenue for the pre-semester costs of marketing and recruitment as a separate performance obligation from course delivery during the semester (i.e. revenue was recognised in line with the marketing costs incurred). Under IFRS 15, revenue will be recognised on a straight-line basis over the semester with no revenue recognised up front for pre-semester recruitment and marketing costs based on management’s judgement under the new standard’s requirements assessing the start of the Group’s contract and determining the Group’s performance obligations. This revised treatment of pre-semester costs only affects the OPM business in North America and will result in a lower trade receivable balance upon adoption on
1 | January 2018. |
Administration fees: This relates to non-refundable upfront administration fees charged to customers which do not relate to the transfer of a promised good or service to the customer. Rather these fees are charged to cover internal costs, such as registration fees for testing candidate exams. Historically administration fees have been recognised in revenue up front when charged. Under IFRS 15, such fees must be deferred and recognised over the period over which services are provided as they do not relate to a specific performance obligation. This revised treatment primarily affects the UK Assessments business and will result in higher deferred revenue upon adoption on 1 January 2018.
Commissions: This relates to incremental costs of obtaining customer contracts, such as sales incentive plans or sales commissions specifically linked to obtaining new contracts. Historically such commissions have been charged to the profit and loss account as incurred. Under IFRS 15, sales commissions in respect of customer transactions with an accounting period of greater than one year will be capitalised and amortised over that accounting period, using practical expedients permissible under the new standard. This revised treatment affects the US Assessments business and will result in a higher contract asset upon adoption on 1 January 2018.
IFRS 15 also requires increased disclosure, in particular analysis of disaggregated revenues, contract balances and transaction price allocated to remaining performance obligations. This disclosure will be incorporated in the 2018 annual report.
Pearson plc Consolidated Financial Statements
Notes to the consolidated financial statements continued
1. Accounting policies continued
a. Basis of preparation continued
Had the Group been applying IFRS 15 during 2017, both sales and profit before tax would have been around £2m higher, with the balance sheet impact at the beginning and end of the year being similar.
The impact on the Groupsales and managementprofit before tax for 2018 is currently assessing the impact.not expected to be materially different to 2017, assuming a like-for-like business portfolio. The cumulative pre-tax impact of adopting IFRS 15 on 1 January 2018 is expected to reduce retained earnings by around £143m, with deferred revenue increasing by £106m, trade receivables reducing by £38m and contract assets increasing by £1m.
IFRS 16 ‘Leases’, effective for annual reporting periods beginning on or after 1 January 2019. Early adoption is permitted. The new standard replaces IAS 17 ‘Leases’ and related interpretations and details the requirements for the classification, measurement and recognition of lease arrangements. Adoption of the new standard is likely to have ana material impact on the Group. Management continues to assess this impact but cannot reasonably estimate this impact due to judgements which are required to be made for each lease and the adoption methods available. The actual impact of applying IFRS 16 will depend on the composition of the Group’s lease portfolio at the adoption date and the extent to which the Group chooses to use practical expedients and managementrecognition exemptions. The Group plans to apply IFRS 16 on 1 January 2019, and anticipates using the modified retrospective approach. Under this approach, the cumulative effect of adopting IFRS 16 will be recognised as an adjustment to the opening balance of retained earnings on 1 January 2019, with no restatement of comparative information.
Although the Group has not completed its detailed assessment, the following changes to lessee accounting are likely to have a material impact:
Currently no lease assets are included on the Group’s consolidated balance sheet for operating leases. Under IFRS 16 right-of-use assets will be recorded on the balance sheet for assets that are leased by the Group
Currently no lease liabilities are included on the Group’s consolidated balance sheet for future operating lease payments; these are disclosed as commitments. Under IFRS 16 liabilities will be recorded for future lease payments. As at 31 December 2017, the Group’s future aggregate minimum lease payments under non-cancellable operating leases amounted to £1,203m, on an undiscounted basis (see note 35)
Currently operating lease rentals, net of any incentives received, are expensed to the income statement on a straight-line basis over the period of the lease. Under IFRS 16 the lease expense will represent the depreciation of the right-of-use asset together with interest charged on lease liabilities
Currently operating lease cash flows are included within operating cash flows in the Group’s consolidated cash flow statement. Under IFRS 16 these cash flows will be recorded as cash flows from financing activities being the repayment of lease liabilities and related interest
Lessor accounting under IFRS 16 is currently assessingsimilar to IAS 17 accounting and is not expected to have a material impact on the impact.Group.
In June 2015, the IASB issued an exposure draft ED/2015/5 ‘Remeasurement on a Plan Amendment, Curtailment or Settlement/Availability of a Refund from a Defined Benefitbenefit Plan (Proposed Amendments to IAS 19 and IFRIC 14)’.’ Management are currently evaluating these proposals and although the proposals The proposed amendments to IFRIC 14, which may have not yet been finalised, it should be noted that the current draft, if adopted, may restrictrestricted the Group’s ability to recognise a pension asset in respect of pension surpluses in its UK defined benefit pension plan.plan, have now been withdrawn.
In addition, the current draft may require certain elementsA number of committed minimum funding contributionsother new standards and amendments to be recognised asstandards and interpretations are effective for annual periods beginning after 1 January 2017, and have not been applied in preparing these financial statements. None of these is expected to have a liabilitymaterial impact on the balance sheet.consolidated financial statements.
Pearson plc Consolidated Financial Statements
Notes to the consolidated financial statements continued
1. Accounting policies continued
a. Basis of preparation continued
3. Critical accounting assumptions and judgementsThe preparation of financial statements in conformity with IFRS requires the use of certain critical accounting assumptions. It also requires management to exercise its judgement in the process of applying the Group’s accounting policies. The areas requiring a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements, are discussed in the relevant accounting policies under the following headings and in the notes to the accounts where appropriate:
Consolidation: Business combinations – classification of investments (see note 1b(1))
Intangible assets: Goodwill (see note 1e(1))
Intangible assets: Pre-publication assets (see note 1e(5)) Taxation (see note 1m)
Revenue recognition including provisions for returns (see note 1p)
Employee benefits: Pensions (see note 1n(1))
Consolidation: Business combinations – determination of fair values
Intangible assets: Goodwill
Intangible assets: Pre-publication assets
Taxation
Revenue recognition
Employee benefits: Pensions (where relevant) (see note 1b(1))
b. Consolidation
1. Business combinations The acquisition method of accounting is used to account for business combinations.
The consideration transferred for the acquisition of a subsidiary is the fair value of the assets transferred, the liabilities incurred and the equity interest issued by the Group. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Acquisition relatedAcquisition-related costs are expensed as incurred in the operating expenses line of the income statement.
Notes to the consolidated financial statements continued
1. Accounting policies continued
b. Consolidation continued
Identifiable assets and contingent assets acquired and identifiable liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. The determination of fair values often requires significant judgements and the use of estimates, and, for material acquisitions, the fair value of the acquired intangible assets is determined by an independent valuer. The excess of the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition date fair value of any previous equity interest in the acquiree over the fair value of the identifiable net assets acquired is recorded as goodwill.goodwill (see note 30).
See note 1e(1) for the accounting policy on goodwill. If this is less than the fair value of the net assets of the subsidiary acquired, in the case of a bargain purchase, the difference is recognised directly in the income statement.
On an acquisition-by-acquisition basis, the Group recognises any non-controlling interest in the acquiree either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s net assets.
IFRS 3 ‘Business Combinations’ has not been applied retrospectively to business combinations before the date of transition to IFRS.
Management exercises judgement in determining the classification of its investments in its businesses, in line with the following:
2. Subsidiaries Subsidiaries are entities over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases.
Pearson plc Consolidated Financial Statements
Notes to the consolidated financial statements continued
1. Accounting policies continued
b. Consolidation continued
3. Transactions with non-controlling interests Transactions with non-controlling interests that do not result in loss of control are accounted for as equity transactions, that is, as transactions with the owners in their capacity as owners. Any surplus or deficit arising from disposals to a non-controlling interest is recorded in equity. For purchases from a non-controlling interest, the difference between consideration paid and the relevant share acquired of the carrying value of the subsidiary is recorded in equity.
4. Joint ventures and associates Joint ventures are entities in which the Group holds an interest on a long-term basis and has rights to the net assets through contractually agreed sharing of control. Associates are entities over which the Group has significant influence but not the power to control the financial and operating policies, generally accompanying a shareholding of between 20% and 50% of the voting rights. Ownership percentage is likely to be the key indicator of investment classification; however, other factors, such as Board representation, may also affect the accounting classification. Judgement is required to assess all of the qualitative and quantitative factors which may indicate that the Group does, or does not, have significant influence over an investment. Penguin Random House is the Group’s only material associate – see note 12 for further details on the judgements involved in its accounting classification. Investments in joint ventures and associates are accounted for by the equity method and are initially recognised at the fair value of consideration transferred.
The Group’s share of its joint ventures’ and associates’ post-acquisition profits or losses is recognised in the income statement and its share of post-acquisition movements in reserves is recognised in reserves.
The Group’s share of its joint ventures’ and associates’ results is recognised as a component of operating profit as these operations form part of the core publishing business of the Group and are an integral part of existing wholly-owned businesses. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. When the Group’s share of losses in a joint venture or associate equals or exceeds its interest in the joint venture or associate, the Group does not recognise further losses unless the Group has incurred obligations or made payments on behalf of the joint venture or associate.
5. Contribution of a subsidiary to an associate or joint venture The gain or loss resulting from the contribution or sale of a subsidiary to an associate or a joint venture is recognised in full. Where such transactions do not involve cash consideration, significant judgements and estimates are used in determining the fair values of the consideration received.
Notes to the consolidated financial statements continued
1. Accounting policies continued
c. Foreign currency translation
1. Functional and presentation currency Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (the ‘functional currency’)functional currency). The consolidated financial statements are presented in sterling, which is the company’s functional and presentation currency.
2. Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year endyear-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement, except when deferred in equity as qualifying net investment hedges.
Pearson plc Consolidated Financial Statements
Notes to the consolidated financial statements continued
1. Accounting policies continued
c. Foreign currency translation continued
3. Group companies The results and financial position of all Group companies that have a functional currency different from the presentation currency are translated into the presentation currency as follows:
i) Assets and liabilities are translated at the closing rate at the date of the balance sheet
ii) Income and expenses are translated at average exchange rates
iii) All resulting exchange differences are recognised as a separate component of equity.
On consolidation, exchange differences arising from the translation of the net investment in foreign entities, and of borrowings and other currency instruments designated as hedges of such investments, are taken to shareholders’ equity. The Group treats specific intercompanyinter-company loan balances, which are not intended to be repaid in the foreseeable future, as part of its net investment. When a foreign operation is sold, such exchange differences are recognised in the income statement as part of the gain or loss on sale.
The principal overseas currency for the Group is the US dollar. The average rate for the year against sterling was $1.53 (2014: $1.65)$1.30 (2016: $1.33) and the year endyear-end rate was $1.47 (2014: $1.56)$1.35 (2016: $1.23).
d. Property, plant and equipment
Property, plant and equipment are stated at historical cost less depreciation. Cost includes the original purchase price of the asset and the costs attributable to bringing the asset to its working condition for intended use. Land is not depreciated. Depreciation on other assets is calculated using the straight-line method to allocate their cost less their residual values over their estimated useful lives as follows:
Buildings (freehold): | 20-50 years | |
Buildings (leasehold): | over the period of the lease | |
Plant and equipment: | 3-10 years |
The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date.
The carrying value of an asset is written down to its recoverable amount if the carrying value of the asset is greater than its estimated recoverable amount.
Notes to the consolidated financial statements continued
1. Accounting policies continued
e. Intangible assets
1. Goodwill For the acquisition of subsidiaries made on or after 1 January 2010, goodwill represents the excess of the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition date fair value of any previous equity interest in the acquiree over the fair value of the identifiable net assets acquired. For the acquisition of subsidiaries made from the date of transition to IFRS to 31 December 2009, goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the net identifiable assets acquired. Goodwill on acquisitions of subsidiaries is included in intangible assets. Goodwill on acquisition of associates and joint ventures represents the excess of the cost of an acquisition over the fair value of the Group’s share of the net identifiable assets acquired. Goodwill on acquisitions of associates and joint ventures is included in investments in associates and joint ventures.
Pearson plc Consolidated Financial Statements
Notes to the consolidated financial statements continued
1. Accounting policies continued
e. Intangible assets continued
Goodwill is tested at least annually for impairment and carried at cost less accumulated impairment losses. An impairment loss is recognised to the extent that the carrying value of goodwill exceeds the recoverable amount. The recoverable amount is the higher of fair value less costs of disposal and value in use. These calculations require the use of estimates in respect of forecast cash flows and discount rates and significant management judgement.judgement in respect of CGU and cost allocation. A description of the key assumptions and sensitivities is included in note 11. Goodwill is allocated to aggregated cash-generating units for the purpose of impairment testing. The allocation is made to those aggregated cash-generating units that are expected to benefit from the business combination in which the goodwill arose.
Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold.
IFRS 3 ‘Business Combinations’ has not been applied retrospectively to business combinations before the date of transition to IFRS.
2. Acquired software Software separately acquired for internal use is capitalised at cost. Software acquired in material business combinations is capitalised at its fair value as determined by an independent valuer. Acquired software is amortised on a straight-line basis over its estimated useful life of between three and eight years.
3. Internally developed software Internal and external costs incurred during the preliminary stage of developing computer software for internal use are expensed as incurred. Internal and external costs incurred to develop computer software for internal use during the application development stage are capitalised if the Group expects economic benefits from the development. Capitalisation in the application development stage begins once the Group can reliably measure the expenditure attributable to the software development and has demonstrated its intention to complete and use the software. Internally developed software is amortised on a straight-line basis over its estimated useful life of between three and eight years.
4. Acquired intangible assets Acquired intangible assets include customer lists, contracts and relationships, trademarks and brands, publishing rights, content, technology and software rights. These assets are capitalised on acquisition at cost and included in intangible assets. Intangible assets acquired in material business combinations are capitalised at their fair value as determined by an independent valuer. Intangible assets are amortised over their estimated useful lives of between two and 20 years, using an amortisation method that reflects the pattern of their consumption.
5. Pre-publication assets Pre-publication assets represent direct costs incurred in the development of educational programmes and titles prior to their publication. These costs are recognised as current intangible assets where the title will generate probable future economic benefits and costs can be measured reliably. Pre-publication assets are amortised upon publication of the title over estimated economic lives of five years or less, being an estimate of the expected operating life cyclelifecycle of the title, with a higher proportion of the amortisation taken in the earlier years.
Notes to the consolidated financial statements continued
1. Accounting policies continued
e. Intangible assets continued
The investment in pre-publication assets has been disclosed as part of cash generated from operations in the cash flow statement (see note 32)33).
The assessment of the recoverability of pre-publication assets and the determination of the amortisation profile involve a significant degree of judgement based on historical trends and management estimation of future potential sales. An incorrect amortisation profile could result in excess amounts being carried forward as intangible assets that would otherwise have been written off to the income statement in an earlier period.
Reviews are performed regularly to estimate recoverability of pre-publication assets. The carrying amount ofpre-publication assets is set out in note 20.
Pearson plc Consolidated Financial Statements
Notes to the consolidated financial statements continued
1. Accounting policies continued
f. Other financial assets
Other financial assets, designated as available for sale investments, are non-derivative financial assets measured at estimated fair value. Changes in the fair value are recorded in equity in the fair value reserve. On the subsequent disposal of the asset, the net fair value gains or losses are taken to the income statement.
g. Inventories
Inventories are stated at the lower of cost and net realisable value. Cost is determined using the first in first out (FIFO) method. The cost of finished goods and work in progress comprises raw materials, direct labour, other direct costs and related production overheads. Net realisable value is the estimated selling price in the ordinary course of business, less estimated costs necessary to make the sale. Provisions are made for slow movingslow-moving and obsolete stock.
h. Royalty advances
Advances of royalties to authors are included within trade and other receivables when the advance is paid less any provision required to adjust the advance to its net realisable value. The realisable value of royalty advances relies on a degree of management judgement in determining the profitability of individual author contracts. If the estimated realisable value of author contracts is overstated, this will have an adverse effect on operating profits as these excess amounts will be written off.
The recoverability of royalty advances is based upon an annual detailed management review of the age of the advance, the future sales projections for new authors and prior sales history of repeat authors.
The royalty advance is expensed at the contracted or effective royalty rate as the related revenues are earned. Royalty advances which will be consumed within one year are held in current assets. Royalty advances which will be consumed after one year are held in non-current assets.
i. Cash and cash equivalents
Cash and cash equivalents in the cash flow statement include cash in hand, deposits held on call with banks, other short-term highly liquid investments with original maturities of three months or less, and bank overdrafts. Bank overdrafts are included in borrowings in current liabilities in the balance sheet.
Short-term deposits and marketable securities with maturities of greater than three months do not qualify as cash and cash equivalents.equivalents and are reported as financial assets. Movements on these financial instrumentsassets are classified as cash flows from financing
Notes to the consolidated financial statements continued
1. Accounting policies continued
i. Cash and cash equivalents continued
activities in the cash flow statement where these amounts are used to offset the borrowings of the Group or as cash flows from investing activities where these amounts are held to generate an investment return.
j. Share capital
Ordinary shares are classified as equity.
Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds.
Pearson plc Consolidated Financial Statements
Notes to the consolidated financial statements continued
1. Accounting policies continued
j. Share capital continued
Where any Group company purchases the company’s equity share capital (treasury shares), the consideration paid, including any directly attributable incremental costs, net of income taxes, is deducted from equity attributable to the company’s equity holders until the shares are cancelled, reissued or disposed of. Where such shares are subsequently sold or reissued, any consideration received, net of any directly attributable transaction costs and the related income tax effects, is included in equity attributable to the company’s equity holders.
Ordinary shares purchased under a buyback programme are cancelled and the nominal value of the shares is transferred to a capital redemption reserve.
k. Borrowings
Borrowings are recognised initially at fair value, which is proceeds received net of transaction costs incurred. Borrowings are subsequently stated at amortised cost with any difference between the proceeds (net of transaction costs) and the redemption value being recognised in the income statement over the period of the borrowings using the effective interest method. Accrued interest is included as part of borrowings. Where a debt instrument is in a fair value hedging relationship, an adjustment is made to its carrying value in the income statement to reflect the hedged risk. Interest on borrowings is expensed in the income statement as incurred.
l. Derivative financial instruments
Derivatives are recognised at fair value and remeasured at each balance sheet date. The fair value of derivatives is determined by using market data and the use of established estimation techniques such as discounted cash flow and option valuation models. The Group designates certain of the derivative instruments within its portfolio to be hedges of the fair value of its bonds (fair value hedges) or hedges of net investments in foreign operations (net investment hedges).
Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the income statement, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk.
The effective portion of changes in the fair value of derivatives that are designated and qualify as net investment hedges are recognised in other comprehensive income. Gains and losses accumulated in equity are included in the income statement when the corresponding foreign operation is disposed of. Gains or losses relating to the ineffective portion are recognised immediately in finance income or finance costs in the income statement.
Certaincosts. However, derivatives do not qualify orrelating to borrowings and certain foreign exchange contracts are not designated as part of a hedging instruments. Such derivatives are classified at fair value and any movement in their fair valuetransaction. The accounting treatment is recognised immediately in finance income or finance costssummarised as follows:
Typical reason for designation | Reporting of gains and losses on effective portion of the hedge | Reporting of gains and losses on disposal | ||
Net investment hedge | ||||
The derivative creates a foreign currency liability which is used to hedge changes in the value of a subsidiary which transacts in that currency. | Recognised in other comprehensive income. | On disposal, the accumulated value of gains and losses reported in other comprehensive income is transferred to the income statement. | ||
Fair value hedges | ||||
The derivative transforms the interest profile on debt from fixed rate to floating rate. Changes in the value of the debt as a result of changes in interest rates are offset by equal and opposite changes in the value of the derivative. When the Group’s debt is swapped to floating rates, the contracts used are designated as fair value hedges. | Gains and losses on the derivative are reported in finance income or finance costs. However, an equal and opposite change is made to the carrying value of the debt (a ‘fair value adjustment’) with the benefit/cost reported in finance income or finance costs. The net result should be a zero charge on a perfectly effective hedge. | If the debt and derivative are disposed of, the value of the derivative and the debt (including the fair value adjustment) are reset to zero. Any resultant gain or loss is recognised in finance income or finance costs. |
Pearson plc Consolidated Financial Statements
Notes to the income statement.consolidated financial statements continued
1. Accounting policies continued
l. Derivative financial instruments continued
Typical reason for designation | Reporting of gains and losses on effective portion of the hedge | Reporting of gains and losses on disposal | ||
Non-hedge accounted contracts | ||||
These are not designated as hedging instruments. Typically these are short- term contracts to convert debt back to fixed rates or foreign exchange contracts where a natural offset exists. | No hedge accounting applies. |
m. Taxation
Current tax is recognised onat the amounts expected to be paid or recovered under the tax rates and laws that have been enacted or substantively enacted at the balance sheet date.
Notes to the consolidated financial statements continued
1. Accounting policies continued
m. Taxation continued
Deferred income tax is provided, using the balance sheet liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts. Deferred income tax is determined using tax rates and laws that have been enacted or substantively enacted by the balance sheet date and are expected to apply when the related deferred tax asset is realised or the deferred income tax liability is settled.
Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised.
Deferred income tax is provided in respect of the undistributed earnings of subsidiaries, associates and joint ventures other than where it is intended that those undistributed earnings will not be remitted in the foreseeable future.
Current and deferred tax are recognised in the income statement, except when the tax relates to items charged or credited directly to equity or other comprehensive income, in which case the tax is also recognised in equity or other comprehensive income.
The Group is subject to income taxes in numerous jurisdictions. Significant judgement is required in determining the estimates in relation to the worldwide provision for income taxes. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. The Group recognises liabilities for anticipated tax audit issuesprovisions when it is considered probable that there will be a future outflow of funds to a tax authority. The provisions are based on management’s best judgement of the application of tax legislation and best estimates of whether additional taxes will be due.future settlement amounts (see note 7). Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made.
Deferred tax assets and liabilities require management judgement in determining the amounts to be recognised. In particular, significant judgement is used when assessing the extent to which deferred tax assets should be recognised with consideration given to the timing and level of future taxable income together with any future tax planning strategies.strategies (see note 13).
Pearson plc Consolidated Financial Statements
Notes to the consolidated financial statements continued
1. Accounting policies continued
n. Employee benefits
1. Pensions The retirement benefit asset and obligation recognised in the balance sheet represents the net of the present value of the defined benefit obligation and the fair value of plan assets at the balance sheet date. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting estimated future cash flows using yields on high qualityhigh-quality corporate bonds which have terms to maturity approximating the terms of the related liability.
When the calculation results in a potential asset, the recognition of that asset is limited to the asset ceiling – that is the present value of any economic benefits available in the form of refunds from the plan or a reduction in future contributions. Management uses judgement to determine the level of refunds available from the plan in recognising an asset.
The determination of the pension cost and defined benefit obligation of the Group’s defined benefit pension schemes depends on the selection of certain assumptions, which include the discount rate, inflation rate, salary growth and longevity.longevity (see note 25).
Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are charged or credited to equity in other comprehensive income in the period in which they arise.
Notes to the consolidated financial statements continued
1. Accounting policies continued
n. Employee benefits continued
The service cost, representing benefits accruing over the year, is included in the income statement as an operating cost. Net interest is calculated by applying the discount rate to the net defined benefit obligation and is presented as finance costs or finance income.
Obligations for contributions to defined contribution pension plans are recognised as an operating expense in the income statement as incurred.
2. Other post-retirement obligations The expected costs of post-retirement medical and life assurance benefits are accrued over the period of employment, using a similar accounting methodology as for defined benefit pension obligations. The liabilities and costs relating to significant other post-retirement obligations are assessed annually by independent qualified actuaries.
3. Share-based payments The fair value of options or shares granted under the Group’s share and option plans is recognised as an employee expense after taking into account the Group’s best estimate of the number of awards expected to vest. Fair value is measured at the date of grant and is spread over the vesting period of the option or share. The fair value of the options granted is measured using an option model that is most appropriate to the award. The fair value of shares awarded is measured using the share price at the date of grant unless another method is more appropriate. Any proceeds received are credited to share capital and share premium when the options are exercised.
o. Provisions
Provisions are recognised if the Group has a present legal or constructive obligation as a result of past events, it is more likely than not that an outflow of resources will be required to settle the obligation and the amount can be reliably estimated. Provisions are discounted to present value where the effect is material.
The Group recognises a provision for deferred consideration at fair value.consideration. Where this is contingent on future performance or a future event, judgement is exercised in establishing the fair value.
Pearson plc Consolidated Financial Statements
Notes to the consolidated financial statements continued
1. Accounting policies continued
o. Provisions continued
The Group recognises a provision for onerous lease contracts when the expected benefits to be derived from a contract are less than the unavoidable costs of meeting the obligations under the contract.
The provision is based on the present value of future payments for surplus leased properties under non- cancellablenon-cancellable operating leases, net of estimated sub-leasing income.
p. Revenue recognition
The Group’s revenue streams are courseware, assessments and services. Courseware includes curriculum materials provided in book form and/or via access to digital content. Assessments includes test development, processing and scoring services provided to governments, educational institutions, corporations and professional bodies. Services includes the operation of schools, colleges and universities, including sistemas in Brazil and English language teaching centres around the world as well as the provision of online learning services in partnership with universities and other academic institutions.
Revenue comprises the fair value of the consideration received or receivable for the sale of goods and services net of sales taxes, rebates and discounts, and after eliminating sales within the Group.
Revenue from the sale of books is recognised when title passes. A provision for anticipated returns is made based primarily on historical return rates.rates, customer buying patterns and retailer behaviours including stock levels (see note 22). If these estimates do not reflect actual returns in future periods then revenues could be understated or overstated for a particular period.
Notes to the consolidated financial statements continued
1. Accounting policies continued
p. Revenue recognition continued
Revenue from the sale of off-the-shelf software is recognised on delivery or on installation of the software where that is a condition of the contract. In certain circumstances, where installation is complex, revenue is recognised when the customer has completed their acceptance procedures. Where software is provided under a term licence, revenue is recognised on a straight-line basis over the period of the license.licence.
Revenue from the provision of services to academic institutions, such as programme development, student acquisition, education technology and student support services, is recognised as performance occurs.
Revenue from multi-year contractual arrangements, such as contracts to process qualifying tests for individual professions and government departments, is recognised as performance occurs. The assumptions, risks and uncertainties inherent to long-term contract accounting can affect the amounts and timing of revenue and related expenses reported. Certain of these arrangements, either as a result of a single service spanning more than one reporting period or where the contract requires the provision of a number of services that together constitute a single project, are treated as long-term contracts with revenue recognised on a percentage of completion basis. Percentage of completion is calculated on a cost basis using the proportion of the total estimated costs incurred to date. Losses on contracts are recognised in the period in which the loss first becomes foreseeable. Contract losses are determined to be the amount by which estimated total costs of the contract exceed the estimated total revenues that will be generated.
Where a contractual arrangement consists of two or more separate elements that can be provided to customers either on a stand-alone basis or as an optional extra, such as the provision of supplementary materials or online access with textbooks and multiple deliverables within testing or service contracts, revenue is recognised for each element as if it were an individual contractual arrangement. This requires judgement regarding the identification of the individual elements as well as the estimation of its relative fair value.
Pearson plc Consolidated Financial Statements
Notes to the consolidated financial statements continued
1. Accounting policies continued
p. Revenue recognition continued
On certain contracts, where the Group acts as agent, only commissions and fees receivable for services rendered are recognised as revenue. Any third-party costs incurred on behalf of the principal that are rechargeable under the contractual arrangement are not included in revenue.
Income from recharges of freight and other activities which are incidental to the normal revenue generatingrevenue-generating activities is included in other income.
Circulation and advertising revenue is recognised when the newspaper or other publication is published. Subscription revenue is recognised on a straight-line basis over the life of the subscription.
q. Leases
Leases of property, plant and equipment where the Group has substantially all the risks and rewards of ownership are classified as finance leases. Finance leases are capitalised at the commencement of the lease at the lower of the fair value of the leased property and the present value of the minimum lease payments. Each lease payment is allocated between the liability and finance charges to achieve a constant rate on the finance balance outstanding. The corresponding rental obligations, net of finance charges, are included in financial liabilities – borrowings. The interest element of the finance cost is charged to the income statement over the lease period to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The property, plant and equipment acquired under finance leases are depreciated over the shorter of the useful life of the asset or the lease term.
Notes to the consolidated financial statements continued
1. Accounting policies continued
q. Leases continued
Leases where a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases by the lessee. Payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the period of the lease.
r. Dividends
DividendsFinal dividends are recorded in the Group’s financial statements in the period in which they are approved by the company’s shareholders. Interim dividends are recorded when paid.
s. Discontinued operations
A discontinued operation is a component of the Group’s business that represents a separate major line of business or geographical area of operations that has been disposed of or meets the criteria to be classified as held for sale.
Discontinued operations are presented in the income statement as a separate line and are shown net of tax.
t. Assets and liabilities held for sale
Assets and liabilities are classified as held for sale and stated at the lower of carrying amount and fair value less costs to sell if it is highly probable that the carrying amount will be recovered principally through a sale transaction rather than through continuing use. No depreciation is charged in respect of non-current assets classified as held for sale. Amounts relating to non-current assets and liabilities held for sale are classified as discontinued operations in the income statement where appropriate.
u. Trade receivables
Trade receivables are stated at fair value after provision for bad and doubtful debts and anticipated future sales returns (see also note 1p).
Pearson plc Consolidated Financial Statements
Notes to the consolidated financial statements continued
2. Segment information
The primary segments for management and reporting are geographies as outlined below. In addition, the Group separately discloses its share of the results from the Penguin Random House (PRH) associate.
The chief operating decision-maker is the Pearson Executive.executive.
Continuing operations:
North AmericaSchool, Higher Education Courseware, Assessments and ProfessionalServices businesses in the US and Canada.
Growth School, Higher EducationCore Courseware, Assessments and Professional businesses in emerging markets which are investment priorities, including Brazil, China, India and South Africa.
Core School, Higher Education and ProfessionalServices businesses in more mature markets including UK, Australia and Italy.
Growth Courseware, Assessments and Services businesses in emerging markets including Brazil, China, India and South Africa.
For more detail on the services and products included in each business segment refer to Item 4.
2017 | ||||||||||||||||||||||||||||||||
All figures in £ millions | Notes | North America | Core | Growth | Penguin Random House | Corporate | Discontinued operations | Group | ||||||||||||||||||||||||
Continuing operations | ||||||||||||||||||||||||||||||||
Sales | 2,929 | 815 | 769 | — | — | 4,513 | ||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Adjusted operating profit | 394 | 50 | 38 | 94 | — | 576 | ||||||||||||||||||||||||||
Cost of major restructuring | (60 | ) | (11 | ) | (8 | ) | — | — | (79 | ) | ||||||||||||||||||||||
Intangible charges | (89 | ) | (12 | ) | (37 | ) | (28 | ) | — | (166 | ) | |||||||||||||||||||||
Other net gains and losses | (3 | ) | — | 35 | 96 | — | 128 | |||||||||||||||||||||||||
Impact of US tax reform | — | — | — | (8 | ) | — | (8 | ) | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Operating profit | 242 | 27 | 28 | 154 | — | 451 | ||||||||||||||||||||||||||
Finance costs | 6 | (110 | ) | |||||||||||||||||||||||||||||
Finance income | 6 | 80 | ||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||
Profit before tax | 421 | |||||||||||||||||||||||||||||||
Income tax | 7 | (13 | ) | |||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||
Profit for the year from continuing operations | 408 | |||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||
Segment assets | 4,116 | 1,914 | 667 | — | 793 | 7,490 | ||||||||||||||||||||||||||
Joint ventures | 12 | — | — | 3 | — | — | 3 | |||||||||||||||||||||||||
Associates | 12 | 4 | 3 | — | 388 | — | 395 | |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Total assets | 4,120 | 1,917 | 670 | 388 | 793 | 7,888 | ||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Other segment items | ||||||||||||||||||||||||||||||||
Share of results of joint ventures and associates | 12 | 5 | 1 | 1 | 71 | — | — | 78 | ||||||||||||||||||||||||
Capital expenditure | 10, 11 | 162 | 35 | 43 | — | — | — | 240 | ||||||||||||||||||||||||
Pre-publication investment | 20 | 218 | 84 | 59 | — | — | — | 361 | ||||||||||||||||||||||||
Depreciation | 10 | 56 | 13 | 21 | — | — | — | 90 | ||||||||||||||||||||||||
Amortisation | 11, 20 | 348 | 103 | 110 | — | — | — | 561 | ||||||||||||||||||||||||
Impairment | 11 | — | — | — | — | — | — | — | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pearson plc Consolidated Financial Statements
The resultsNotes to the consolidated financial statements continued
2. Segment information continued
2016 | ||||||||||||||||||||||||||||||||
All figures in £ millions | Notes | North America | Core | Growth | Penguin Random House | Corporate | Discontinued operations | Group | ||||||||||||||||||||||||
Continuing operations | ||||||||||||||||||||||||||||||||
Sales | 2,981 | 803 | 768 | — | — | 4,552 | ||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Adjusted operating profit | 420 | 57 | 29 | 129 | — | 635 | ||||||||||||||||||||||||||
Cost of major restructuring | (172 | ) | (62 | ) | (95 | ) | (9 | ) | — | (338 | ) | |||||||||||||||||||||
Intangible charges | (2,684 | ) | (16 | ) | (33 | ) | (36 | ) | — | (2,769 | ) | |||||||||||||||||||||
Other net gains and losses | (12 | ) | (12 | ) | (1 | ) | — | — | (25 | ) | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Operating (loss)/profit | (2,448 | ) | (33 | ) | (100 | ) | 84 | — | (2,497 | ) | ||||||||||||||||||||||
Finance costs | 6 | (97 | ) | |||||||||||||||||||||||||||||
Finance income | 6 | 37 | ||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||
Loss before tax | (2,557 | ) | ||||||||||||||||||||||||||||||
Income tax | 7 | 222 | ||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||
Loss for the yearfrom continuing operations | (2,335 | ) | ||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||
Segment assets | 4,859 | 1,461 | 859 | — | 1,640 | 8,819 | ||||||||||||||||||||||||||
Joint ventures | 12 | — | — | 2 | — | — | 2 | |||||||||||||||||||||||||
Associates | 12 | 1 | 4 | — | 1,240 | — | 1,245 | |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Total assets | 4,860 | 1,465 | 861 | 1,240 | 1,640 | 10,066 | ||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Other segment items | ||||||||||||||||||||||||||||||||
Share of results of joint ventures and associates | 12 | (1 | ) | 1 | (1 | ) | 98 | — | — | 97 | ||||||||||||||||||||||
Capital expenditure | 10, 11 | 153 | 42 | 51 | — | — | — | 246 | ||||||||||||||||||||||||
Pre-publication investment | 20 | 235 | 92 | 68 | — | — | — | 395 | ||||||||||||||||||||||||
Depreciation | 10 | 56 | 12 | 27 | — | — | — | 95 | ||||||||||||||||||||||||
Amortisation | 11, 20 | 394 | 109 | 116 | — | — | — | 619 | ||||||||||||||||||||||||
Impairment | 11 | 2,548 | — | — | — | — | — | 2,548 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pearson plc Consolidated Financial Statements
Notes to the consolidated financial statements continued
2. Segment information continued
2015 | ||||||||||||||||||||||||||||||||
All figures in £ millions | Notes | North America | Core | Growth | PRH | Corporate | Discontinued operations | Group | ||||||||||||||||||||||||
Continuing operations | ||||||||||||||||||||||||||||||||
Sales | 2,940 | 815 | 713 | — | — | 4,468 | ||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Adjusted operating profit/(loss) | 480 | 105 | (3 | ) | 90 | — | 672 | |||||||||||||||||||||||||
Intangible charges | (386 | ) | (79 | ) | (583 | ) | (41 | ) | — | (1,089 | ) | |||||||||||||||||||||
Cost of major restructuring | — | — | — | — | — | — | ||||||||||||||||||||||||||
Acquisition costs | — | — | — | — | — | — | ||||||||||||||||||||||||||
Other net gains and losses | 19 | (5 | ) | — | (1 | ) | — | 13 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Operating (loss)/profit | 113 | 21 | (586 | ) | 48 | — | (404 | ) | ||||||||||||||||||||||||
Finance costs | 6 | (100 | ) | |||||||||||||||||||||||||||||
Finance income | 6 | 71 | ||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||
Loss before tax | (433 | ) | ||||||||||||||||||||||||||||||
Income tax | 7 | 81 | ||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||
Loss for the year from continuing operations | (352 | ) | ||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||
Segment assets | 6,399 | 1,573 | 719 | — | 1,841 | 10,532 | ||||||||||||||||||||||||||
Joint ventures | 12 | 1 | — | 3 | — | — | 4 | |||||||||||||||||||||||||
Associates | 12 | — | 6 | — | 1,093 | — | 1,099 | |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Total assets | 6,400 | 1,579 | 722 | 1,093 | 1,841 | 11,635 | ||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Other segment items | ||||||||||||||||||||||||||||||||
Share of results of joint ventures and associates | 12 | (9 | ) | — | (3 | ) | 64 | — | 16 | 68 | ||||||||||||||||||||||
Capital expenditure | 10, 11 | 136 | 42 | 50 | — | — | 15 | 243 | ||||||||||||||||||||||||
Pre-publication investment | 20 | 218 | 63 | 66 | — | — | — | 347 | ||||||||||||||||||||||||
Depreciation | 10 | 42 | 9 | 18 | — | — | 6 | 75 | ||||||||||||||||||||||||
Amortisation | 11, 20 | 338 | 95 | 109 | — | — | 15 | 557 | ||||||||||||||||||||||||
Impairment | 11 | 282 | 37 | 530 | — | — | — | 849 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no material inter-segment sales in either 2017, 2016 or 2015.
Adjusted operating profit is shown in the above tables as it is the key financial measure used by management to evaluate the performance of the FT Group segment (to 30 November 2015) and Mergermarket (to 4 February 2014) are shownallocate resources to business segments. The measure also enables investors to more easily, and consistently, track the underlying operational performance of the Group and its business segments by separating out those items of income and expenditure relating to acquisition and disposal transactions and major restructuring programmes.
Cost of major restructuring: In January 2016, the Group announced that it was embarking on a restructuring programme to simplify the business, reduce costs and position the Group for growth in its major markets. The costs of this programme of £338m in 2016 were significant enough to exclude from the adjusted operating profit measure so as discontinuedto better highlight the underlying performance. These costs included costs associated with headcount reductions, property rationalisation and closure or exit from certain systems, platforms, products and supplier and customer relationships. A new programme of restructuring, announced in May 2017, to run between 2017 and 2019, began in the relevant periods.second half of 2017 and is expected to drive further significant cost savings. Costs incurred to date relating to this new programme were £79m at the end of 2017 and related to cost efficiencies in
Pearson plc Consolidated Financial Statements
Notes to the consolidated financial statements continued
2. Segment information continued
For more detail onhigher education and enabling functions together with further rationalisation of the services and products included in each business segment refer to the strategic report.
2015 | ||||||||||||||||||||||||||||||||
All figures in £ millions | Notes | North America | Core | Growth | PRH | Corporate | Discontinued operations | Group | ||||||||||||||||||||||||
Continuing operations | ||||||||||||||||||||||||||||||||
Sales | 2,940 | 836 | 692 | — | — | — | 4,468 | |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
Operating (loss)/profit | 113 | 30 | (595 | ) | 48 | — | — | (404 | ) | |||||||||||||||||||||||
Finance costs | 6 | (100 | ) | |||||||||||||||||||||||||||||
Finance income | 6 | 71 | ||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||
Loss before tax | (433 | ) | ||||||||||||||||||||||||||||||
Income tax | 7 | 81 | ||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||
Loss for the year from continuing operations | (352 | ) | ||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||
Segment assets | 6,399 | 1,573 | 719 | — | 1,841 | — | 10,532 | |||||||||||||||||||||||||
Joint ventures | 12 | 1 | — | 3 | — | — | — | 4 | ||||||||||||||||||||||||
Associates | 12 | — | 6 | — | 1,093 | — | — | 1,099 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
Total assets | 6,400 | 1,579 | 722 | 1,093 | 1,841 | — | 11,635 | |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
Other segment items | ||||||||||||||||||||||||||||||||
Share of results of joint ventures and associates | 12 | (9 | ) | — | (3 | ) | 64 | — | 16 | 68 | ||||||||||||||||||||||
Capital expenditure | 10, 11 | 85 | 33 | 110 | — | — | 15 | 243 | ||||||||||||||||||||||||
Pre-publication investment | 20 | 218 | 63 | 66 | — | — | — | 347 | ||||||||||||||||||||||||
Depreciation | 10 | 42 | 9 | 18 | — | — | 6 | 75 | ||||||||||||||||||||||||
Amortisation | 11, 20 | 338 | 95 | 109 | — | — | 15 | 557 | ||||||||||||||||||||||||
Impairment | 11 | 282 | 37 | 530 | — | — | — | 849 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes to the consolidated financial statements continued
2. Segment information continued
2014 restated | ||||||||||||||||||||||||||||||||
All figures in £ millions | Notes | North America | Core | Growth | PRH | Corporate | Discontinued operations | Group | ||||||||||||||||||||||||
Continuing operations | ||||||||||||||||||||||||||||||||
Sales | 2,906 | 910 | 724 | — | — | — | 4,540 | |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
Operating profit/(loss) | 336 | 100 | (103 | ) | 15 | — | — | 348 | ||||||||||||||||||||||||
Finance costs | 6 | (140 | ) | |||||||||||||||||||||||||||||
Finance income | 6 | 47 | ||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||
Profit before tax | 255 | |||||||||||||||||||||||||||||||
Income tax | 7 | (56 | ) | |||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||
Profit for the year from continuing operations | 199 | |||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||
Segment assets | 6,580 | 1,426 | 1,394 | — | 660 | 219 | 10,279 | |||||||||||||||||||||||||
Joint ventures | 12 | 1 | — | 3 | — | — | 9 | 13 | ||||||||||||||||||||||||
Associates | 12 | 1 | 8 | — | 1,095 | — | 1 | 1,105 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
Total assets | 6,582 | 1,434 | 1,397 | 1,095 | 660 | 229 | 11,397 | |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
Other segment items | ||||||||||||||||||||||||||||||||
Share of results of joint ventures and associates | 12 | — | (1 | ) | (3 | ) | 35 | — | 20 | 51 | ||||||||||||||||||||||
Capital expenditure | 10, 11 | 97 | 32 | 49 | — | — | 16 | 194 | ||||||||||||||||||||||||
Pre-publication investment | 20 | 209 | 77 | 72 | — | — | — | 358 | ||||||||||||||||||||||||
Depreciation | 10 | 41 | 10 | 16 | — | — | 7 | 74 | ||||||||||||||||||||||||
Amortisation | 11, 20 | 306 | 99 | 121 | — | — | 16 | 542 | ||||||||||||||||||||||||
Impairment | 11 | — | — | 77 | — | — | — | 77 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013 restated | ||||||||||||||||||||||||||||||||
All figures in £ millions | Notes | North America | Core | Growth | PRH | Corporate | Discontinued operations | Group | ||||||||||||||||||||||||
Continuing operations | ||||||||||||||||||||||||||||||||
Sales | 3,008 | 1,008 | 712 | — | — | — | 4,728 | |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
Operating profit/(loss) | 358 | 58 | (5 | ) | 20 | — | — | 431 | ||||||||||||||||||||||||
Finance costs | 6 | (110 | ) | |||||||||||||||||||||||||||||
Finance income | 6 | 37 | ||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||
Profit before tax | 358 | |||||||||||||||||||||||||||||||
Income tax | 7 | (88 | ) | |||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||
Profit for the year from continuing operations | 270 | |||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||
Other segment items | ||||||||||||||||||||||||||||||||
Share of results of joint ventures and associates | 1 | — | (4 | ) | 31 | — | 26 | 54 | ||||||||||||||||||||||||
Depreciation | 10 | 45 | 12 | 16 | — | — | 9 | 82 | ||||||||||||||||||||||||
Amortisation | 285 | 131 | 103 | — | — | 16 | 535 | |||||||||||||||||||||||||
Impairment | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes to the consolidated financial statements continued
2. Segment information continued
There were no material inter-segment sales in 2013, 2014 or 2015.
Both operating profit andproperty portfolio. The costs of this new programme have also been excluded from adjusted operating profit (see note 3).
Intangible charges: These represent charges in 2015respect of goodwill, including impairment, and intangible assets acquired through business combinations and the direct costs of acquiring those businesses. These charges are stated afterexcluded as they reflect past acquisition activity and do not necessarily reflect the following restructuring charges:current year performance of the Group. In 2016, intangible charges included an impairment of goodwill in the Group’s North America £24m (2014:business of £2,548m (see note 11). In 2015, intangible charges included an impairment of goodwill and intangibles in our North America business of £282m, our Core business of £37m 2013: £77m); Core £nil (2014: £21m, 2013: £49m);and our Growth £11m, (2014: £6m, 2013: £36m);business of £530m. There was no impairment in 2017.
Other net gains and losses: These represent profits and losses on the sale of subsidiaries, joint ventures, associates and other financial assets and are excluded from adjusted operating profit as they distort the performance of the Group as reported on a statutory basis. Other net gains of £128m in 2017 largely relate to the sale of the test preparation business in China which resulted in a profit on sale of £44m and the part sale of the Group’s share in Penguin Random House £12m (2014: £19m, 2013: £nil)which resulted in a profit of £96m (see note 31). In 2016, the net losses in the Core segment mainly relate to the closure of the Group’s English language schools in Germany and in the North America segment relate to the sale of the Pearson English Business Solutions business. Other net gain and losses in 2015 relate to the profit on disposal of PowerSchool in North America, net of small losses on other investments.
Impact of US tax reform In 2017, as a result of US tax reform, the Group’s share of profit from associates was adversely impacted by £8m. This amount has been excluded from adjusted operating profit as it is considered to be a transition adjustment that is not expected to recur in the near future.
Corporate costs are allocated to business segments including discontinued operations on an appropriate basis depending on the nature of the cost;cost and therefore the total segment result is equal to the Group operating profit.
Segment assets, excluding corporate assets, consist of property, plant and equipment, intangible assets, inventories, receivables, deferred taxation and other financial assets and exclude cash and cash equivalents and derivative assets. Corporate assets comprise cash and cash equivalents, marketable securities and derivative financial instruments. Capital expenditure comprises additions to property, plant and equipment and software (see notes 10 and 11).
Property, plant and equipment and intangible assets acquired through business combination were £1m (2014: £263m)£nil (2016: £10m) (see note 30).
The following tables analyse the Group’s revenue streams. Courseware includes curriculum materials provided in book form and/or via access to digital content. Assessments includes test development, processing and scoring services provided to governments, educational institutions, corporations and professional bodies. Services includes the operation of schools, colleges and universities, including sistemas in Brazil and English language teaching centres around the world as well as the provision of online learning services in partnership with universities and other academic institutions. School Systems includes PowerSchool and Family Education Network, both of which were disposed during 2015.
Pearson plc Consolidated Financial Statements
All figures in £ millions | 2015 | |||||||||||||||
North America | Core | Growth | Group | |||||||||||||
Courseware | ||||||||||||||||
School Courseware | 406 | 186 | 104 | 696 | ||||||||||||
Higher Education Courseware | 1,207 | 96 | 55 | 1,358 | ||||||||||||
English Courseware | 22 | 84 | 79 | 185 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
1,635 | 366 | 238 | 2,239 | |||||||||||||
|
|
|
|
|
|
|
| |||||||||
Assessments | ||||||||||||||||
School and Higher Education Assessments | 420 | 301 | 15 | 736 | ||||||||||||
Clinical Assessments | 126 | 32 | — | 158 | ||||||||||||
Professional Certification | 269 | 82 | 36 | 387 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
815 | 415 | 51 | 1,281 | |||||||||||||
|
|
|
|
|
|
|
| |||||||||
Services | ||||||||||||||||
School Services | 209 | 1 | 47 | 257 | ||||||||||||
Higher Education Services | 223 | 26 | 70 | 319 | ||||||||||||
English Services | 18 | 28 | 286 | 332 | ||||||||||||
School Systems | 40 | — | — | 40 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
490 | 55 | 403 | 948 | |||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | 2,940 | 836 | 692 | 4,468 | ||||||||||||
|
|
|
|
|
|
|
|
Notes to the consolidated financial statements continued
2. Segment information continued
2014 restated | ||||||||||||||||||||||||||||||||
All figures in £ millions | North America | Core | Growth | Group | 2017 | |||||||||||||||||||||||||||
All figures in £ millions | North America | Core | Growth | Group | ||||||||||||||||||||||||||||
Courseware | ||||||||||||||||||||||||||||||||
School Courseware | 389 | 214 | 120 | 723 | 394 | 171 | 139 | 704 | ||||||||||||||||||||||||
Higher Education Courseware | 1,179 | 114 | 66 | 1,359 | 1,146 | 93 | 63 | 1,302 | ||||||||||||||||||||||||
English Courseware | 22 | 92 | 75 | 189 | 20 | 60 | 102 | 182 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
1,590 | 420 | 261 | 2,271 | 1,560 | 324 | 304 | 2,188 | |||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Assessments | ||||||||||||||||||||||||||||||||
School and Higher Education Assessments | 416 | 312 | 14 | 742 | 355 | 256 | 23 | 634 | ||||||||||||||||||||||||
Clinical Assessments | 115 | 34 | — | 149 | 146 | 46 | — | 192 | ||||||||||||||||||||||||
Professional Certification | 228 | 93 | 19 | 340 | ||||||||||||||||||||||||||||
Professional and English Certification | 341 | 138 | 60 | 539 | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
759 | 439 | 33 | 1,231 | 842 | 440 | 83 | 1,365 | |||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Services | ||||||||||||||||||||||||||||||||
School Services | 253 | — | 56 | 309 | 274 | 5 | 54 | 333 | ||||||||||||||||||||||||
Higher Education Services | 215 | 22 | 90 | 327 | 253 | 34 | 32 | 319 | ||||||||||||||||||||||||
English Services | 20 | 29 | 284 | 333 | — | 12 | 296 | 308 | ||||||||||||||||||||||||
School Systems | 69 | — | — | 69 | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
557 | 51 | 430 | 1,038 | 527 | 51 | 382 | 960 | |||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Total | 2,906 | 910 | 724 | 4,540 | 2,929 | 815 | 769 | 4,513 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
2016 | ||||||||||||||||||||||||||||||||
All figures in £ millions | North America | Core | Growth | Group | ||||||||||||||||||||||||||||
Sales: | ||||||||||||||||||||||||||||||||
Courseware | ||||||||||||||||||||||||||||||||
School Courseware | 418 | 173 | 127 | 718 | ||||||||||||||||||||||||||||
Higher Education Courseware | 1,147 | 92 | 60 | 1,299 | ||||||||||||||||||||||||||||
English Courseware | 21 | 65 | 97 | 183 | ||||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
1,586 | 330 | 284 | 2,200 | |||||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Assessments | ||||||||||||||||||||||||||||||||
School and Higher Education Assessments | 378 | 268 | 21 | 667 | ||||||||||||||||||||||||||||
Clinical Assessments | 143 | 40 | – | 183 | ||||||||||||||||||||||||||||
Professional and English Certification | 333 | 112 | 49 | 494 | ||||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
854 | 420 | 70 | 1,344 | |||||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Services | ||||||||||||||||||||||||||||||||
School Services | 259 | 6 | 54 | 319 | ||||||||||||||||||||||||||||
Higher Education Services | 269 | 29 | 46 | 344 | ||||||||||||||||||||||||||||
English Services | 13 | 18 | 314 | 345 | ||||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
541 | 53 | 414 | 1,008 | |||||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Total | 2,981 | 803 | 768 | 4,552 | ||||||||||||||||||||||||||||
|
|
|
|
Pearson plc Consolidated Financial Statements
Notes to the consolidated financial statements continued
2. Segment information continued
2013 restated | 2015 | |||||||||||||||||||||||||||||||
All figures in £ millions | North America | Core | Growth | Group | North America | Core | Growth | Group | ||||||||||||||||||||||||
Courseware | ||||||||||||||||||||||||||||||||
School Courseware | 467 | 233 | 167 | 867 | 406 | 178 | 112 | 696 | ||||||||||||||||||||||||
Higher Education Courseware | 1,180 | 138 | 66 | 1,384 | 1,207 | 94 | 57 | 1,358 | ||||||||||||||||||||||||
English Courseware | 23 | 105 | 83 | 211 | 22 | 65 | 84 | 171 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
1,670 | 476 | 316 | 2,462 | 1,635 | 337 | 253 | 2,225 | |||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Assessments | ||||||||||||||||||||||||||||||||
School and Higher Education Assessments | 452 | 375 | 7 | 834 | 420 | 296 | 20 | 736 | ||||||||||||||||||||||||
Clinical Assessments | 150 | — | — | 150 | 126 | 32 | — | 158 | ||||||||||||||||||||||||
Professional Certification | 221 | 82 | 24 | 327 | ||||||||||||||||||||||||||||
Professional and English Certification | 269 | 95 | 37 | 401 | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
823 | 457 | 31 | 1,311 | 815 | 423 | 57 | 1,295 | |||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Services | ||||||||||||||||||||||||||||||||
School Services | 239 | 6 | 79 | 324 | 209 | 1 | 47 | 257 | ||||||||||||||||||||||||
Higher Education Services | 167 | 23 | 83 | 273 | 223 | 26 | 70 | 319 | ||||||||||||||||||||||||
English Services | 22 | 46 | 203 | 271 | 18 | 28 | 286 | 332 | ||||||||||||||||||||||||
School Systems | 87 | — | — | 87 | 40 | — | — | 40 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
515 | 75 | 365 | 955 | 490 | 55 | 403 | 948 | |||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Total | 3,008 | 1,008 | 712 | 4,728 | 2,940 | 815 | 713 | 4,468 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
Pearson plc Consolidated Financial Statements
Notes to the consolidated financial statements continued
2. Segment information continued
The Group operates in the following main geographic areas:
Sales | Non-current assets | Sales | Non-current assets | |||||||||||||||||||||||||||||||||||||
All figures in £ millions | 2015 | 2014 restated | 2013 restated | 2015 | 2014 | 2017 | 2016 | 2015 | 2017 | 2016 | ||||||||||||||||||||||||||||||
Continuing operations | ||||||||||||||||||||||||||||||||||||||||
UK | 421 | 444 | 476 | 991 | 1,056 | 384 | 393 | 421 | 796 | 946 | ||||||||||||||||||||||||||||||
Other European countries | 246 | 281 | 299 | 121 | 180 | 262 | 255 | 246 | 128 | 134 | ||||||||||||||||||||||||||||||
US | 2,800 | 2,762 | 2,852 | 5,000 | 5,243 | 2,770 | 2,829 | 2,800 | 2,247 | 3,351 | ||||||||||||||||||||||||||||||
Canada | 107 | 109 | 128 | 235 | 288 | 126 | 118 | 107 | 240 | 268 | ||||||||||||||||||||||||||||||
Asia Pacific | 590 | 565 | 588 | 211 | 416 | 643 | 632 | 590 | 151 | 205 | ||||||||||||||||||||||||||||||
Other countries | 304 | 379 | 385 | 144 | 661 | 328 | 325 | 304 | 184 | 232 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Total continuing | 4,468 | 4,540 | 4,728 | 6,702 | 7,844 | 4,513 | 4,552 | 4,468 | 3,746 | 5,136 | ||||||||||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||||||||
Discontinued operations | ||||||||||||||||||||||||||||||||||||||||
UK | 134 | 170 | 270 | — | — | — | — | 134 | — | — | ||||||||||||||||||||||||||||||
Other European countries | 64 | 66 | 116 | — | — | — | — | 64 | — | — | ||||||||||||||||||||||||||||||
US | 72 | 68 | 430 | — | — | — | — | 72 | — | — | ||||||||||||||||||||||||||||||
Canada | 2 | 1 | 24 | — | — | — | — | 2 | — | — | ||||||||||||||||||||||||||||||
Asia Pacific | 35 | 34 | 110 | — | — | — | — | 35 | — | — | ||||||||||||||||||||||||||||||
Other countries | 5 | 4 | 12 | — | — | — | — | 5 | — | — | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Total discontinued | 312 | 343 | 962 | — | — | — | — | 312 | — | — | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Total | 4,780 | 4,883 | 5,690 | 6,702 | 7,844 | 4,513 | 4,552 | 4,780 | 3,746 | 5,136 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
Sales are allocated based on the country in which the customer is located. This does not differ materially from the location where the order is received. The geographical split of non-current assets is based on the subsidiary’s country of domicile. This is not materially different to the location of the assets. Non-current assets comprise property, plant and equipment, intangible assets, investments in joint ventures and associates and trade and other receivables.
Pearson plc Consolidated Financial Statements
Notes to the consolidated financial statements continued
3. Discontinued operations2. Segment information continued
Discontinued
There are no discontinued operations in either 2017 or 2016. All discontinued operations in 2015 relate to the FT Group, Penguin and Mergermarket.Group. An analysis of the results and cash flows of discontinued operations is as follows:
2015 | 2014 restated | 2013 restated | 2017 | 2016 | 2015 | |||||||||||||||||||||||||||||||||||||||||||||||||||
All figures in £ millions | FT Group | Total | Penguin | Mergermarket | FT Group | Total | Penguin | Mergermarket | FT Group | Total | Total | Total | FT Group | Total | ||||||||||||||||||||||||||||||||||||||||||
Sales | 312 | 312 | — | 9 | 334 | 343 | 513 | 108 | 341 | 962 | — | — | 312 | 312 | ||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||
Operating profit | 48 | 48 | — | 2 | 50 | 52 | 28 | 24 | 27 | 79 | — | — | 48 | 48 | ||||||||||||||||||||||||||||||||||||||||||
Finance income/(costs) | — | — | — | — | — | — | 1 | — | (3 | ) | (2 | ) | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||
Profit before tax | 48 | 48 | — | 2 | 50 | 52 | 29 | 24 | 24 | 77 | — | — | 48 | 48 | ||||||||||||||||||||||||||||||||||||||||||
Income tax | (8 | ) | (8 | ) | — | (1 | ) | (7 | ) | (8 | ) | (9 | ) | (9 | ) | 1 | (17 | ) | — | — | (8 | ) | (8 | ) | ||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||
Profit after tax | 40 | 40 | — | 1 | 43 | 44 | 20 | 15 | 25 | 60 | — | — | 40 | 40 | ||||||||||||||||||||||||||||||||||||||||||
Profit on disposal of Penguin | — | — | 29 | — | — | 29 | 202 | — | — | 202 | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
Attributable tax benefit | — | — | — | — | — | — | 15 | — | — | 15 | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
Profit on disposal of The Economist | 473 | 473 | — | — | — | — | — | — | — | — | — | — | 473 | 473 | ||||||||||||||||||||||||||||||||||||||||||
Profit on disposal of Financial Times | 711 | 711 | — | — | — | — | — | — | — | — | — | — | 711 | 711 | ||||||||||||||||||||||||||||||||||||||||||
Attributable tax expense | (49 | ) | (49 | ) | — | — | — | — | — | — | — | — | — | — | (49 | ) | (49 | ) | ||||||||||||||||||||||||||||||||||||||
Mergermarket transaction costs | — | — | — | — | — | — | — | (8 | ) | — | (8 | ) | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
Profit on disposal of Mergermarket | — | — | — | 244 | — | 244 | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
Attributable tax expense | — | — | — | (46 | ) | — | (46 | ) | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||
Profit for the year from discontinued operations | 1,175 | 1,175 | 29 | 199 | 43 | 271 | 237 | 7 | 25 | 269 | — | — | 1,175 | 1,175 | ||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||
Operating cash flows | 31 | 31 | — | 2 | 24 | 26 | 36 | 22 | 17 | 75 | — | — | 31 | 31 | ||||||||||||||||||||||||||||||||||||||||||
Investing cash flows | 3 | 3 | — | — | (5 | ) | (5 | ) | (6 | ) | (2 | ) | 2 | (6 | ) | — | — | 3 | 3 | |||||||||||||||||||||||||||||||||||||
Financing cash flows | — | — | — | — | — | — | (8 | ) | (29 | ) | — | (37 | ) | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||
Total cash flows | 34 | 34 | — | 2 | 19 | 21 | 22 | (9 | ) | 19 | 32 | — | — | 34 | 34 | |||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included within3. Restructuring costs
An analysis of restructuring costs is as follows:
All figures in £ millions | 2017 | 2016 | 2015 | |||||||||
By nature: | ||||||||||||
Product costs | 15 | 32 | — | |||||||||
Employee costs | 11 | 139 | 18 | |||||||||
Depreciation and amortisation | 13 | 29 | — | |||||||||
Property and facilities | 24 | 43 | 5 | |||||||||
Technology and communications | 2 | 7 | — | |||||||||
Professional and outsourced services | 12 | 31 | 5 | |||||||||
General and administrative costs | 2 | 48 | 7 | |||||||||
|
|
|
|
|
| |||||||
Total restructuring – operating expenses | 79 | 329 | 35 | |||||||||
|
|
|
|
|
| |||||||
Share of associate restructuring | — | 9 | 12 | |||||||||
|
|
|
|
|
| |||||||
Total | 79 | 338 | 47 | |||||||||
|
|
|
|
|
|
In January 2016, the cost of disposal of Penguin in 2013 are amounts in respect of the settlement of litigation related to the agency arrangement for eBooks. Also included in cost of disposal for Penguin for 2013 was a provision for amounts payable to Bertelsmann upon settlement of the transfer of Penguin’s UK past service pension liabilities to the new PRH venture. During 2014,Group announced that it was decided thatembarking on a restructuring programme to simplify the business, reduce costs and position the Group for growth in its major markets. The costs of this transfer would not go ahead as planned and the costs have been credited backprogramme in the £29m gain reported against the disposal in 2014.
Pearson plc Consolidated Financial Statements
Notes to the consolidated financial statements continued
3. Restructuring costs continued
2016 were significant enough to exclude from the adjusted operating profit measure so as to better highlight the underlying performance (see note 8). A new programme of restructuring, the 2017-2019 restructuring programme announced in May 2017, began in the second half of 2017 and is expected to drive further significant cost savings. The costs of this new programme have also been excluded from adjusted operating profit. The restructuring in 2015 was not part of a major restructuring programme.
4. Operating expenses
All figures in £ millions | 2015 | 2014 restated | 2013 restated | Notes | 2017 | 2016 | 2015 | |||||||||||||||||||||
By function: | ||||||||||||||||||||||||||||
Cost of goods sold | 1,981 | 2,021 | 2,123 | 2,066 | 2,093 | 1,981 | ||||||||||||||||||||||
Operating expenses | ||||||||||||||||||||||||||||
Distribution costs | 80 | 84 | 88 | 84 | 88 | 80 | ||||||||||||||||||||||
Selling, marketing and product development costs | 895 | 931 | 995 | 896 | 908 | 895 | ||||||||||||||||||||||
Administrative and other expenses | 1,195 | 1,168 | 1,056 | 1,207 | 1,240 | 1,195 | ||||||||||||||||||||||
Restructuring costs | 35 | 64 | 162 | 3 | 79 | 329 | 35 | |||||||||||||||||||||
Other net gains and losses | (13 | ) | (2 | ) | 16 | |||||||||||||||||||||||
Other income | (98 | ) | (120 | ) | (115 | ) | (64 | ) | (85 | ) | (98 | ) | ||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||
Total net operating expenses | 2,094 | 2,125 | 2,202 | 2,202 | 2,480 | 2,107 | ||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||
Other net gains and losses | (128 | ) | 25 | (13 | ) | |||||||||||||||||||||||
Impairment of intangible assets | 849 | 77 | — | 11 | — | 2,548 | 849 | |||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||
Total | 4,924 | 4,223 | 4,325 | 4,140 | 7,146 | 4,924 | ||||||||||||||||||||||
|
|
|
|
|
|
Included in other income is service fee income from Penguin Random House of £16m (2014: £41m, 2013: £28m)£3m (2016: £4m, 2015: £16m). Included in administrative and other expenses are research and efficacy costs of £33m (2014: £22m, 2013: £5m)£14m (2016: £23m, 2015: £33m). In addition to the restructuring costs shown above, there were restructuring costs in Penguin Random House of £12m (2014: £19m, 2013: £nil) and in discontinued operations of £nil (2014: £1m, 2013: £14m)(2016: £9m, 2015: £12m).
All figures in £ millions | Notes | 2015 | 2014 restated | 2013 restated | ||||||||||||
By nature: | ||||||||||||||||
Royalties expensed | 249 | 242 | 256 | |||||||||||||
Other product costs | 566 | 620 | 663 | |||||||||||||
Employee benefit expense | 5 | 1,742 | 1,832 | 1,938 | ||||||||||||
Contract labour | 182 | 183 | 190 | |||||||||||||
Employee related expense | 127 | 136 | 167 | |||||||||||||
Promotional costs | 163 | 149 | 148 | |||||||||||||
Depreciation of property, plant and equipment | 10 | 69 | 67 | 73 | ||||||||||||
Amortisation of intangible assets – pre-publication | 20 | 281 | 292 | 308 | ||||||||||||
Amortisation of intangible assets – software | 11 | 61 | 51 | 48 | ||||||||||||
Amortisation of intangible assets – other | 11 | 199 | 184 | 163 | ||||||||||||
Impairment of intangible assets | 11 | 849 | 77 | — | ||||||||||||
Property and facilities | 219 | 204 | 213 | |||||||||||||
Technology and communications | 153 | 123 | 88 | |||||||||||||
Professional and outsourced services | 262 | 253 | 245 | |||||||||||||
Other general and administrative costs | 132 | 121 | 104 | |||||||||||||
Capitalised costs | (219 | ) | (195 | ) | (193 | ) | ||||||||||
Acquisition costs | — | 6 | 12 | |||||||||||||
Other net gains and losses | (13 | ) | (2 | ) | 16 | |||||||||||
Other income | (98 | ) | (120 | ) | (114 | ) | ||||||||||
|
|
|
|
|
| |||||||||||
Total | 4,924 | 4,223 | 4,325 | |||||||||||||
|
|
|
|
|
|
Included in other net gains and losses within continuing operations in 2015 in the North America segment is the profit on disposal of PowerSchool of £30m, net of small losses on other investments. In the Core segment the loss on disposal relates to adjustments to prior year disposals.
Pearson plc Consolidated Financial Statements
Notes to the consolidated financial statements continued
4. Operating expenses continued
Included in other net gains and losses in continuing operations in 2014 are gains on the sale of joint venture interests in Safari Books Online and CourseSmart (£40m) and a loss on disposal of an investment in Nook Media (£38m).
Included in other net gains and losses in 2013 is a loss on the disposal of the Japanese school and local publishing assets.
All figures in £ millions | Notes | 2017 | 2016 | 2015 | ||||||||||||
By nature: | ||||||||||||||||
Royalties expensed | 246 | 264 | 249 | |||||||||||||
Other product costs | 564 | 616 | 566 | |||||||||||||
Employee benefit expense | 5 | 1,805 | 1,888 | 1,742 | ||||||||||||
Contract labour | 152 | 206 | 182 | |||||||||||||
Employee-related expense | 127 | 122 | 127 | |||||||||||||
Promotional costs | 229 | 217 | 163 | |||||||||||||
Depreciation of property, plant and equipment | 10 | 90 | 95 | 69 | ||||||||||||
Amortisation of intangible assets – pre-publication | 20 | 338 | 350 | 281 | ||||||||||||
Amortisation of intangible assets – software | 11 | 85 | 84 | 61 | ||||||||||||
Amortisation of intangible assets – other | 11 | 138 | 185 | 199 | ||||||||||||
Impairment of intangible assets | 11 | — | 2,548 | 849 | ||||||||||||
Property and facilities | 202 | 243 | 219 | |||||||||||||
Technology and communications | 218 | 188 | 153 | |||||||||||||
Professional and outsourced services | 322 | 378 | 262 | |||||||||||||
Other general and administrative costs | 140 | 140 | 132 | |||||||||||||
Costs capitalised to intangible assets | (324 | ) | (318 | ) | (219 | ) | ||||||||||
Other net gains and losses | (128 | ) | 25 | (13 | ) | |||||||||||
Other income | (64 | ) | (85 | ) | (98 | ) | ||||||||||
|
|
|
|
|
| |||||||||||
Total | 4,140 | 7,146 | 4,924 | |||||||||||||
|
|
|
|
|
|
During the year the Group obtained the following services from the Group’s auditors:
All figures in £ millions | 2015 | 2014 | 2013 | 2017 | 2016 | 2015 | ||||||||||||||||||
The audit of parent company and consolidated financial statements | 4 | 5 | 4 | 4 | 5 | 4 | ||||||||||||||||||
The audit of the company’s subsidiaries | 2 | 2 | 2 | 2 | 2 | 2 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Total audit fees | 6 | 7 | 6 | 6 | 7 | 6 | ||||||||||||||||||
Other assurance services | 2 | 1 | 1 | 1 | 1 | 2 | ||||||||||||||||||
Other non-audit services | 1 | — | — | 1 | 1 | 1 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Total other services | 3 | 1 | 1 | 2 | 2 | 3 | ||||||||||||||||||
Tax compliance services | 1 | 1 | 2 | — | — | 1 | ||||||||||||||||||
Tax advisory services | — | — | 2 | |||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Total tax services | 1 | 1 | 4 | — | — | 1 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Total non-audit services | 4 | 2 | 5 | 2 | 2 | 4 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Total | 10 | 9 | 11 | 8 | 9 | 10 | ||||||||||||||||||
|
|
|
|
|
|
Reconciliation between audit and non-audit service fees is shown below:
All figures in £ millions | 2015 | 2014 | 2013 | 2017 | 2016 | 2015 | ||||||||||||||||||
Group audit fees including fees for attestation under section 404 of the Sarbanes-Oxley Act | 6 | 7 | 6 | 6 | 7 | 6 | ||||||||||||||||||
Non-audit fees | 4 | 2 | 5 | 2 | 2 | 4 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Total | 10 | 9 | 11 | 8 | 9 | 10 | ||||||||||||||||||
|
|
|
|
|
|
Pearson plc Consolidated Financial Statements
Notes to the consolidated financial statements continued
4. Operating expenses continued
Fees for attestation under section 404 of the Sarbanes-Oxley Act are allocated between fees payable for the audits of consolidated and subsidiary accounts.
Included in non-audit fees in 2015 are amounts related to carve outcarve-out audits for disposals of £1m.£1m (2016: £1m, 2015: £1m).
5. Employee information
All figures in £ millions | Notes | 2015 | 2014 restated | 2013 restated | ||||||||||||
Employee benefit expense | ||||||||||||||||
Wages and salaries (including termination benefits and restructuring costs) | 1,507 | 1,607 | 1,697 | |||||||||||||
Social security costs | 124 | 122 | 124 | |||||||||||||
Share-based payment costs | 26 | 26 | 32 | 37 | ||||||||||||
Retirement benefits – defined contribution plans | 25 | 66 | 61 | 58 | ||||||||||||
Retirement benefits – defined benefit plans | 25 | 19 | 21 | 22 | ||||||||||||
Other post-retirement benefits | 25 | — | (11 | ) | — | |||||||||||
|
|
|
|
|
| |||||||||||
Total | 1,742 | 1,832 | 1,938 | |||||||||||||
|
|
|
|
|
|
Notes to the consolidated financial statements continued
5. Employee information continued
All figures in £ millions | Notes | 2017 | 2016 | 2015 | ||||||||||||
Employee benefit expense | ||||||||||||||||
Wages and salaries (including termination costs) | 1,567 | 1,661 | 1,507 | |||||||||||||
Social security costs | 130 | 124 | 124 | |||||||||||||
Share-based payment costs | 26 | 33 | 22 | 26 | ||||||||||||
Retirement benefits – defined contribution plans | 25 | 57 | 67 | 66 | ||||||||||||
Retirement benefits – defined benefit plans | 25 | 19 | 16 | 19 | ||||||||||||
Other post-retirement medical benefits | 25 | (1 | ) | (2 | ) | — | ||||||||||
|
|
|
|
|
| |||||||||||
Total | 1,805 | 1,888 | 1,742 | |||||||||||||
|
|
|
|
|
|
The details of the emoluments of the directorsDirectors of Pearson plc are shown in the report on directors’Directors’ remuneration.
Average number employed | 2015 | 2014 restated | 2013 restated | 2017 | 2016 | 2015 | ||||||||||||||||||
Employee numbers | ||||||||||||||||||||||||
North America | 19,951 | 20,927 | 21,856 | 16,295 | 16,841 | 19,951 | ||||||||||||||||||
Core | 5,936 | 6,139 | 7,075 | 5,291 | 5,664 | 5,936 | ||||||||||||||||||
Growth | 11,114 | 11,406 | 10,768 | 8,268 | 9,868 | 11,114 | ||||||||||||||||||
Other | 264 | 182 | 187 | 485 | 346 | 264 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Continuing operations | 37,265 | 38,654 | 39,886 | |||||||||||||||||||||
Total | 30,339 | 32,719 | 37,265 | |||||||||||||||||||||
|
|
|
|
|
|
The employee benefit expense relating to discontinued operations was £132m (2014: £151m, 2013: £330m)£nil (2016: £nil, 2015: £132m) and the average number employed was 2,282 (2014: 2,295, 2013: 5,821)nil (2016: nil, 2015: 2,282).
Pearson plc Consolidated Financial Statements
Notes to the consolidated financial statements continued
6. Net finance costs
All figures in £ millions | Notes | 2015 | 2014 restated | 2013 restated | Notes | 2017 | 2016 | 2015 | ||||||||||||||||||||||||
Interest payable | (61 | ) | (81 | ) | (81 | ) | (99 | ) | (74 | ) | (61 | ) | ||||||||||||||||||||
Net finance costs in respect of retirement benefits | — | — | (3 | ) | ||||||||||||||||||||||||||||
Net foreign exchange losses | (36 | ) | (53 | ) | — | — | (21 | ) | (36 | ) | ||||||||||||||||||||||
Finance cost of put options, deferred consideration associated with acquisitions and other interest charges related to transactions | — | — | (9 | ) | ||||||||||||||||||||||||||||
Derivatives not in hedging relationships | (3 | ) | (6 | ) | (17 | ) | ||||||||||||||||||||||||||
Finance costs associated with transactions | (6 | ) | — | — | ||||||||||||||||||||||||||||
Derivatives not in a hedge relationship | (5 | ) | (2 | ) | (3 | ) | ||||||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||
Finance costs | (100 | ) | (140 | ) | (110 | ) | (110 | ) | (97 | ) | (100 | ) | ||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||
Interest receivable | 15 | 17 | 10 | 20 | 15 | 15 | ||||||||||||||||||||||||||
Net finance income in respect of retirement benefits | 25 | 4 | 1 | — | 25 | 3 | 11 | 4 | ||||||||||||||||||||||||
Net foreign exchange gains | 43 | 17 | 22 | 44 | 1 | 43 | ||||||||||||||||||||||||||
Financial instruments in a hedging relationship | — | — | 1 | |||||||||||||||||||||||||||||
Derivatives not in hedging relationships | 9 | 12 | 4 | |||||||||||||||||||||||||||||
Derivatives not in a hedge relationship | 12 | 10 | 9 | |||||||||||||||||||||||||||||
Derivatives in a hedge relationship | 1 | — | — | |||||||||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||
Finance income | 71 | 47 | 37 | 80 | 37 | 71 | ||||||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||
Net finance costs | (29 | ) | (93 | ) | (73 | ) | (30 | ) | (60 | ) | (29 | ) | ||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||
Analysed as: | ||||||||||||||||||||||||||||||||
Net interest payable | (46 | ) | (64 | ) | (71 | ) | ||||||||||||||||||||||||||
Other net finance income/(costs) | 17 | (29 | ) | (2 | ) | |||||||||||||||||||||||||||
|
|
| ||||||||||||||||||||||||||||||
Total net finance costs | (29 | ) | (93 | ) | (73 | ) | ||||||||||||||||||||||||||
|
|
|
Included in interest receivable is £1m (2014:(2016: £1m, 2013: £nil)2015: £1m) of interest receivable from related parties. There was a net movement of £nil£1m on fair value hedges in 2015 (2014:2017 (2016: £nil, 2013: net gain of £1m)2015: £nil), comprising a gain of £22m (2014:£37m (2016: loss of £27m, 2013:£4m, 2015: gain of £95m)£22m) on the underlying bonds, offset by a loss of £22m (2014:£36m (2016: gain of £27m, 2013:£4m, 2015: loss of £94m)£22m) on the related derivative financial instruments.
Notes to the consolidated financial statements continued
7. Income tax
All figures in £ millions | Notes | 2015 | 2014 restated | 2013 restated | Notes | 2017 | 2016 | 2015 | ||||||||||||||||||||||||
Current tax | ||||||||||||||||||||||||||||||||
Charge in respect of current year | (155 | ) | (96 | ) | (130 | ) | (121 | ) | (66 | ) | (155 | ) | ||||||||||||||||||||
Adjustments in respect of prior years | 42 | 30 | (7 | ) | (2 | ) | 27 | 42 | ||||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||
Total current tax charge | (113 | ) | (66 | ) | (137 | ) | (123 | ) | (39 | ) | (113 | ) | ||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||
Deferred tax | ||||||||||||||||||||||||||||||||
In respect of temporary differences | 185 | 8 | 14 | 96 | 277 | 185 | ||||||||||||||||||||||||||
Other adjustments in respect of prior years | 9 | 2 | 35 | 14 | (16 | ) | 9 | |||||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||
Total deferred tax credit | 13 | 194 | 10 | 49 | 13 | 110 | 261 | 194 | ||||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||
Total tax credit/(charge) | 81 | (56 | ) | (88 | ) | |||||||||||||||||||||||||||
Total tax (charge)/credit | (13 | ) | 222 | 81 | ||||||||||||||||||||||||||||
|
|
|
|
|
|
The adjustments in respect of prior years in 2015, 2014both 2017 and 2013 mainly relate2016 primarily arise from revising the previous year’s reported tax provision to changesreflect the tax returns subsequently filed. This results in estimates arising from uncertaina change between deferred and current tax positions following agreement of historicalas well as an absolute benefit to the total tax positions.charge.
The tax on the Group’s profit/(loss)/profit before tax differs from the theoretical amount that would arise using the UK tax rate as follows:follows. Information for 2016 has been re-presented to give additional disclosure.
Pearson plc Consolidated Financial Statements
Notes to the consolidated financial statements continued
7. Income tax continued
All figures in £ millions | 2015 | 2014 restated | 2013 restated | 2017 | 2016 | 2015 | ||||||||||||||||||
(Loss)/profit before tax | (433 | ) | 255 | 358 | ||||||||||||||||||||
Tax calculated at UK rate (2015: 20.25%, 2014: 21.5%) | 88 | (55 | ) | (84 | ) | |||||||||||||||||||
Profit/(loss) before tax | 421 | (2,557 | ) | (433 | ) | |||||||||||||||||||
Tax calculated at UK rate (2017: 19.25%, 2016: 20%, 2015: 20.25%) | (81 | ) | 511 | 88 | ||||||||||||||||||||
Effect of overseas tax rates | 52 | (10 | ) | (13 | ) | 15 | 424 | 52 | ||||||||||||||||
Joint venture and associate income reported net of tax | 10 | 7 | 7 | 15 | 19 | 10 | ||||||||||||||||||
Intangible impairment not subject to tax | — | (722 | ) | (60 | ) | |||||||||||||||||||
Intra-group financing benefit | 26 | 34 | 18 | |||||||||||||||||||||
Movement in provisions for tax uncertainties | 49 | (37 | ) | 30 | ||||||||||||||||||||
Impact of US tax reform | (1 | ) | — | — | ||||||||||||||||||||
Net expense not subject to tax | (66 | ) | (11 | ) | (14 | ) | (39 | ) | (8 | ) | (10 | ) | ||||||||||||
Gains and losses on sale of businesses not subject to tax | (32 | ) | — | (6 | ) | 8 | 15 | (32 | ) | |||||||||||||||
Unutilised tax losses | (22 | ) | (19 | ) | (7 | ) | ||||||||||||||||||
Utilisation of previously unrecognised tax losses and credits | — | — | 1 | (1 | ) | — | — | |||||||||||||||||
Unrecognised tax losses | (16 | ) | (25 | ) | (22 | ) | ||||||||||||||||||
Adjustments in respect of prior years | 51 | 32 | 28 | 12 | 11 | 7 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Total tax credit/(charge) | 81 | (56 | ) | (88 | ) | |||||||||||||||||||
Total tax (charge)/credit | (13 | ) | 222 | 81 | ||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
UK | (25 | ) | — | (14 | ) | (36 | ) | 46 | (25 | ) | ||||||||||||||
Overseas | 106 | (56 | ) | (74 | ) | 23 | 176 | 106 | ||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Total tax credit/(charge) | 81 | (56 | ) | (88 | ) | |||||||||||||||||||
Total tax (charge)/credit | (13 | ) | 222 | 81 | ||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Tax rate reflected in earnings | 18.7 | % | 22.0 | % | 24.6 | % | 3.1 | % | 8.7 | % | 18.7 | % |
The impact of US tax reform includes a benefit from revaluation of deferred tax balances to the reduced federal rate of £5m and a repatriation tax charge of £6m. The Group continues to analyse the detail of new legislation and this may result in revisions to these impacts.
Factors which may affect future tax charges include changes in tax legislation, transfer pricing regulations, the level and mix of profitability in different countries, and settlements with tax authorities.
The movement in provisions for tax uncertainties primarily reflects releases due to the expiry of relevant statutes of limitation. The current tax liability of £231m (2016: £224m) includes £280m (2016: £322m) of provisions for tax uncertainties principally in respect of a number of issues in the US, the UK and China. The issues provided for include the allocation between territories of proceeds of historic business disposals, and the potential disallowance of intra-group recharges and interest expense. The Group is currently under audit in a number of countries, and the timing of any resolution of these audits is uncertain. Of the balance of £280m, £38m relates to 2013 and earlier and is mostly under audit. In most countries tax years up to and including 2013 are now statute barred from examination by tax authorities. Of the remaining balance, £70m relates to 2014, £86m to 2015, £57m to 2016 and £29m to 2017. If relevant enquiry windows pass with no audit, management believes it is reasonably possible that provision levels will reduce by an estimated £60m within the next 12 months.
In 2016 the Group impaired US goodwill (see note 11). The majority of this impairment charge is not deductible for tax purposes.
Pearson plc Consolidated Financial Statements
Notes to the consolidated financial statements continued
7. Income tax continued
The tax (charge)/benefit recognised in other comprehensive income is as follows:
All figures in £ millions | 2015 | 2014 | 2013 | 2017 | 2016 | 2015 | ||||||||||||||||||
Net exchange differences on translation of foreign operations | 5 | (6 | ) | 6 | 9 | (5 | ) | 5 | ||||||||||||||||
Fair value gain on other financial assets | (4 | ) | — | — | ||||||||||||||||||||
Remeasurement of retirement benefit obligations | (24 | ) | (1 | ) | (23 | ) | (42 | ) | 58 | (24 | ) | |||||||||||||
|
|
|
|
|
| |||||||||||||||||||
(19 | ) | (7 | ) | (17 | ) | (37 | ) | 53 | (19 | ) | ||||||||||||||
|
|
|
|
|
|
A tax charge of £1m (2014:£nil (2016: tax charge £3m, 2013:£nil, 2015: tax charge £nil)£1m) relating to share-based payments has been recognised directly in equity.
Notes to the consolidated financial statements continued
8. Earnings per share
Basic
Basic earnings per share is calculated by dividing the profit attributable to equity shareholders of the company by the weighted average number of ordinary shares in issue during the year, excluding ordinary shares purchased by the company and held as treasury shares.
Diluted
Diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares to take account of all dilutive potential ordinary shares and adjusting the profit attributable, if applicable, to account for any tax consequences that might arise from conversion of those shares.
All figures in £ millions | Notes | 2015 | 2014 restated | 2013 restated | Notes | 2017 | 2016 | 2015 | ||||||||||||||||||||||||
(Loss)/profit for the year from continuing operations | (352 | ) | 199 | 270 | ||||||||||||||||||||||||||||
Earnings/(loss) for the year from continuing operations | 408 | (2,335 | ) | (352 | ) | |||||||||||||||||||||||||||
Non-controlling interest | — | 1 | (1 | ) | (2 | ) | (2 | ) | — | |||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||
Earnings from continuing operations | (352 | ) | 200 | 269 | ||||||||||||||||||||||||||||
Earnings/(loss) from continuing operations | 406 | (2,337 | ) | (352 | ) | |||||||||||||||||||||||||||
Profit for the year from discontinued operations | 3 | 1,175 | 271 | 269 | 2 | — | — | 1,175 | ||||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||
Earnings | 823 | 471 | 538 | |||||||||||||||||||||||||||||
Earnings/(loss) attributable to equity holders of the company | 406 | (2,337 | ) | 823 | ||||||||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||
Weighted average number of shares (millions) | 813.3 | 810.9 | 807.8 | 813.4 | 814.8 | 813.3 | ||||||||||||||||||||||||||
Effect of dilutive share options (millions) | — | 1.0 | 1.1 | 0.3 | — | — | ||||||||||||||||||||||||||
Weighted average number of shares (millions) for diluted earnings | 813.3 | 811.9 | 808.9 | 813.7 | 814.8 | 813.3 | ||||||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||
Earnings per share from continuing and discontinued operations | ||||||||||||||||||||||||||||||||
Earnings/(loss) per share from continuing and discontinued operations | ||||||||||||||||||||||||||||||||
Basic | 101.2p | 58.1p | 66.6p | 49.9p | (286.8)p | 101.2p | ||||||||||||||||||||||||||
Diluted | 101.2p | 58.0p | 66.5p | 49.9p | (286.8)p | 101.2p | ||||||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||
(Loss)/earnings per share from continuing operations | ||||||||||||||||||||||||||||||||
Earnings/(loss) per share from continuing operations | ||||||||||||||||||||||||||||||||
Basic | (43.3)p | 24.7p | 33.3p | 49.9p | (286.8)p | (43.3)p | ||||||||||||||||||||||||||
Diluted | (43.3)p | 24.6p | 33.3p | 49.9p | (286.8)p | (43.3)p | ||||||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||
Earnings per share from discontinued operations | ||||||||||||||||||||||||||||||||
Basic | 144.5p | 33.4p | 33.3p | — | — | 144.5p | ||||||||||||||||||||||||||
Diluted | 144.5p | 33.4p | 33.3p | — | — | 144.5p | ||||||||||||||||||||||||||
|
|
|
|
|
|
Pearson plc Consolidated Financial Statements
Notes to the consolidated financial statements continued
9. Dividends
All figures in £ millions | 2015 | 2014 | 2013 | |||||||||
Final paid in respect of prior year 34.0p (2014: 32.0p, 2013: 30.0p) | 277 | 259 | 242 | |||||||||
Interim paid in respect of current year 18.0p (2014: 17.0p, 2013: 16.0p) | 146 | 138 | 130 | |||||||||
|
|
|
|
|
| |||||||
423 | 397 | 372 | ||||||||||
|
|
|
|
|
|
All figures in £ millions | 2017 | 2016 | 2015 | |||||||||
Final paid in respect of prior year 34.0p (2016: 34.0p, 2015: 34.0p) | 277 | 277 | 277 | |||||||||
Interim paid in respect of current year 5.0p (2016: 18.0p, 2015: 18.0p) | 41 | 147 | 146 | |||||||||
|
|
|
|
|
| |||||||
318 | 424 | 423 | ||||||||||
|
|
|
|
|
|
The directorsDirectors are proposing a final dividend in respect of the financial year ended 31 December 20152017 of 34.0p12.0p per share which will absorb an estimated £277m£93m of shareholders’ funds. It will be paid on 611 May 20162018 to shareholders who are on the register of members on 86 April 2016.2018. These financial statements do not reflect this dividend.
10. Property, plant and equipment
All figures in £ millions | Land and buildings | Plant and equipment | Assets in course of construction | Total | ||||||||||||
Cost | ||||||||||||||||
At 1 January 2016 | 359 | 508 | 22 | 889 | ||||||||||||
Exchange differences | 44 | 83 | 2 | 129 | ||||||||||||
Additions | 26 | 59 | 4 | 89 | ||||||||||||
Disposals | (26 | ) | (100 | ) | — | (126 | ) | |||||||||
Disposal through business disposal | (1 | ) | (2 | ) | — | (3 | ) | |||||||||
Reclassifications | (4 | ) | 12 | (8 | ) | — | ||||||||||
|
|
|
|
|
|
|
| |||||||||
At 31 December 2016 | 398 | 560 | 20 | 978 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Exchange differences | (20 | ) | (29 | ) | (2 | ) | (51 | ) | ||||||||
Additions | 26 | 40 | 24 | 90 | ||||||||||||
Disposals | (13 | ) | (34 | ) | — | (47 | ) | |||||||||
Disposal through business disposal | (11 | ) | (5 | ) | — | (16 | ) | |||||||||
Reclassifications | 5 | 8 | (13 | ) | — | |||||||||||
Transfer to intangible assets | — | (11 | ) | — | (11 | ) | ||||||||||
Transfer to assets classified as held for sale | (55 | ) | (2 | ) | — | (57 | ) | |||||||||
|
|
|
|
|
|
|
| |||||||||
At 31 December 2017 | 330 | 527 | 29 | 886 | ||||||||||||
|
|
|
|
|
|
|
|
Pearson plc Consolidated Financial Statements
Notes to the consolidated financial statements continued
10. Property, plant and equipment continued
All figures in £ millions | Land and buildings | Plant and equipment | Assets in course of construction | Total | ||||||||||||
Cost | ||||||||||||||||
At 1 January 2014 | 375 | 568 | 32 | 975 | ||||||||||||
Exchange differences | 11 | 17 | — | 28 | ||||||||||||
Additions | 10 | 58 | 19 | 87 | ||||||||||||
Disposals | (9 | ) | (46 | ) | (2 | ) | (57 | ) | ||||||||
Acquisition through business combination | — | 2 | — | 2 | ||||||||||||
Disposal through business disposal | — | (1 | ) | — | (1 | ) | ||||||||||
Reclassifications | 1 | 3 | (4 | ) | — | |||||||||||
Transfer to software | — | — | (16 | ) | (16 | ) | ||||||||||
|
|
|
|
|
|
|
| |||||||||
At 31 December 2014 | 388 | 601 | 29 | 1,018 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Exchange differences | 8 | 10 | 1 | 19 | ||||||||||||
Additions | 15 | 42 | 25 | 82 | ||||||||||||
Disposals | (20 | ) | (86 | ) | — | (106 | ) | |||||||||
Acquisition through business combination | — | — | — | — | ||||||||||||
Disposal through business disposal | (48 | ) | (76 | ) | — | (124 | ) | |||||||||
Reclassifications | 16 | 17 | (33 | ) | — | |||||||||||
|
|
|
|
|
|
|
| |||||||||
At 31 December 2015 | 359 | 508 | 22 | 889 | ||||||||||||
|
|
|
|
|
|
|
|
All figures in £ millions | Land and buildings | Plant and equipment | Assets in course of construction | Total | Land and buildings | Plant and equipment | Assets in course of construction | Total | ||||||||||||||||||||||||
Depreciation | ||||||||||||||||||||||||||||||||
At 1 January 2014 | (210 | ) | (423 | ) | — | (633 | ) | |||||||||||||||||||||||||
At 1 January 2016 | (192 | ) | (377 | ) | — | (569 | ) | |||||||||||||||||||||||||
Exchange differences | (7 | ) | (15 | ) | — | (22 | ) | (26 | ) | (62 | ) | — | (88 | ) | ||||||||||||||||||
Charge for the year | (23 | ) | (51 | ) | — | (74 | ) | (34 | ) | (61 | ) | — | (95 | ) | ||||||||||||||||||
Disposals | 9 | 36 | — | 45 | 22 | 95 | — | 117 | ||||||||||||||||||||||||
Reclassifications | 1 | (1 | ) | — | — | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
At 31 December 2014 | (231 | ) | (453 | ) | — | (684 | ) | |||||||||||||||||||||||||
At 31 December 2016 | (229 | ) | (406 | ) | — | (635 | ) | |||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Exchange differences | (5 | ) | (12 | ) | — | (17 | ) | 12 | 23 | — | 35 | |||||||||||||||||||||
Charge for the year | (22 | ) | (53 | ) | — | (75 | ) | (35 | ) | (55 | ) | — | (90 | ) | ||||||||||||||||||
Disposals | 18 | 82 | — | 100 | 9 | 26 | — | 35 | ||||||||||||||||||||||||
Disposal through business disposal | 48 | 59 | — | 107 | 6 | 3 | — | 9 | ||||||||||||||||||||||||
Transfer to assets classified as held for sale | 40 | 1 | — | 41 | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
At 31 December 2015 | (192 | ) | (377 | ) | — | (569 | ) | |||||||||||||||||||||||||
At 31 December 2017 | (197 | ) | (408 | ) | — | (605 | ) | |||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Carrying amounts | ||||||||||||||||||||||||||||||||
At 1 January 2014 | 165 | 145 | 32 | 342 | ||||||||||||||||||||||||||||
At 31 December 2014 | 157 | 148 | 29 | 334 | ||||||||||||||||||||||||||||
At 1 January 2016 | 167 | 131 | 22 | 320 | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
At 31 December 2015 | 167 | 131 | 22 | 320 | ||||||||||||||||||||||||||||
At 31 December 2016 | 169 | 154 | 20 | 343 | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
At 31 December 2017 | 133 | 119 | 29 | 281 | ||||||||||||||||||||||||||||
|
|
|
|
Depreciation expense of £19m (2014: £16m, 2013: £24m)£23m (2016: £21m) has been included in the income statement in cost of goods sold and £50m (2014: £51m, 2013: £49m)£67m (2016: £74m) in operating expenses. In 2015 £6m (2014: £7m, 2013: £9m) relates to discontinued operations.
The Group leases certain equipment under a number of finance lease agreements. The net carrying amount of leased plant and equipment included within property, plant and equipment was £8m (2014: £13m)£9m (2016: £10m).
Pearson plc Consolidated Financial Statements
Notes to the consolidated financial statements continued
11. Intangible assets
All figures in £ millions | Goodwill | Software | Acquired customer lists, contracts and relationships | Acquired trademarks and brands | Acquired publishing rights | Other intangibles acquired | Total | |||||||||||||||||||||
Cost | ||||||||||||||||||||||||||||
At 1 January 2014 | 4,666 | 469 | 855 | 237 | 198 | 398 | 6,823 | |||||||||||||||||||||
Exchange differences | 198 | 17 | 34 | 5 | — | 14 | 268 | |||||||||||||||||||||
Impairment | (67 | ) | — | — | — | — | — | (67 | ) | |||||||||||||||||||
Additions – internal development | — | 54 | — | — | — | — | 54 | |||||||||||||||||||||
Additions – purchased | — | 53 | — | — | — | — | 53 | |||||||||||||||||||||
Disposals | — | (7 | ) | — | — | — | — | (7 | ) | |||||||||||||||||||
Acquisition through business combination | 238 | — | 5 | 69 | — | 186 | 498 | |||||||||||||||||||||
Disposal through business disposal | (5 | ) | (5 | ) | — | (3 | ) | (1 | ) | — | (14 | ) | ||||||||||||||||
Transfer from PPE | — | 16 | — | — | — | — | 16 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
At 31 December 2014 | 5,030 | 597 | 894 | 308 | 197 | 598 | 7,624 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Exchange differences | 105 | 17 | 25 | (17 | ) | (7 | ) | (40 | ) | 83 | ||||||||||||||||||
Impairment | (826 | ) | — | — | — | — | — | (826 | ) | |||||||||||||||||||
Additions – internal development | — | 125 | — | — | — | — | 125 | |||||||||||||||||||||
Additions – purchased | — | 36 | — | — | — | — | 36 | |||||||||||||||||||||
Disposals | — | (18 | ) | — | (4 | ) | (10 | ) | (29 | ) | (61 | ) | ||||||||||||||||
Acquisition through business combination | — | — | — | — | — | 1 | 1 | |||||||||||||||||||||
Disposal through business disposal | (175 | ) | (138 | ) | (59 | ) | (6 | ) | — | (21 | ) | (399 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
At 31 December 2015 | 4,134 | 619 | 860 | 281 | 180 | 509 | 6,583 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All figures in £ millions | Goodwill | Software | Acquired customer lists, contracts and relationships | Acquired trademarks and brands | Acquired publishing rights | Other intangibles acquired | Total | |||||||||||||||||||||
Amortisation | ||||||||||||||||||||||||||||
At 1 January 2014 | — | (316 | ) | (249 | ) | (93 | ) | (148 | ) | (216 | ) | (1,022 | ) | |||||||||||||||
Exchange differences | — | (13 | ) | (11 | ) | (3 | ) | — | (12 | ) | (39 | ) | ||||||||||||||||
Impairment | — | — | (6 | ) | (2 | ) | — | (2 | ) | (10 | ) | |||||||||||||||||
Charge for the year | — | (63 | ) | (83 | ) | (25 | ) | (12 | ) | (67 | ) | (250 | ) | |||||||||||||||
Disposals | — | 5 | — | — | — | — | 5 | |||||||||||||||||||||
Disposal through business disposal | — | 1 | — | 1 | — | — | 2 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
At 31 December 2014 | — | (386 | ) | (349 | ) | (122 | ) | (160 | ) | (297 | ) | (1,314 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Exchange differences | — | (14 | ) | (8 | ) | 1 | 6 | (6 | ) | (21 | ) | |||||||||||||||||
Impairment | — | — | (13 | ) | (1 | ) | (9 | ) | — | (23 | ) | |||||||||||||||||
Charge for the year | — | (74 | ) | (99 | ) | (40 | ) | (10 | ) | (53 | ) | (276 | ) | |||||||||||||||
Disposals | 18 | — | 4 | 10 | 29 | 61 | ||||||||||||||||||||||
Disposal through business disposal | — | 99 | 39 | 3 | — | 13 | 154 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
At 31 December 2015 | — | (357 | ) | (430 | ) | (155 | ) | (163 | ) | (314 | ) | (1,419 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Carrying amounts | ||||||||||||||||||||||||||||
At 1 January 2014 | 4,666 | 153 | 606 | 144 | 50 | 182 | 5,801 | |||||||||||||||||||||
At 31 December 2014 | 5,030 | 211 | 545 | 186 | 37 | 301 | 6,310 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
At 31 December 2015 | 4,134 | 262 | 430 | 126 | 17 | 195 | 5,164 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All figures in £ millions | Goodwill | Software | Acquired customer lists, contracts and relationships | Acquired trademarks and brands | Acquired publishing rights | Other intangibles acquired | Total | |||||||||||||||||||||
Cost | ||||||||||||||||||||||||||||
At 1 January 2016 | 4,134 | 619 | 860 | 281 | 180 | 509 | 6,583 | |||||||||||||||||||||
Exchange differences | 752 | 85 | 157 | 65 | 31 | 135 | 1,225 | |||||||||||||||||||||
Impairment | (2,548 | ) | — | — | — | — | — | (2,548 | ) | |||||||||||||||||||
Additions – internal development | — | 132 | — | — | — | — | 132 | |||||||||||||||||||||
Additions – purchased | — | 25 | — | — | — | — | 25 | |||||||||||||||||||||
Disposals | — | (49 | ) | (37 | ) | — | — | — | (86 | ) | ||||||||||||||||||
Acquisition through business combination | 3 | — | — | 7 | — | 3 | 13 | |||||||||||||||||||||
Disposal through business disposal | — | — | (6 | ) | — | — | (47 | ) | (53 | ) | ||||||||||||||||||
Transfer to intangible assets – | — | (14 | ) | — | — | — | — | (14 | ) | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
At 31 December 2016 | 2,341 | 798 | 974 | 353 | 211 | 600 | 5,277 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Exchange differences | (148 | ) | (46 | ) | (74 | ) | (26 | ) | (6 | ) | (50 | ) | (350 | ) | ||||||||||||||
Impairment | — | — | — | — | — | — | — | |||||||||||||||||||||
Additions – internal development | — | 133 | — | — | — | — | 133 | |||||||||||||||||||||
Additions – purchased | — | 17 | — | — | — | — | 17 | |||||||||||||||||||||
Disposals | — | (23 | ) | — | — | — | — | (23 | ) | |||||||||||||||||||
Disposal through business disposal | — | (4 | ) | (9 | ) | (19 | ) | — | (27 | ) | (59 | ) | ||||||||||||||||
Transfer from property, plant and equipment | — | 11 | — | — | — | — | 11 | |||||||||||||||||||||
Transfer to assets classified as held for sale | (163 | ) | (4 | ) | (2 | ) | (27 | ) | (21 | ) | (34 | ) | (251 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
At 31 December 2017 | 2,030 | 882 | 889 | 281 | 184 | 489 | 4,755 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pearson plc Consolidated Financial Statements
Notes to the consolidated financial statements continued
11. Intangible assets continued
All figures in £ millions | Goodwill | Software | Acquired customer lists, contracts and relationships | Acquired trademarks and brands | Acquired publishing rights | Other intangibles acquired | Total | |||||||||||||||||||||
Amortisation | ||||||||||||||||||||||||||||
At 1 January 2016 | — | (357 | ) | (430 | ) | (155 | ) | (163 | ) | (314 | ) | (1,419 | ) | |||||||||||||||
Exchange differences | — | (60 | ) | (83 | ) | (32 | ) | (27 | ) | (75 | ) | (277 | ) | |||||||||||||||
Charge for the year | — | (84 | ) | (85 | ) | (22 | ) | (8 | ) | (70 | ) | (269 | ) | |||||||||||||||
Disposals | — | 38 | 37 | — | — | — | 75 | |||||||||||||||||||||
Disposal through business disposal | — | — | 6 | — | — | 47 | 53 | |||||||||||||||||||||
Transfer to intangible assets – | — | 2 | — | — | — | — | 2 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
At 31 December 2016 | — | (461 | ) | (555 | ) | (209 | ) | (198 | ) | (412 | ) | (1,835 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Exchange differences | — | 30 | 43 | 13 | 4 | 36 | 126 | |||||||||||||||||||||
Charge for the year | — | (85 | ) | (77 | ) | (18 | ) | (3 | ) | (40 | ) | (223 | ) | |||||||||||||||
Disposals | — | 21 | — | — | — | — | 21 | |||||||||||||||||||||
Disposal through business disposal | — | 2 | 8 | 18 | — | 22 | 50 | |||||||||||||||||||||
Transfer to assets classified as held for sale | — | — | 1 | 16 | 19 | 34 | 70 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
At 31 December 2017 | — | (493 | ) | (580 | ) | (180 | ) | (178 | ) | (360 | ) | (1,791 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Carrying amounts | ||||||||||||||||||||||||||||
At 1 January 2016 | 4,134 | 262 | 430 | 126 | 17 | 195 | 5,164 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
At 31 December 2016 | 2,341 | 337 | 419 | 144 | 13 | 188 | 3,442 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
At 31 December 2017 | 2,030 | 389 | 309 | 101 | 6 | 129 | 2,964 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
The goodwill carrying value of £4,134m£2,030m relates to acquisitions completed after 1 January 1998. Prior to 1 January 1998 all goodwill was written off to reserves on the date of acquisition. For acquisitions completed between 1 January 1998 and 31 December 2002, no value was ascribed to intangibles other than goodwill and the goodwill on each acquisitionwhich was amortised over a period of up to 20 years. On adoption of IFRS on 1 January 2003, the Group chose not to restate the goodwill balance and at that date the balance was frozen (i.e. amortisation ceased). If goodwill had been restated, then a significant value would have been ascribed to other intangible assets, which would be subject to amortisation, and the carrying value of goodwill would be significantly lower. For acquisitions completed after 1 January 2003, value has been ascribed to other intangible assets which are amortised.
Other intangible assets
Other intangibles acquired include content, technology and software rights.
Intangible assets are valued separately for each acquisition and the primary method of valuation used is the discounted cash flow method. The majority of acquired intangibles are amortised using an amortisation profile based on the projected cash flows underlying the acquisition date valuation of the intangible asset, which generally results in a larger proportion of amortisation being recognised in the early years of the asset’s life. The Group keeps the expected pattern of consumption under review.
Pearson plc Consolidated Financial Statements
Notes to the consolidated financial statements continued
11. Intangible assets continued
Other intangible assets continued
Amortisation of £13m (2014: £12m, 2013: £15m)£17m (2016: £17m) is included in the income statement in cost of goods sold and £248m (2014: £222m, 2013: £196m)£206m (2016: £252m) in operating expenses. In 2015, £16m (2014: £15m, 2013: £16m) of amortisation relates to discontinued operations.
The range of useful economic lives for each major class of intangible asset (excluding goodwill and software) is shown below:
| ||
Class of intangible asset | Useful economic life | |
Acquired customer lists, contracts and relationships | 3–20 years | |
Acquired trademarks and brands | 2–20 years | |
Acquired publishing rights | 5–20 years | |
Other intangibles acquired | 2–20 years |
The expected amortisation profile of acquired intangible assets is shown below:
2015 | ||||||||||||||||
All figures in £ millions | One to five years | Six to ten years | More than ten years | Total | ||||||||||||
Class of intangible asset | ||||||||||||||||
Acquired customer lists, contracts and relationships | 268 | 122 | 40 | 430 | ||||||||||||
Acquired trademarks and brands | 56 | 47 | 23 | 126 | ||||||||||||
Acquired publishing rights | 15 | 2 | — | 17 | ||||||||||||
Other intangibles acquired | 146 | 43 | 6 | 195 |
Notes to the consolidated financial statements continued
11. Intangible assets continued
2017 | ||||||||||||||||
All figures in £ millions | One to five years | Six to ten years | More than ten years | Total | ||||||||||||
Class of intangible asset | ||||||||||||||||
Acquired customer lists, contracts and relationships | 215 | 75 | 19 | 309 | ||||||||||||
Acquired trademarks and brands | 56 | 31 | 14 | 101 | ||||||||||||
Acquired publishing rights | 5 | 1 | — | 6 | ||||||||||||
Other intangibles acquired | 97 | 32 | — | 129 |
Impairment tests for cash-generating units (CGUs) containing goodwill
Impairment tests have been carried out where appropriate as described below.
Following a reorganisation of the business effective 1 January 2014 goodwill Goodwill was allocated to CGUs, or an aggregation of CGUs, where goodwill could not be reasonably allocated to individual business units. Impairment reviews were conducted on these CGUs. The recoverable amount for each unit exceeds its carrying value therefore there is no impairment in 2017. The carrying value of the goodwill in each of the CGUs after the impact of impairments, is summarised below:
All figures in £ millions | 2015 | 2014 | 2017 | 2016 | ||||||||||||
North America | 3,155 | 3,422 | 1,013 | 1,295 | ||||||||||||
Core | 635 | 618 | 641 | 633 | ||||||||||||
Growth (includes Brazil, China, India and South Africa) | — | 612 | — | — | ||||||||||||
Pearson VUE | 344 | 327 | 376 | 413 | ||||||||||||
Financial Times Group | — | 51 | ||||||||||||||
|
|
|
| |||||||||||||
Total | 4,134 | 5,030 | 2,030 | 2,341 | ||||||||||||
|
|
|
|
The recoverable amount of each aggregated cash generating unit (CGU)CGU is based on fair value less costs of disposal or value in use calculations as appropriate.disposal. Goodwill is tested at least annually for impairment. Other than goodwill there are no intangible assets with indefinite lives. The goodwill is generally denominated in the currency of the relevant cash flows and therefore the impairment review is not materially sensitive to exchange rate fluctuations.
Following significant economic and market deterioration in
Pearson plc Consolidated Financial Statements
Notes to the Group’s operations in emerging markets and ongoing cyclical and policy-related pressures in the Group’s mature market operations, management’s expectations of future returns were revised down in the course of 2015. It was determined during the impairment review that the fair value less costs of disposal of the Growth, North America and Core CGUs no longer supported the carrying value of the goodwill. An impairment of £507m was booked in respect of the Group’s Growth operations, representing impairments of £269m in the Brazil CGU, £181m in the China CGU, £48m in the South Africa CGU and £9m in the Other Growth CGU, thereby bringing the carrying value of goodwill in those CGUs down to £nil. Impairments of £10m and £13m were also booked in respect of other acquired intangibles in the South Africa and Other Growth CGUs respectively, bringing their carrying value down to £nil. Impairments of £282m and £37m were also booked in respect of the North America and Core CGUs respectively, bringing the carrying value of the goodwill in those CGUs down to fair value less costs of disposal. Fair value less costs of disposal was determined using post-tax discount rates of 17.4% for Brazil, 11.0% for China, 13.6% for South Africa, 12.8% for Other Growth, 8.6% for North America and 8.7% for Core. Following the above impairments, the recoverable amounts of the Growth, North America and Core CGUs are £350m, £4,750m and £926m respectively.consolidated financial statements continued
11. Intangible assets continued
Key assumptions
For the purpose of estimating the fair value less costs of disposal of the CGUs, management has used an income approach based on present value techniques. The calculations use cash flow projections based on financial budgets approved by management covering a five-year period, management’s best estimate about future developments and market assumptions. The fair value less costs of disposal measurement is categorised as Level 3 on the fair value hierarchy. The key assumptions used by management in the fair value less costs of disposal calculations were:
Discount rates The discount rate is based on the risk-free rate for government bonds, adjusted for a risk premium to reflect the increased risk in investing in equities. The risk premium adjustment is assessed for each specific
Notes to the consolidated financial statements continued
11. Intangible assets continued
Key assumptions continued
CGU. The average post-tax discount rates range from 7.2%8.4% to 17.4%14.3%. Discount rates are lower for those businesses which operate in more mature markets with low inflation and higher for those operating in emerging markets with higher inflation.
Perpetuity growth rates A perpetuity growth rate of 2.0% (2014: 2.0%) was used for cash flows subsequent to the approved budget period for CGUs operating in mature markets. This perpetuity growth rate is a conservative rate and is considered to be lower than the long-term historical growth rates of the underlying territories in which the CGU operates and the long-term growth rate prospects of the sectors in which the CGU operates. CGU growth rates between 5.0%3.0% and 8.5%6.9% were used for cash flows subsequent to the approved budget period for CGUs operating in emerging markets with high inflation. These growth rates are also below the long-term historical growth rates in these markets.
The key assumptions used by management in setting the financial budgets for the initial five-year period were as follows:
Forecast sales growth rates Forecast sales growth rates are based on past experience adjusted for the strategic direction and near-term investment priorities within each CGU. Key factorsassumptions include USA and UK college enrolment rates, assessment growth rates, the success of new product launches, growth rates and economic conditions in emerging markets and the rate of growth in new services businesses.Online Program Management, Online Blended Learning and Professional Certification, stabilisation in UK Qualifications and US Assessments, and ongoing pressures in the US higher education courseware market. The five-year sales forecasts use average nominal growth rates between 1.1%3% and 1.6%6% for mature markets and between 0.1%5% and 5.6%14% for emerging markets with high inflation.
Operating profits Operating profits are forecast based on historical experience of operating margins, adjusted for the impact of changes to product costs and cost savingcost-saving initiatives, including the impact of the global restructuring programme planned in 2016.implementation of our cost efficiency programme.
Cash conversion Cash conversion is the ratio of operating cash flow to operating profit. Management forecasts cash conversion rates based on historical experience, adjusted for the impact of product investment priorities and the shift to digital and service based business.experience.
Sensitivities
The Group’s impairment review is sensitive to a change in assumptions used, most notably the discount rates and the perpetuity growth rates. As the
The carrying value of goodwill in the Growth market CGUs has beenwas written down to £nil the value of other intangible assets in Brazil and China is sensitive to any increase in discount rates or reduction in perpetuity growth rates. In the North America and Core CGUs goodwill has been written down to fair value less costs of disposal and any further increase in discount rates or reduction in perpetuity growth rates would give rise to further impairment. 2015.
A 0.1% increase in discount rates would cause the fair value less costs of disposal of the Brazil, China, North America and Core CGUsCGU to reduce by £3m, £5m, £120m£50m, the Core GGU by £17m and £25m respectively. the VUE CGU by £21m.
Pearson plc Consolidated Financial Statements
Notes to the consolidated financial statements continued
11. Intangible assets continued
Sensitivities continued
A 0.1% reduction in perpetuity growth rates would cause the fair value less costs of disposal of the Brazil, China, North America and Core CGUsCGU to reduce by £2m, £5m, £100m£39m, the Core CGU by £14m and £21m respectively. All CGUs which have been written down to fair value less costs of disposal arethe VUE CGU by £17m.
The Core CGU is highly sensitive to any reductions in short-term cash flows, whether driven by lower sales growth, lower operating profits or lower cash conversion. A 5% reduction in total annual operating profits, spread evenly across all CGUs, would give rise to an impairment of £29m£66m in the Growth CGUs, £241mCore CGU. An increase in discount rates or a reduction in perpetuity growth rates would also give rise to an impairment in the Core CGU. The North America CGU and £62mis no longer considered to be highly sensitive to changes in the Core CGU.
Notesimpairment assumptions, with increased headroom when compared to the consolidated financial statements continued2016.
11. Intangible assets continued
20142016 impairment tests
In 2014At the end of 2016, following deteriorationtrading in the market conditions forfinal quarter of the Group’s online tutoring business based in India,year, it was determinedbecame clear that the underlying issues in the courseUS higher education courseware business market were more severe than anticipated. These issues related to declining student enrolments, changes in buying patterns of students and correction of inventory levels by distributors and bookshops. As a result, in January 2017, strategic plans and estimates for future cash flows were revised and we determined during the goodwill impairment review that the fair value in useless costs of disposal of the IndiaNorth America CGU no longer supported the carrying value of thethis goodwill in that CGU. An impairment of £67m was booked, thereby bringing the carrying value ofand as a consequence impaired goodwill in the India CGU down to £nil. An impairment of £10m was also booked in respect of other acquired intangibles in that CGU, bringing their carrying value to £nil. The India CGU incorporates all the Group’s trading operations in India. A pre-tax discount rate of 13.6% was used to determine the value in use of the India CGU. No previous assessment had been made of the value in use of that CGU as the Group’s India operations, prior to the 1 January 2014 reorganisation, were previously part of a larger Emerging Markets aggregated CGU.by £2,548m.
12. Investments in joint ventures and associates
The amounts recognised in the balance sheet are as follows:
All figures in £ millions | 2015 | 2014 | 2017 | 2016 | ||||||||||||
Associates | 1,099 | 1,105 | 395 | 1,245 | ||||||||||||
Joint ventures | 4 | 13 | 3 | 2 | ||||||||||||
|
|
|
| |||||||||||||
Total | 1,103 | 1,118 | 398 | 1,247 | ||||||||||||
|
|
|
|
The amounts recognised in the income statement are as follows:
All figures in £ millions | 2015 | 2014 | ||||||
Associates | 72 | 54 | ||||||
Joint ventures | (4 | ) | (3 | ) | ||||
|
|
|
| |||||
Total | 68 | 51 | ||||||
|
|
|
|
Included within the 2015 results are discontinued operations consisting of £17m profit from associates (2014: £21m profit) and £1m loss from joint ventures (2014: £1m loss). For further information on discontinued operations and the profit on sale of associates and joint ventures, see notes 3 and 31.
All figures in £ millions | 2017 | 2016 | ||||||
Associates | 77 | 98 | ||||||
Joint ventures | 1 | (1 | ) | |||||
|
|
|
| |||||
Total | 78 | 97 | ||||||
|
|
|
|
Investment in associates
On 16 October 2015, the Group sold 39% of its 50% stake in The Economist (see note 31 for further information). As at 31 December 2015, the Group holds an 11% stake in The Economist which has been classified as an ‘Other financial asset’ (see note 15).
The Group has the following material associates:
Principal place of business | Ownership interest | Nature of relationship | Measurement method | |||||||||||||
Penguin Random House Ltd | UK/Global | % | See below | Equity | ||||||||||||
Penguin Random House LLC | US | % | See below | Equity |
Pearson plc Consolidated Financial Statements
Notes to the consolidated financial statements continued
12. Investments in joint ventures and associates continued
Investment in associates continued
On 1 July 2013, Penguin Random House was formed, upon the completion of an agreement between Pearson and Bertelsmann to merge their respective trade publishing companies, Penguin and Random House, with the parent companies owning 47% and 53% of the combined business respectively. On 5 October 2017, Pearson sold a 22% stake in Penguin Random House to Bertelsmann, retaining a 25% share (see note 31 for more information on disposal of associates). Pearson owns its 25% interest in Penguin Random House via 25% interests in each of the two entities listed in the table above. Despite the separate legal structures of the two Penguin Random House entities, Pearson regards Penguin Random House as one combined global business. Consequently, Pearson discloses Penguin Random House as one single operating segment and presents disclosures related to its interests in Penguin Random House on a combined basis.
The shareholder agreement includes
Notes to the consolidated financial statements continued
12. Investments in joint ventures and associates continued
Investment in associates continued
protection protective rights for Pearson as the minority shareholder, including rights to dividends. Management considers ownership percentage, boardBoard composition and the additional protective rights, and exercises judgement to determine that Pearson has significant influence over Penguin Random House and Bertelsmann has the power to direct the relevant activities and therefore control. Following the transaction in 2017 the assessment of significant influence has not changed. Penguin Random House does not have a quoted market price.
The summarised financial information of the material associatesassociate is detailed below:
2015 | 2014 | 2017 | 2016 | |||||||||||||||||||||
All figures in £ millions | Penguin Random House | The Economist | Penguin Random House | The Economist | Penguin Random House | Penguin Random House | ||||||||||||||||||
Assets | ||||||||||||||||||||||||
Non-current assets | 1,048 | 1,267 | ||||||||||||||||||||||
Current assets | 1,354 | — | 1,355 | 110 | 1,758 | 1,587 | ||||||||||||||||||
Non-current assets | 1,244 | — | 1,429 | 166 | ||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||
Non-current liabilities | (859 | ) | (394 | ) | ||||||||||||||||||||
Current liabilities | (1,034 | ) | — | (1,113 | ) | (190 | ) | (1,579 | ) | (1,074 | ) | |||||||||||||
Non-current liabilities | (358 | ) | — | (424 | ) | (86 | ) | |||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Net assets | 1,206 | — | 1,247 | — | 368 | 1,386 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Sales | 2,453 | 276 | 2,416 | 320 | 2,693 | 2,620 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Profit from continuing operations | 136 | — | 74 | — | ||||||||||||||||||||
Profit from discontinued operations | — | 34 | — | 42 | ||||||||||||||||||||
Other comprehensive income/(expense) | 51 | — | 42 | (20 | ) | |||||||||||||||||||
Profit for the year | 171 | 209 | ||||||||||||||||||||||
Other comprehensive expense | (60 | ) | (14 | ) | ||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Total comprehensive income | 187 | 34 | 116 | 22 | 111 | 195 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Dividends received from associate | 142 | 20 | 95 | 21 | ||||||||||||||||||||
Dividends received from associate in relation to profits | 146 | 131 | ||||||||||||||||||||||
Re-capitalisation dividends received from associate | 312 | — | ||||||||||||||||||||||
|
|
|
|
|
|
The information above reflects the amounts presented in the financial statements of the associates,associate, adjusted for fair value and similar adjustments. Amounts presented for The Economist cover the period up until the date of the partial disposal. The tax on Penguin Random House LLC is settled by the partners. For the purposes of clear and consistent presentation, the tax has been shown in the associate line items in the consolidated income statement and consolidated balance sheet, recording the Group’s share of profit after tax consistently for the Penguin Random House associates.
Pearson plc Consolidated Financial Statements
Notes to the consolidated financial statements continued
12. Investments in joint ventures and associates continued
Investment in associates continued
A reconciliation of the summarised financial information to the carrying value of the material associatesassociate is shown below:
2015 | 2014 | 2017 | 2016 | |||||||||||||||||||||
All figures in £ millions | Penguin Random House | The Economist | Penguin Random House | The Economist | Penguin Random House | Penguin Random House | ||||||||||||||||||
Opening net assets | 1,247 | — | 1,232 | 16 | 1,386 | 1,206 | ||||||||||||||||||
Exchange differences | (1 | ) | — | (1 | ) | — | (18 | ) | 179 | |||||||||||||||
Profit for the period | 136 | 34 | 74 | 42 | ||||||||||||||||||||
Other comprehensive income/(expense) | 51 | — | 42 | (20 | ) | |||||||||||||||||||
Profit for the year | 171 | 209 | ||||||||||||||||||||||
Other comprehensive expense | (60 | ) | (14 | ) | ||||||||||||||||||||
Dividends, net of tax paid | (229 | ) | (40 | ) | (100 | ) | (42 | ) | (1,167 | ) | (194 | ) | ||||||||||||
Additions | 2 | — | — | — | ||||||||||||||||||||
Distribution from associate in excess of carrying value | — | — | — | 4 | ||||||||||||||||||||
Reversal of distribution from associate in excess of carrying value | — | (3 | ) | — | — | |||||||||||||||||||
Disposal | — | 9 | — | — | ||||||||||||||||||||
Tax adjustments in relation to disposals | 56 | — | ||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Closing net assets | 1,206 | — | 1,247 | — | 368 | 1,386 | ||||||||||||||||||
Share of net assets | 567 | — | 586 | — | 92 | 651 | ||||||||||||||||||
Goodwill | 526 | — | 509 | — | 296 | 589 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Carrying value of associate | 1,093 | — | 1,095 | — | 388 | 1,240 | ||||||||||||||||||
|
|
|
|
|
|
Information on other individually immaterial associates is detailed below:
All figures in £ millions | 2015 | 2014 | ||||||
Loss from continuing operations | (9 | ) | (2 | ) | ||||
Other comprehensive income | — | — | ||||||
|
|
|
| |||||
Total comprehensive expense | (9 | ) | (2 | ) | ||||
|
|
|
|
All figures in £ millions | 2017 | 2016 | ||||||
Profit for the year | 7 | — | ||||||
|
|
|
| |||||
Total comprehensive income | 7 | — | ||||||
|
|
|
|
Transactions with material associates
The Group has loans to Penguin Random House which are unsecured and interest is calculated based on market rates. The amount outstanding at 31 December 20152017 was £47m (2014: £54m)£46m (2016: £33m). The loans are provided under a working capital facility and fluctuate during the year. The loan outstanding at 31 December 20152017 was repaid in its entirety in January 2016.2018.
The Group also has a current asset receivable of £27m (2014: £41m)£19m (2016: £21m) from Penguin Random House and a current liability payable of £3m (2016: £nil) arising from the provision of services. Included in other income (note 4) is £16m (2014: £41m)£3m (2016: £4m) of service fees. In addition, the Group will receive a further re-capitalisation dividend of £49m in April 2018, which was triggered by the Group’s decision to sell a 22% stake in Penguin Random House in 2017.
Investment in joint ventures
Information on joint ventures, all of which are individually immaterial, is detailed below:
All figures in £ millions | 2015 | 2014 | ||||||
Loss from continuing operations | (3 | ) | (3 | ) | ||||
Loss from discontinued operations | (1 | ) | — | |||||
Other comprehensive income | — | — | ||||||
|
|
|
| |||||
Total comprehensive expense | (4 | ) | (3 | ) | ||||
|
|
|
|
All figures in £ millions | 2017 | 2016 | ||||||
Profit/(loss) for the year | 1 | (1 | ) | |||||
|
|
|
| |||||
Total comprehensive income/(expense) | 1 | (1 | ) | |||||
|
|
|
|
Pearson plc Consolidated Financial Statements
Notes to the consolidated financial statements continued
13. Deferred income tax
All figures in £ millions | 2015 | 2014 | 2017 | 2016 | ||||||||||||
Deferred income tax assets | 276 | 295 | 95 | 451 | ||||||||||||
Deferred income tax liabilities | (560 | ) | (714 | ) | (164 | ) | (466 | ) | ||||||||
|
|
|
| |||||||||||||
Net deferred income tax | (284 | ) | (419 | ) | (69 | ) | (15 | ) | ||||||||
|
|
|
|
Substantially all of the deferred income tax assets are expected to be recovered after more than one year.
Deferred income tax assets and liabilities mayshall be offset when there is a legally enforceable right to offset current income tax assets againstwith current income tax liabilities and whenwhere the deferred income taxes relate to the same fiscal authority. At 31 December 20152017, the Group has unrecognised deferred income tax assets of £nil (2014: £4m)£32m (2016: £32m) in respect of UK losses, £11m (2014: £14m)£18m (2016: £18m) in respect of US losses and approximately £70m (2014: £44m)£86m (2016: £95m) in respect of losses in other territories. The UK losses are capital losses. The US losses relate to state taxes and therefore have expiry periods of between five and 20 years. Other deferred tax assets of £12m (2016: £9m) have not been recognised.
Deferred tax assets of £75m (2016: £95m) have been recognised in countries that reported a loss in either the current or preceding year. The majority arises in Brazil in respect of tax deductible goodwill. It is considered more likely than not that there will be sufficient future taxable profits to realise these assets.
The recognition of the deferred income tax assets is supported by management’s forecasts of the future profitability of the relevant business units.
The movement on the net deferred income tax account is as follows:
All figures in £ millions | Notes | 2015 | 2014 | |||||||||
At beginning of year | (419 | ) | (362 | ) | ||||||||
Exchange differences | (26 | ) | (22 | ) | ||||||||
Income statement benefit | 7 | 196 | 10 | |||||||||
Disposal through business disposal | 1 | (1 | ) | |||||||||
Tax charge to other comprehensive income or equity | (36 | ) | (18 | ) | ||||||||
Transfer to current tax | — | (26 | ) | |||||||||
|
|
|
| |||||||||
At end of year | (284 | ) | (419 | ) | ||||||||
|
|
|
|
Included in the income statement above for 2015 is a £2m benefit (2014: £nil) relating to discontinued operations.countries.
The movement in deferred income tax assets and liabilities during the year is as follows:
All figures in £ millions | Trading losses | Returns provisions | Retirement benefit obligations | Other | Total | |||||||||||||||
Deferred income tax assets | ||||||||||||||||||||
At 1 January 2014 | 15 | 39 | 42 | 154 | 250 | |||||||||||||||
Exchange differences | 1 | 2 | 4 | 5 | 12 | |||||||||||||||
Acquisition through business combination | 2 | — | — | — | 2 | |||||||||||||||
Income statement benefit | 10 | 3 | 7 | 35 | 55 | |||||||||||||||
Tax benefit/(charge) to other comprehensive income or equity | — | — | 10 | (7 | ) | 3 | ||||||||||||||
Transfer to current tax | — | — | — | (26 | ) | (26 | ) | |||||||||||||
Disposal through business disposal | — | — | (1 | ) | — | (1 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
At 31 December 2014 | 28 | 44 | 62 | 161 | 295 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Exchange differences | 5 | 3 | 4 | 9 | 21 | |||||||||||||||
Income statement charge | (14 | ) | (4 | ) | (3 | ) | (15 | ) | (36 | ) | ||||||||||
Tax charge to other comprehensive income or equity | — | — | (4 | ) | — | (4 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
At 31 December 2015 | 19 | 43 | 59 | 155 | 276 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
All figures in £ millions | Trading losses | Returns provisions | Retirement benefit obligations | Deferred revenue | Goodwill and intangibles | Other | Total | |||||||||||||||||||||
Deferred income tax assets/(liabilities) | ||||||||||||||||||||||||||||
At 1 January 2016 | 19 | 43 | (9 | ) | 55 | (348 | ) | (44 | ) | (284 | ) | |||||||||||||||||
Exchange differences | 3 | 7 | 10 | 15 | (84 | ) | 27 | (22 | ) | |||||||||||||||||||
Income statement (charge)/benefit | — | (15 | ) | (4 | ) | 50 | 144 | 86 | 261 | |||||||||||||||||||
Disposal through business disposal | — | — | — | (3 | ) | (7 | ) | — | (10 | ) | ||||||||||||||||||
Tax benefit in other comprehensive income | — | — | 40 | — | — | — | 40 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
At 31 December 2016 | 22 | 35 | 37 | 117 | (295 | ) | 69 | (15 | ) | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Exchange differences | (2 | ) | (3 | ) | (4 | ) | (8 | ) | 19 | (8 | ) | (6 | ) | |||||||||||||||
Income statement (charge)/benefit | (11 | ) | 6 | 7 | (9 | ) | 118 | (1 | ) | 110 | ||||||||||||||||||
Disposal through business disposal | — | — | — | — | — | (3 | ) | (3 | ) | |||||||||||||||||||
Tax charge in other comprehensive income | — | — | (84 | ) | — | — | (5 | ) | (89 | ) | ||||||||||||||||||
Transfer to assets/(liabilities) classified as held for sale | — | (4 | ) | — | (73 | ) | 3 | 8 | (66 | ) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
At 31 December 2017 | 9 | 34 | (44 | ) | 27 | (155 | ) | 60 | (69 | ) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other deferred income tax items include temporary differences in respect of share-based payments, provisions, depreciation and royalty advances.
Pearson plc Consolidated Financial Statements
Notes to the consolidated financial statements continued
13. Deferred income tax continued
Other deferred income tax assets include temporary differences on goodwill, deferred income, share-based payments, inventory and other provisions.
All figures in £ millions | Goodwill and intangibles | Other | Total | |||||||||
Deferred income tax liabilities | ||||||||||||
At 1 January 2014 | (584 | ) | (28 | ) | (612 | ) | ||||||
Exchange differences | (30 | ) | (4 | ) | (34 | ) | ||||||
Acquisition through business combination | (2 | ) | — | (2 | ) | |||||||
Income statement benefit/(charge) | 18 | (63 | ) | (45 | ) | |||||||
Tax charge to other comprehensive income or equity | — | (21 | ) | (21 | ) | |||||||
|
|
|
|
|
| |||||||
At 31 December 2014 | (598 | ) | (116 | ) | (714 | ) | ||||||
|
|
|
|
|
| |||||||
Exchange differences | (41 | ) | (6 | ) | (47 | ) | ||||||
Income statement benefit | 180 | 52 | 232 | |||||||||
Disposal through business disposal | 1 | — | 1 | |||||||||
Tax charge to other comprehensive income or equity | — | (32 | ) | (32 | ) | |||||||
|
|
|
|
|
| |||||||
At 31 December 2015 | (458 | ) | (102 | ) | (560 | ) | ||||||
|
|
|
|
|
|
Other deferred income tax liabilities include temporary differences in respect of depreciation and royalty advances.
14. Classification of financial instruments
The accounting classification of each class of the Group’s financial assets and financial liabilities, together with their carrying values and market values, is as follows:
2015 | 2017 | 2016 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fair value | Amortised cost | Fair value | Amortised cost | Fair value | Amortised cost | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
All figures in £ millions | Notes | Available for sale | Derivatives deemed held for trading | Derivatives in hedging relationships | Other liabilities | Loans and receivables | Other liabilities | Total carrying value | Total market value | Notes | Available for sale | Derivatives held for trading | Derivatives in hedge relationship | Loans and receivables | Total carrying value | Available for sale | Derivatives held for trading | Derivatives in hedge relationship | Loans and receivables | Total carrying value | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Investments in listed securities | 15 | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Investments in unlisted securities | 15 | 143 | — | — | — | — | — | 143 | 143 | 15 | 77 | — | — | — | 77 | 65 | — | — | — | 65 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cash and cash equivalents | 17 | — | — | — | — | 1,703 | — | 1,703 | 1,703 | 17 | — | — | — | 518 | 518 | — | — | — | 1,459 | 1,459 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cash and cash equivalents – within assets classified as held for sale | 32 | — | — | — | 127 | 127 | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Marketable securities | 28 | — | — | — | — | — | 28 | 28 | 8 | — | — | — | 8 | 10 | — | — | — | 10 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Derivative financial instruments | 16 | — | 29 | 81 | — | — | — | 110 | 110 | 16 | — | 3 | 137 | — | 140 | — | 3 | 168 | — | 171 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Trade receivables | 22 | — | — | — | — | 963 | — | 963 | 963 | 22 | — | — | — | 760 | 760 | — | — | — | 982 | 982 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Trade receivables – within assets classified as held for sale | — | — | — | 22 | 22 | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total financial assets | 171 | 29 | 81 | — | 2,666 | — | 2,947 | 2,947 | 85 | 3 | 137 | 1,427 | 1,652 | 75 | 3 | 168 | 2,441 | 2,687 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Derivative financial instruments | 16 | — | (36 | ) | (129 | ) | — | — | — | (165 | ) | (165 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Trade payables | 24 | — | — | — | — | — | (319 | ) | (319 | ) | (319 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Bank loans and overdrafts | 18 | — | — | — | — | — | (38 | ) | (38 | ) | (38 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Borrowings due within one year | 18 | — | — | — | — | — | (244 | ) | (244 | ) | (244 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Borrowings due after more than one year | 18 | — | — | — | — | — | (2,048 | ) | (2,048 | ) | (2,009 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total financial liabilities | — | (36 | ) | (129 | ) | — | — | (2,649 | ) | (2,814 | ) | (2,775 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
The carrying value of the Group’s financial assets is equal to, or approximately equal to, the market value.
Pearson plc Consolidated Financial Statements
Notes to the consolidated financial statements continued
14. Classification of financial instruments continued
2014 | ||||||||||||||||||||||||||||||||||||
Fair value | Amortised cost | |||||||||||||||||||||||||||||||||||
All figures in £ millions | Notes | Available for sale | Derivatives deemed held for trading | Derivatives in hedging relationships | Other liabilities | Loans and receivables | Other liabilities | Total carrying value | Total market value | |||||||||||||||||||||||||||
Investments in listed securities | 15 | 9 | — | — | — | — | — | 9 | 9 | |||||||||||||||||||||||||||
Investments in unlisted securities | 15 | 45 | — | — | — | — | — | 45 | 45 | |||||||||||||||||||||||||||
Cash and cash equivalents | 17 | — | — | — | — | 530 | — | 530 | 530 | |||||||||||||||||||||||||||
Marketable securities | 16 | — | — | — | — | — | 16 | 16 | ||||||||||||||||||||||||||||
Derivative financial instruments | 16 | — | 6 | 108 | — | — | — | 114 | 114 | |||||||||||||||||||||||||||
Trade receivables | 22 | — | — | — | — | 989 | — | �� | 989 | 989 | ||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Total financial assets | 70 | 6 | 108 | — | 1,519 | — | 1,703 | 1,703 | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Derivative financial instruments | 16 | — | (33 | ) | (41 | ) | — | — | — | (74 | ) | (74 | ) | |||||||||||||||||||||||
Trade payables | 24 | — | — | — | — | — | (329 | ) | (329 | ) | (329 | ) | ||||||||||||||||||||||||
Bank loans and overdrafts | 18 | — | — | — | — | — | (42 | ) | (42 | ) | (42 | ) | ||||||||||||||||||||||||
Borrowings due within one year | 18 | — | — | — | — | — | (305 | ) | (305 | ) | (319 | ) | ||||||||||||||||||||||||
Borrowings due after more than one year | 18 | — | — | — | — | — | (1,878 | ) | (1,878 | ) | (1,888 | ) | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Total financial liabilities | — | (33 | ) | (41 | ) | — | — | (2,554 | ) | (2,628 | ) | (2,652 | ) | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CertainThe accounting classification of each class of the Group’s financial liabilities, together with their carrying values and market values, is as follows:
2017 | 2016 | |||||||||||||||||||||||||||||||||||||||||||
Fair value | Amortised cost | Fair value | Amortised cost | |||||||||||||||||||||||||||||||||||||||||
All figures in £ millions | Notes | Derivatives held for trading | Derivatives in hedge relationship | Other liabilities | Total carrying value | Total market value | Derivatives held for trading | Derivatives in hedge relationship | Other liabilities | Total carrying value | Total market value | |||||||||||||||||||||||||||||||||
Derivative financial liabilities | 16 | — | (140 | ) | — | (140 | ) | (140 | ) | (7 | ) | (257 | ) | — | (264 | ) | (264 | ) | ||||||||||||||||||||||||||
Trade payables | 24 | — | — | (265 | ) | (265 | ) | (265 | ) | — | — | (333 | ) | (333 | ) | (333 | ) | |||||||||||||||||||||||||||
Trade payables – within liabilities classified as held for sale | — | — | (20 | ) | (20 | ) | (20 | ) | — | — | — | — | — | |||||||||||||||||||||||||||||||
Liability to purchase own shares | 24 | — | — | (151 | ) | (151 | ) | (151 | ) | — | — | — | — | — | ||||||||||||||||||||||||||||||
Bank loans and overdrafts | 18 | — | — | (15 | ) | (15 | ) | (15 | ) | — | — | (39 | ) | (39 | ) | (39 | ) | |||||||||||||||||||||||||||
Other borrowings due within one year | 18 | — | — | (4 | ) | (4 | ) | (4 | ) | — | — | (5 | ) | (5 | ) | (5 | ) | |||||||||||||||||||||||||||
Borrowings due after more than one year | 18 | — | — | (1,066 | ) | (1,066 | ) | (1,070 | ) | — | — | (2,424 | ) | (2,424 | ) | (2,385 | ) | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Total financial liabilities | — | (140 | ) | (1,521 | ) | (1,661 | ) | (1,665 | ) | (7 | ) | (257 | ) | (2,801 | ) | (3,065 | ) | (3,026 | ) | |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value measurement
As shown above, the Group’s derivative financialassets and liabilities, unlisted securities and marketable securities are held at fair value. Financial instruments that are measured subsequently to initial recognition at fair value are grouped into levels 1 to 3, based on the degree to which the fair value is observable, as follows:
Level 1 fair value measurements are those derived from unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2 fair value measurements are those derived from inputs, other than quoted prices included within level 1, that are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices).
Level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs).
The Group’s derivative assets valued at £140m (2016: £171m) and derivative liabilities valued at £140m (2016: £264m) are classified as held for trading eitherlevel 2. The Group’s marketable securities valued at £8m (2016: £10m) are classified as they do not meetlevel 2. The Group’s investments in unlisted securities are valued at £77m (2016: £65m) and are classified as level 3.
Pearson plc Consolidated Financial Statements
Notes to the hedge accounting criteria specified in IAS 39 ‘Financial Instruments: Recognition and Measurement’ or as the Group has chosen not to seek hedge accounting for these instruments. Noneconsolidated financial statements continued
14. Classification of these derivatives are held for speculative trading purposes. Transactions in derivative financial instruments are only undertaken to manage risks arising from underlying business activity, in accordance with the Group’s treasury policy as described in note 19.continued
Fair value measurement continued
The Group designates certain qualifying derivative financial instruments as hedges offollowing table analyses the movements in level 3 fair value of its bonds (fair value hedges). Changes in the fair value of these derivative financial instruments are recorded in the income statement, together with any change in theremeasurements:
2017 | 2016 | |||||||
All figures in £ millions | Investments in unlisted securities | Investments in unlisted securities | ||||||
At beginning of year | 65 | 143 | ||||||
Exchange differences | (4 | ) | 8 | |||||
Acquisition of investments | 3 | 6 | ||||||
Fair value movements | 13 | — | ||||||
Disposal of investments | — | (92 | ) | |||||
|
|
|
| |||||
At end of year | 77 | 65 | ||||||
|
|
|
|
The fair value of the hedged liability attributableinvestments in unlisted securities is determined by reference to the hedged risk.
The Group also designates certain of its borrowings and derivative financial instruments as hedges of its investments in foreign operations (net investment hedges). Movements in the fair value of these financial instruments (to the extent they are effective) are recognised in other comprehensive income.
Noneperformance of the Group’sunderlying asset, recent funding rounds and amounts realised on the sale of similar assets.
15. Other financial assets or liabilities are designated at fair value through the income statement upon initial recognition.
More detail on the Group’s accounting for
All figures in £ millions | 2017 | 2016 | ||||||
At beginning of year | 65 | 143 | ||||||
Exchange differences | (4 | ) | 8 | |||||
Acquisition of investments | 3 | 6 | ||||||
Fair value movements | 13 | — | ||||||
Disposal of investments | — | (92 | ) | |||||
|
|
|
| |||||
At end of year | 77 | 65 | ||||||
|
|
|
|
Other financial instruments is included in the Group’s accounting policies. The Group’s approach to managing risks in relation to financial instruments is described in note 19.assets comprise unlisted securities of £77m (2016: £65m).
Pearson plc Consolidated Financial Statements
Notes to the consolidated financial statements continued
15. Other financial assets
All figures in £ millions | 2015 | 2014 | ||||||
At beginning of year | 54 | 94 | ||||||
Exchange differences | 3 | 6 | ||||||
Acquisition of investments | 101 | 12 | ||||||
Disposal of investments | (15 | ) | (58 | ) | ||||
|
|
|
| |||||
At end of year | 143 | 54 | ||||||
|
|
|
|
Other financial assets comprise listed securities of £nil (2014: £9m) and unlisted securities of £143m (2014: £45m).
Acquisition of investments includes the remaining 11% stake in The Economist, see note 31 for further information.
16. Derivative financial instruments
The Group’s approach to the management of financial risks is set out in note 19. The Group’s outstanding derivative financial instruments are as follows:
2015 | 2014 | 2017 | 2016 | |||||||||||||||||||||||||||||||||||||||||||||
All figures in £ millions | Gross notional amounts | Assets | Liabilities | Gross notional amounts | Assets | Liabilities | Gross notional amounts | Assets | Liabilities | Gross notional amounts | Assets | Liabilities | ||||||||||||||||||||||||||||||||||||
Interest rate derivatives – in a fair value hedge relationship | 1,952 | 70 | (10 | ) | 1,607 | 84 | (5 | ) | 799 | 23 | — | 2,157 | 68 | (4 | ) | |||||||||||||||||||||||||||||||||
Interest rate derivatives – not in a hedge relationship | 848 | — | (6 | ) | 673 | — | (7 | ) | 429 | 3 | — | 1,187 | 3 | (7 | ) | |||||||||||||||||||||||||||||||||
Cross-currency rate derivatives – in a hedge relationship | 1,879 | 10 | (119 | ) | 889 | 24 | (36 | ) | 1,522 | 114 | (140 | ) | 1,622 | 100 | (253 | ) | ||||||||||||||||||||||||||||||||
Cross-currency rate derivatives – not in a hedge relationship | 120 | 30 | (30 | ) | 451 | 6 | (26 | ) | ||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||
Total | 4,799 | 110 | (165 | ) | 3,620 | 114 | (74 | ) | 2,750 | 140 | (140 | ) | 4,966 | 171 | (264 | ) | ||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||
Analysed as expiring: | ||||||||||||||||||||||||||||||||||||||||||||||||
In less than one year | 324 | 32 | (29 | ) | 200 | 24 | (1 | ) | — | — | — | 162 | — | — | ||||||||||||||||||||||||||||||||||
Later than one year and not later than five years | 1,255 | 44 | (4 | ) | 1,386 | 67 | (8 | ) | 1,638 | 65 | (95 | ) | 2,776 | 86 | (157 | ) | ||||||||||||||||||||||||||||||||
Later than five years | 3,220 | 34 | (132 | ) | 2,034 | 23 | (65 | ) | 1,112 | 75 | (45 | ) | 2,028 | 85 | (107 | ) | ||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||
Total | 4,799 | 110 | (165 | ) | 3,620 | 114 | (74 | ) | 2,750 | 140 | (140 | ) | 4,966 | 171 | (264 | ) | ||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
The carrying valueGroup has issued both euro and US dollar fixed rate debt. The fixed rate euro debt is converted to either a fixed or floating rate US dollar exposure using interest rate and cross-currency swaps. The Group’s remaining fixed rate US dollar debt is held as fixed rate instruments.
The Group receives interest under its euro debt related swap contracts to match the interest on the bonds (ranging from a receipt of 1.375% on its euro 2025 notes to 1.875% on its euro 2021 notes) and, in turn, pays US dollar interest at rates ranging between US Libor + 0.84% to US Libor + 1.35%.
Interest rate swaps are then used to fix an element of the above derivative financial instruments equals their fair value. Fair valuesinterest charge, in line with the Group’s interest rate hedging policy, which requires a proportion of the Group’s gross debt to be fixed in line with the Group’s hedging policy. During 2017, the Group executed a number of floating interest rate swaps to match the maturity of the 2021 and 2025 euro bonds mitigating the exposure to interest rate increases. Theall-in rates (including the Libor spread) that the Group pays are determined by using market databetween 2.78% and 3.58%. At 31 December 2017, the useGroup had contracts to fix $579m of established estimation techniques such as discounted cash flowdebt over the next 12 months and option valuation models.$331m of outstanding fixed rate bonds bringing the total fixed rate debt to $910m.
At the end of 2015,2017, the currency split of themark-to-market values of rate derivatives, including the exchange of principal on cross-currencycross currency rate derivatives, was US dollar £(917)£(869)m, sterling £102m,£12m and euro £759m and Brazilian real £nil (2014:£857m (2016: US dollar £(607)£(1,051)m, sterling £214m,£19m and euro £430m and Brazilian real £4m)£939m).
The fixed interest rates on outstanding rate derivative contracts at the end of 2015 range from 1.10% to 14.48% (2014: 1.10% to 14.48%) and the floating rates are based on LIBOR in US dollar, euro and sterling.
Notes to the consolidated financial statements continued
16. Derivative financial instruments continued
The Group’s portfolio of rate derivatives is diversified by maturity, counterparty and type. Natural offsets between transactions within the portfolio and the designation of certain derivatives as hedges significantly reduce the risk of income statement volatility. The sensitivity of the portfolio to changes in market rates is set out in note 19.
Pearson plc Consolidated Financial Statements
Notes to the consolidated financial statements continued
16. Derivative financial instruments continued
Derivative financial assets and liabilities subject to offsetting arrangements are as follows:
2015 | 2014 | 2017 | 2016 | |||||||||||||||||||||||||||||||||||||||||||||
All figures in £ millions | Gross derivative assets | Gross derivative liabilities | Net derivative assets/ liabilities | Gross derivative assets | Gross derivative liabilities | Net derivative assets/ liabilities | Gross derivative assets | Gross derivative liabilities | Net derivative assets/ liabilities | Gross derivative assets | Gross derivative liabilities | Net derivative assets/ liabilities | ||||||||||||||||||||||||||||||||||||
Counterparties in an asset position | 50 | (22 | ) | 28 | 94 | (28 | ) | 66 | 103 | (78 | ) | 25 | 30 | (11 | ) | 19 | ||||||||||||||||||||||||||||||||
Counterparties in a liability position | 60 | (143 | ) | (83 | ) | 20 | (46 | ) | (26 | ) | 37 | (62 | ) | (25 | ) | 141 | (253 | ) | (112 | ) | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||
Total as presented in the balance sheet | 110 | (165 | ) | (55 | ) | 114 | (74 | ) | 40 | 140 | (140 | ) | — | 171 | (264 | ) | (93 | ) | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
All of the Group’s derivative financial instruments are subject to enforceable netting arrangements with individual counterparties, allowing net settlement in the event of default of either party. Offset arrangements in respect of cash balances are showndescribed in note 17.
Counterparty exposure from all derivatives is managed, together with that from deposits and bank account balances, within credit limits that reflect published credit ratings and by reference to other market measures (e.g. market prices for credit default swaps) to ensure that there is no significant risk to any one counterparty. No single derivative transaction had a market value (positive or negative) at the balance sheet date that exceeded 3% of the Group’s consolidated total equity.
In accordance with IAS 39 ‘Financial Instruments: Recognition and Measurement’, the Group has reviewed all of its material contracts for embedded derivatives that are required to be separately accounted for if they do not meet certain requirements, and has concluded that there are no material embedded derivatives.
17. Cash and cash equivalents (excluding overdrafts)
All figures in £ millions | 2015 | 2014 | 2017 | 2016 | ||||||||||||
Cash at bank and in hand | 627 | 483 | 361 | 570 | ||||||||||||
Short-term bank deposits | 1,076 | 47 | 157 | 889 | ||||||||||||
|
|
|
| |||||||||||||
1,703 | 530 | 518 | 1,459 | |||||||||||||
|
|
|
| |||||||||||||
Cash at bank and in hand – within assets classified as held for sale | 127 | — | ||||||||||||||
|
| |||||||||||||||
645 | 1,459 | |||||||||||||||
|
|
Short-term bank deposits are invested with banks and earn interest at the prevailing short-term deposit rates.
At the end of 20152017, the currency split of cash and cash equivalents was US dollar 23% (2014: 18%36% (2016: 34%), sterling 57% (2014: 13%8% (2016: 40%), euro 2% (2014:7% (2016: 3%), renminbi 8% (2014: 28%20% (2016: 10%) and other 10% (2014: 38%29% (2016: 13%). At the end of 2017, a significant proportion of the renminbi cash relates to assets held for sale.
Cash and cash equivalents have fair values that approximate to their carrying value due to their short-term nature. Cash and cash equivalents include the following for the purpose of the cash flow statement:
All figures in £ millions | 2015 | 2014 | ||||||
Cash and cash equivalents – continuing operations | 1,703 | 530 | ||||||
Bank overdrafts – continuing operations | (32 | ) | (19 | ) | ||||
|
|
|
| |||||
1,671 | 511 | |||||||
|
|
|
|
All figures in £ millions | 2017 | 2016 | ||||||
Cash and cash equivalents | 518 | 1,459 | ||||||
Cash and cash equivalents – within assets classified as held for sale | 127 | — | ||||||
Bank overdrafts | (15 | ) | (35 | ) | ||||
|
|
|
| |||||
630 | 1,424 | |||||||
|
|
|
|
Pearson plc Consolidated Financial Statements
Notes to the consolidated financial statements continued
17. Cash and cash equivalents (excluding overdrafts) continued
The Group has the followingcertain cash pooling arrangements in US dollars, sterling, euro and canadianCanadian dollars where both the company and the bank have a legal right of offset.
2015 | 2014 | |||||||||||||||||||||||
All figures in £ millions | Offset asset | Offset liability | Net offset asset | Offset asset | Offset liability | Net offset asset | ||||||||||||||||||
US dollars | 446 | (442 | ) | 4 | 267 | (266 | ) | 1 | ||||||||||||||||
Sterling | 290 | (289 | ) | 1 | 430 | (427 | ) | 3 | ||||||||||||||||
Euro | 5 | (3 | ) | 2 | 9 | (8 | ) | 1 | ||||||||||||||||
Canadian dollars | 36 | (10 | ) | 26 | 10 | — | 10 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total for continuing operations as presented in the balance sheet | 33 | 15 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
At 31 December 2017, the offsetting amounts are presented gross in the balance sheet. Offset arrangements in respect of derivatives are shown in note 16.
18. Financial liabilities – borrowings
The Group’s current andnon-current borrowings are as follows:
All figures in £ millions | 2015 | 2014 | 2017 | 2016 | ||||||||||||
Non-current | ||||||||||||||||
4.0% US dollar notes 2016 (nominal amount $350m) | — | 231 | ||||||||||||||
6.25% Global dollar bonds 2018 (nominal amount $550m) | 403 | 390 | — | 469 | ||||||||||||
4.625% US dollar notes 2018 (nominal amount $300m) | 218 | 210 | — | 254 | ||||||||||||
1.875% Euro notes 2021 (nominal amount €500m) | 386 | 408 | ||||||||||||||
3.75% US dollar notes 2022 (nominal amount $500m) | 342 | 319 | ||||||||||||||
3.25% US dollar notes 2023 (nominal amount $500m) | 336 | 315 | ||||||||||||||
1.375% Euro notes 2025 (nominal amount €500m) | 359 | — | ||||||||||||||
Bank loans and overdrafts | — | 5 | ||||||||||||||
1.875% euro notes 2021 (nominal amount €500m) | 463 | 453 | ||||||||||||||
3.75% US dollar notes 2022 (nominal amount $117m; 2016: nominal amount $500m) | 85 | 407 | ||||||||||||||
3.25% US dollar notes 2023 (nominal amount $94m; 2016: nominal amount $500m) | 69 | 402 | ||||||||||||||
1.375% euro notes 2025 (nominal amount €500m) | 445 | 435 | ||||||||||||||
Finance lease liabilities | 4 | 5 | 4 | 4 | ||||||||||||
|
|
|
| |||||||||||||
2,048 | 1,883 | 1,066 | 2,424 | |||||||||||||
|
|
|
| |||||||||||||
Current | ||||||||||||||||
Due within one year or on-demand: | ||||||||||||||||
6.0% Sterling bonds 2015 (nominal amount £300m) | — | 300 | ||||||||||||||
4.0% US dollar notes 2016 (nominal amount $350m) | 240 | — | ||||||||||||||
Bank loans and overdrafts | 38 | 37 | 15 | 39 | ||||||||||||
Finance lease liabilities | 4 | 5 | 4 | 5 | ||||||||||||
|
|
|
| |||||||||||||
282 | 342 | 19 | 44 | |||||||||||||
|
|
|
| |||||||||||||
Total borrowings | 2,330 | 2,225 | 1,085 | 2,468 | ||||||||||||
|
|
|
|
Included in thenon-current borrowings above is £15m£10m of accrued interest (2014: £13m)(2016: £18m). Included in the current borrowings above is £1m£nil of accrued interest (2014: £1m)(2016: £nil).
The maturity of the Group’snon-current borrowing is as follows:
All figures in £ millions | 2017 | 2016 | ||||||
Between one and two years | 3 | 726 | ||||||
Between two and five years | 549 | 454 | ||||||
Over five years | 514 | 1,244 | ||||||
|
|
|
| |||||
1,066 | 2,424 | |||||||
|
|
|
|
Pearson plc Consolidated Financial Statements
Notes to the consolidated financial statements continued
18. Financial liabilities – borrowings continued
The maturity of the Group’s non-current borrowing is as follows:
All figures in £ millions | 2015 | 2014 | ||||||
Between one and two years | 3 | 239 | ||||||
Between two and five years | 622 | 602 | ||||||
Over five years | 1,423 | 1,042 | ||||||
|
|
|
| |||||
2,048 | 1,883 | |||||||
|
|
|
|
The carrying amounts and market values of borrowings are as follows:
2015 | 2014 | 2017 | 2016 | |||||||||||||||||||||||||||||||||||||||||||||
All figures in £ millions | Effective interest rate | Carrying value | Market value | Effective interest rate | Carrying value | Market value | Effective interest rate | Carrying value | Market value | Effective interest rate | Carrying value | Market value | ||||||||||||||||||||||||||||||||||||
Bank loans and overdrafts | n/a | 38 | 38 | n/a | 42 | 42 | n/a | 15 | 15 | n/a | 39 | 39 | ||||||||||||||||||||||||||||||||||||
6.0% Sterling bonds 2015 | — | — | — | 6.27 | % | 300 | 314 | |||||||||||||||||||||||||||||||||||||||||
4.0% US dollar notes 2016 | 4.26 | % | 240 | 240 | 4.26 | % | 231 | 233 | ||||||||||||||||||||||||||||||||||||||||
6.25% Global dollar bonds 2018 | 6.46 | % | 403 | 405 | 6.46 | % | 390 | 397 | n/a | — | — | 6.46 | % | 469 | 468 | |||||||||||||||||||||||||||||||||
4.625% US dollar notes 2018 | 4.69 | % | 218 | 213 | 4.69 | % | 210 | 205 | n/a | — | — | 4.69 | % | 254 | 250 | |||||||||||||||||||||||||||||||||
1.875% Euro notes 2021 | 2.04 | % | 386 | 380 | 2.04 | % | 408 | 407 | ||||||||||||||||||||||||||||||||||||||||
1.875% euro notes 2021 | 2.04 | % | 463 | 467 | 2.04 | % | 453 | 454 | ||||||||||||||||||||||||||||||||||||||||
3.75% US dollar notes 2022 | 3.94 | % | 342 | 335 | 3.94 | % | 319 | 327 | 3.94 | % | 85 | 87 | 3.94 | % | 407 | 396 | ||||||||||||||||||||||||||||||||
3.25% US dollar notes 2023 | 3.36 | % | 336 | 322 | 3.36 | % | 315 | 314 | 3.36 | % | 69 | 67 | 3.36 | % | 402 | 381 | ||||||||||||||||||||||||||||||||
1.375% Euro notes 2025 | 1.44 | % | 359 | 350 | n/a | — | — | |||||||||||||||||||||||||||||||||||||||||
1.375% euro notes 2025 | 1.44 | % | 445 | 445 | 1.44 | % | 435 | 432 | ||||||||||||||||||||||||||||||||||||||||
Finance lease liabilities | n/a | 8 | 8 | n/a | 10 | 10 | n/a | 8 | 8 | n/a | 9 | 9 | ||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||
2,330 | 2,291 | 2,225 | 2,249 | 1,085 | 1,089 | 2,468 | 2,429 | |||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
The market values stated above are based on clean market prices at the year end or, where these are not available, on the quoted market prices of comparable debt issued by other companies. The effective interest rates above relate to the underlying debt instruments.
The carrying amounts of the Group’s borrowings before the effect of derivatives (see notes 16 and 19 for further information on the impact of derivatives) are denominated in the following currencies:
All figures in £ millions | 2015 | 2014 | 2017 | 2016 | ||||||||||||
US dollar | 1,563 | 1,491 | 172 | 1,559 | ||||||||||||
Sterling | 1 | 303 | 1 | 13 | ||||||||||||
Euro | 759 | 408 | 911 | 892 | ||||||||||||
Other | 7 | 23 | 1 | 4 | ||||||||||||
|
|
|
| |||||||||||||
2,330 | 2,225 | 1,085 | 2,468 | |||||||||||||
|
|
|
|
The Group has the following$1.75bn (£1.3bn) of undrawn capacity on its committed borrowing facilities as at 31 December:
All figures in £ millions | 2015 | 2014 | ||||||
Floating rate | ||||||||
– expiring within one year | — | — | ||||||
– expiring beyond one year | 1,187 | 1,122 | ||||||
|
|
|
| |||||
1,187 | 1,122 | |||||||
|
|
|
|
Notes to the consolidated financial statements continued
18. Financial liabilities – borrowings continued
December 2017 (2016: $1.75bn (£1.4bn) undrawn). In addition, to the above facilities, there are a number of short-term facilities that are utilised in the normal course of business.
All of the Group’s borrowings are unsecured. In respect of finance lease obligations, the rights to the leased asset revert to the lessor in the event of default.
Pearson plc Consolidated Financial Statements
Notes to the consolidated financial statements continued
18. Financial liabilities – borrowings continued
The maturity of the Group’s finance lease obligations is as follows:
All figures in £ millions | 2015 | 2014 | 2017 | 2016 | ||||||||||||
Finance lease liabilities – minimum lease payments | ||||||||||||||||
Not later than one year | 4 | 5 | 4 | 5 | ||||||||||||
Later than one year and not later than two years | 3 | 3 | 3 | 3 | ||||||||||||
Later than two years and not later than three years | 1 | 1 | 1 | 1 | ||||||||||||
Later than three years and not later than four years | — | 1 | — | — | ||||||||||||
Later than four years and not later than five years | — | — | — | — | ||||||||||||
Later than five years | — | — | — | — | ||||||||||||
Future finance charges on finance leases | — | — | — | — | ||||||||||||
|
|
|
| |||||||||||||
Present value of finance lease liabilities | 8 | 10 | 8 | 9 | ||||||||||||
|
|
|
|
The present value of the Group’s finance lease liabilitiesobligations is as follows:
All figures in £ millions | 2015 | 2014 | 2017 | 2016 | ||||||||||||
Not later than one year | 4 | 5 | 4 | 5 | ||||||||||||
Later than one year and not later than five years | 4 | 5 | 4 | 4 | ||||||||||||
Later than five years | — | — | — | — | ||||||||||||
|
|
| ||||||||||||||
8 | 10 | 8 | 9 | |||||||||||||
|
|
|
|
The carrying amounts of the Group’s lease obligations approximate their fair value.
19. Financial risk management
The Group’s approach to the management of financial risks together with sensitivity analyses of its financial instruments is set out below.
Treasury policy
Pearson’s treasury function has primary responsibility for managing certain financial risks to which the Group is exposed. The Group holds financial instrumentsGroup’s treasury policies are approved by the Board of Directors annually and the Audit Committee receives regular reports on the Group’s treasury activities, policies and procedures. The Group’s treasury function is not run as a profit centre and does not enter into any transactions for two principal purposes:speculative purposes.
The treasury function is permitted to finance its operations and to manage theuse derivatives for risk management purposes which may include interest rate and currency risks arising from its operations and its sources of finance. The Group finances its operations by a mixture of cash flows from operations, short-term borrowings from banks and commercial paper markets, and longer-term loans from banks and capital markets. The Group borrows principally in US dollars, euros and sterling, at both floating and fixed rates of interest, using derivative financial instruments (‘derivatives’), where appropriate, to generate the desired currency profile and interest rate basis. The derivatives used for this purpose are principally rate swaps, rate caps and collars, currency rate swaps and forward foreign exchange contracts. The main risks arising from the Group’s financial instruments arecontracts, of which interest rate risk, liquidityswaps and refinancingforward foreign exchange swaps are the most commonly used.
Capital risk counterparty risk
The Group’s primary objective when managing capital is to safeguard its ability to continue as a going concern and foreign currency risk. These risksretain financial flexibility by maintaining a strong balance sheet. The Group aims to maintain net debt at a level less than 1.5 times EBITDA, which is consistent with a solid investment grade rating (assuming no material deterioration in trading performance) and provides comfortable headroom against covenants. This should permit the business to invest in organic growth. Shareholder returns are managed by the chief financial officer under policies approved by the board, which are summarised in this note. All the key treasury policies remained unchanged throughout the year, except for revisionsmade through a sustainable and progressive dividend policy. Any surplus cash is returned to the Group’s bank counterparty risk limits and clarifications in respect of the Group’s approach to compliance with laws and regulations.shareholders via share buybacks or special dividends.
Pearson plc Consolidated Financial Statements
Notes to the consolidated financial statements continued
19. Financial risk management continued
Treasury policyCapital risk continued
The audit committee receives regular reports on theGroup is currently rated BBB (negative outlook) with Standard and Poor’s and Baa2 (negative outlook) with Moody’s.
Net debt
The Group’s treasury activities, policiesnet debt position is set out below:
All figures in £ millions | 2017 | 2016 | ||||||
Cash and cash equivalents | 645 | 1,459 | ||||||
Marketable securities | 8 | 10 | ||||||
Derivative financial instruments | — | (93 | ) | |||||
Bank loans and overdrafts | (15 | ) | (39 | ) | ||||
Bonds | (1,062 | ) | (2,420 | ) | ||||
Finance lease liabilities | (8 | ) | (9 | ) | ||||
|
|
|
| |||||
Net debt | (432 | ) | (1,092 | ) | ||||
|
|
|
|
Interest and procedures. The treasury department is not a profit centre and its activities are subject to regular internal audit.
Liquidity and refinancing riskforeign exchange rate management
The Group’s objectiveprincipal currency exposure is to secure continuitythe US dollar which represents more than 60% of funding at a reasonable cost. To do this it seeks to arrange committed funding for a variety of maturities from a diversity of sources. the Group’s sales.
The Group’s policy objectivelong-term debt is primarily held in US dollars to maintain the weighted average maturityprovide a natural hedge of its core gross borrowings (treating short-term advances as having the final maturitythis exposure, which is achieved through issued US dollar debt or by converting euro debt to US dollars using cross-currency swaps.
As at 31 December 2017, £674m of the facilities availableGroup’s debt is held at fixed rates (2016: £650m), with £411m held at floating rates (2016: £1,818m), partially offset by US dollar cash balances which attract floating rate interest. As at 31 December 2017, a 1% movement in US dollar interest rates for one year would result in a £2m movement in the interest charge (2016: £13m).
Overseas profits are converted to refinance them)sterling to satisfy sterling cash outflows such as dividends at the prevailing spot rate at the time of the transaction. To the extent the Group has sufficient sterling, US dollars may be between three and ten years. Atheld as dollar cash to provide a natural offset to the end of 2015 the average maturity of gross borrowings was 5.1 years (2014: 4.7 years) of which bonds represented 98% (2014: 97%) of these borrowings.Group’s debt or to satisfy future US dollar cash outflows.
The Group believes that ready access to different funding markets also helps to reduce its liquidity risk, and that published credit ratings and published financial policies improve such access. At the year end, the long-term ratings were Baa1 from Moody’s and BBB+ from Standard & Poor’s, and the short-term ratings were P2 and A2 respectively. All of the Group’s credit ratings remained unchanged during the year, although in October 2015, Standard & Poor’s changed the outlook on their long-term rating from ‘Stable’ to ‘Negative’. In February 2016, Moody’s changed Pearson’s long-term rating from Baa1 (negative) to Baa2 (stable). In March 2016, Standard & Poor’s changed Pearson’s long-term rating from BBB+ (Negative) to BBB (Stable). The short-term ratings from Moody’s and Standard & Poor’s remain unchanged at P2 and A2. The Group’s policy is to strive to maintain a rating of Baa1/BBB+ over the long term. The Group also uses a range of ratios to monitor and manage its finances internally. These include interest cover, net debt to operating profit and cash flow to debt measures. The Group also maintains undrawn committed borrowing facilities. At the end of 2015 the committed facilities amounted to $1,750m (£1,187m) and their weighted average maturity was 4.6 years.does not have significant cross border foreign exchange transactional exposures.
Interest rate risk managementPearson plc Consolidated Financial Statements
The Group’s exposure to interest rate fluctuations on its borrowings is managed by borrowing on a fixed rate basis and by entering into rate swaps, rate caps and forward rate agreements. The Group also aims to avoid undue exposure to a single interest rate setting. Reflecting this objective, the Group has predominantly swapped its fixed rate bond issues to floating rate at their launch. This creates a group of derivatives, under which the Group is a receiver of fixed rates and a payer of floating rates.
The Group’s policy objective has continued to be to set a target proportion of its forecast borrowings (taken at the year end, with cash netted against floating rate debt and before certain adjustments for IAS 39) to be hedged (i.e. fixed or capped at the year end) over the next four years, subject to a maximum of 65% and a minimum that starts at 40% and falls by 10% at each year end. At the end of 2015 the fixed to floating hedging ratio, on the above basis, was approximately 90%:10%. The higher than policy ratio is a result of higher cash balances due to divestments in 2015. Our policy is to not close out contracts where we anticipate reverting to compliance with the policy over the longer term. A simultaneous 1% change on 1 January 2016 in the Group’s variable interest rates in US dollar and sterling, taking into account forecast seasonal debt, would have a £6m effect on profit before tax.
The policy described above creates a further group of derivatives, under which the Group is a payer of fixed rates and a receiver of floating rates. The Group’s accounting objective in relation to its use of interest rate derivatives is to minimise the impact on the income statement of changes in the mark-to-market value of its derivative portfolio as a whole. It uses duration calculations to estimate the sensitivity of the derivatives to movements in
Notes to the consolidated financial statements continued
19. Financial risk management continued
Interest and foreign exchange rate management continued
As at 31 December 2017, the sensitivity of the carrying value of the Group’s financial instruments to fluctuations in interest rates and exchange rates is as follows:
All figures in £ millions | Carrying value | Impact of 1% increase in interest rates | Impact of 1% decrease in interest rates | Impact of 10% strengthening in sterling | Impact of 10% weakening in sterling | |||||||||||||||
Investments in unlisted securities | 77 | — | — | (6 | ) | 7 | ||||||||||||||
Cash and cash equivalents | 645 | — | — | (54 | ) | 66 | ||||||||||||||
Marketable securities | 8 | — | — | — | — | |||||||||||||||
Derivative financial instruments | — | (26 | ) | 26 | 1 | (1 | ) | |||||||||||||
Bonds | (1,062 | ) | 45 | (48 | ) | 97 | (118 | ) | ||||||||||||
Other borrowings | (23 | ) | — | — | 2 | (2 | ) | |||||||||||||
Liability to purchase own shares | (151 | ) | — | — | — | — | ||||||||||||||
Other net financial assets | 497 | — | — | (41 | ) | 50 | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total financial instruments | (9 | ) | 19 | (22 | ) | (1 | ) | 2 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
The table shows the sensitivities of the fair values of each class of financial instruments to an isolated change in either interest rates or foreign exchange rates. Other net financial assets comprises trade receivables less trade payables. A significant proportion of the movements shown above would impact equity rather than the income statement due to the location and functional currency of the entities in which they arise and the availability of net investment hedging.
The Group’s income statement is reported at average rates for the year while the balance sheet is translated at the year-end closing rate. Differences between these rates can distort ratio calculations such as debt to EBITDA and interest cover. Adjusted operating profit translated at year-end closing rates would be £22m lower than the reported figure of £576m at £554m (2016: £55m higher if translated at the year-end 2016 rate instead of the 2016 average rate at £690m compared with a reported figure of £635m). EBITDA translated at year-end closing rates would be £25m lower than the reported figure of £738m at £713m (2016: £63m higher if translated at the year-end 2016 rate instead of the 2016 average rate, at £848m, compared with a reported figure of £785m).
Liquidity and re-financing risk management
The Group regularly reviews the level of cash and debt facilities required to fund its activities. This involves preparing a prudent cash flow forecast for the next three to five years, determining the level of debt facilities required to fund the business, planning for shareholder returns and repayments of maturing debt, and identifying an appropriate amount of headroom to provide a reserve against unexpected outflows.
At 31 December 2017, the Group had cash of £0.6bn and an undrawn US dollar denominated revolving credit facility due 2021 of $1.75bn (£1.3bn). At 31 December 2016, the Group had cash of £1.5bn and an undrawn US dollar denominated revolving credit facility due 2021 of $1.75bn (£1.4bn).
The $1.75bn facility contains interest cover and leverage covenants which the Group has complied with for the year ended 31 December 2017.
At the end of 2017, the currency split of the Group’s trade payables was US dollar £137m, sterling £58m and other currencies £90m (2016: US dollar £164m, sterling £67m and other currencies £102m) . Trade payables are all due within one year (2016: all due within one year).
Pearson plc Consolidated Financial Statements
Notes to the consolidated financial statements continued
19. Financial risk management continued
Liquidity and re-financing risk management continued
market rates. The Group also identifies which derivatives are eligible for fair value hedge accounting (which reducesfollowing table analyses the income statement impact of changesGroup’s bonds and derivative assets and liabilities into relevant maturity groupings based on the remaining period at the balance sheet date to the contractual maturity date. The amounts disclosed in the market value of a derivative). The Group then balancestable are the total portfolio between hedge-accountedcontractual undiscounted cash flows (including interest) and pooled segments, so thatas such may differ from the expected movementamounts disclosed on the pooled segment is minimal.balance sheet.
Analysed by maturity | Analysed by currency | |||||||||||||||||||||||||||||||
All figures in £ millions | Less than one year | Later than one year but less than five years | Five years or more | Total | USD | GBP | Other | Total | ||||||||||||||||||||||||
At 31 December 2017 | ||||||||||||||||||||||||||||||||
Bonds | 20 | 601 | 533 | 1,154 | 184 | — | 970 | 1,154 | ||||||||||||||||||||||||
Rate derivatives – inflows | (38 | ) | (975 | ) | (684 | ) | (1,697 | ) | (53 | ) | (751 | ) | (893 | ) | (1,697 | ) | ||||||||||||||||
Rate derivatives – outflows | 48 | 1,060 | 667 | 1,775 | 1,003 | 751 | 21 | 1,775 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Total | 30 | 686 | 516 | 1,232 | 1,134 | — | 98 | 1,232 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
At 31 December 2016 | ||||||||||||||||||||||||||||||||
Bonds | 82 | 1,308 | 1,292 | 2,682 | 1,732 | — | 950 | 2,682 | ||||||||||||||||||||||||
Rate derivatives – inflows | (103 | ) | (1,086 | ) | (867 | ) | (2,056 | ) | (239 | ) | (838 | ) | (979 | ) | (2,056 | ) | ||||||||||||||||
Rate derivatives – outflows | 82 | 1,202 | 891 | 2,175 | 1,308 | 838 | 29 | 2,175 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Total | 61 | 1,424 | 1,316 | 2,801 | 2,801 | — | — | 2,801 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial counterparty risk management
Counterparty credit limits, which take published credit rating and other factors into account, are set to cover the Group’s total aggregate exposure to a single financial institution. The limits applicable to published credit ratingsrating bands are approved by the chief financial officerChief Financial Officer within guidelines approved by the board. Exposures and limits applicable to each financial institution are reviewed on a regular basis.
Foreign currencyCash deposits and derivative transactions are made with approved counterparties up to pre-agreed limits. To manage counterparty risk management
Althoughassociated with cash and cash equivalents, the Group is based in the UK, it has its most significantuses a mixture of money market funds as well as bank deposits. As at 31 December 2017, 58% of cash and cash equivalents was held with investment in overseas operations. The most significant currency forgrade bank counterparties, 38% with AAA money market funds and 4% held with non-investment grade bank counterparties. As at 31 December 2017, the Group is the US dollar. The Group’s policy on routine transactional conversions between currencies (for example, the collection of receivables, and the settlement of payables or interest) remains that these should be transacted at the relevant spot exchange rate. The majority of the Group’s operations are domestic within their country of operation. No unremitted profits are hedged with foreign exchange contracts, as the company judges it inappropriate to hedge non cash flow translational exposure with cash flow instruments. However, the Group does seek to create a natural hedge of this exposure through its policy of aligning approximately the currency composition of its core net borrowings (after the impact of cross-currency rate derivatives) with its forecast operating profit before depreciation and amortisation. This policy aims to soften the impact of changes in foreign exchange rates on consolidated interest cover and earnings. The policy above applies only to currencies that account for more than 15% of Group operating profit before depreciation and amortisation, which currently is only the US dollar. The Group still borrows small amounts in other currencies, typically for seasonal working capital needs. The Group policy does not require existing currency debt to be terminated to match declines in that currency’s share of Group operating profit before depreciation and amortisation. In addition, currencies that account for less than 15% of Group operating profit before depreciation and amortisation can be included in the above hedging process at the request of the chief financial officer.
Included within year end net debt, the net borrowings/(cash) in the hedging currencies above (taking into account the effect of cross-currency swaps) were: US dollar £1,345m and sterling £(385)m.
Use of currency debt and currency derivatives
The Group uses both currency denominated debt and derivative instruments to implement the above policy.
Its intention is that gains/losses on the derivatives and debt offset the losses/gains on the foreign currency assets and income. Each quarter the value of hedging instruments is monitored against the assets in the relevant currency and, where practical, a decision is made whether to treat the debt or derivative ashad a net exposure of £24m with investment hedge (permitting foreign exchange movements on it to be taken to reserves)grade counterparties for the purposes of IAS 39.derivative transactions.
Pearson plc Consolidated Financial Statements
Notes to the consolidated financial statements continued
19. Financial risk management continued
Analysis of Group debt, including the impact of derivatives
The following tables analyse the Group’s sources of funding and the impact of derivatives on the Group’s debt instruments.
The Group’s net debt position is set out below:
All figures in £ millions | 2015 | 2014 | ||||||
Cash and cash equivalents | 1,703 | 530 | ||||||
Marketable securities | 28 | 16 | ||||||
Derivative financial instruments | (55 | ) | 40 | |||||
Bank loans, overdrafts and loan notes | (38 | ) | (42 | ) | ||||
Bonds | (2,284 | ) | (2,173 | ) | ||||
Finance lease liabilities | (8 | ) | (10 | ) | ||||
|
|
|
| |||||
Net debt | (654 | ) | (1,639 | ) | ||||
|
|
|
|
The split of net debt between fixed and floating rate, stated after the impact of rate derivatives, is as follows:
All figures in £ millions | 2015 | 2014 | ||||||
Fixed rate | 577 | 597 | ||||||
Floating rate | 77 | 1,042 | ||||||
|
|
|
| |||||
Total | 654 | 1,639 | ||||||
|
|
|
|
Gross borrowings, after the impact of cross-currency rate derivatives, analysed by currency are as follows:
All figures in £ millions | 2015 | 2014 | ||||||
US dollar | 2,308 | 2,099 | ||||||
Sterling | 1 | 104 | ||||||
Other | 21 | 22 | ||||||
|
|
|
| |||||
Total | 2,330 | 2,225 | ||||||
|
|
|
|
As at 31 December 2015 the exposure of the borrowings of the Group to interest rate changes when the borrowings re-price is as follows:
All figures in £ millions | Less than one year | One to five years | More than five years | Total | ||||||||||||
Re-pricing profile of borrowings | 282 | 625 | 1,423 | 2,330 | ||||||||||||
Effect of rate derivatives | 1,449 | (33 | ) | (1,416 | ) | — | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | 1,731 | 592 | 7 | 2,330 | ||||||||||||
|
|
|
|
|
|
|
|
Notes to the consolidated financial statements continued
19. Financial risk management continued
Analysis of Group debt, including the impact of derivatives continued
The maturity of contracted cash flows associated with the Group’s financial liabilities is as follows:
2015 | ||||||||||||||||
All figures in £ millions | USD | GBP | Other | Total | ||||||||||||
Not later than one year | 470 | 58 | 73 | 601 | ||||||||||||
Later than one year and not later than five years | 705 | — | — | 705 | ||||||||||||
Later than five years | 1,578 | — | — | 1,578 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | 2,753 | 58 | 73 | 2,884 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Analysed as: | ||||||||||||||||
Bonds | 1,745 | — | 829 | 2,574 | ||||||||||||
Rate derivatives – inflows | (335 | ) | (858 | ) | (919 | ) | (2,112 | ) | ||||||||
Rate derivatives – outflows | 1,155 | 858 | 90 | 2,103 | ||||||||||||
Trade payables | 188 | 58 | 73 | 319 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | 2,753 | 58 | 73 | 2,884 | ||||||||||||
|
|
|
|
|
|
|
|
2014 | ||||||||||||||||
All figures in £ millions | USD | GBP | Other | Total | ||||||||||||
Not later than one year | 398 | 160 | 99 | 657 | ||||||||||||
Later than one year and not later than five years | 877 | — | — | 877 | ||||||||||||
Later than five years | 1,126 | — | — | 1,126 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | 2,401 | 160 | 99 | 2,660 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Analysed as: | ||||||||||||||||
Bonds | 1,711 | 318 | 439 | 2,468 | ||||||||||||
Rate derivatives – inflows | (379 | ) | (656 | ) | (537 | ) | (1,572 | ) | ||||||||
Rate derivatives – outflows | 893 | 444 | 98 | 1,435 | ||||||||||||
Trade payables | 176 | 54 | 99 | 329 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | 2,401 | 160 | 99 | 2,660 | ||||||||||||
|
|
|
|
|
|
|
|
All cash flow projections shown above are on an undiscounted basis. Any cash flows based on a floating rate are calculated using interest rates as set at the date of the last rate reset. Where this is not possible, floating rates are based on interest rates prevailing at 31 December in the relevant year. All derivative amounts are shown gross, although the Group net settles these amounts wherever possible.
Any amounts drawn under revolving credit facilities and commercial paper are assumed to mature at the maturity date of the relevant facility, with interest calculated as payable in each calendar year up to and including the date of maturity of the facility.
Notes to the consolidated financial statements continued
19. Financial risk management continued
Financial instruments – fair value measurement
The following table provides an analysis of those financial instruments that are measured subsequently to initial recognition at fair value, grouped into levels 1 to 3, based on the degree to which the fair value is observable:
Level 1 fair value measurements are those derived from unadjusted quoted prices in active markets for identical assets or liabilities;
Level 2 fair value measurements are those derived from inputs, other than quoted prices included within level 1, that are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices); and
Level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs).
2015 | 2014 | |||||||||||||||||||||||||||||||
All figures in £ millions | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||||||
Financial assets at fair value | ||||||||||||||||||||||||||||||||
Derivative financial assets | — | 110 | — | 110 | — | 114 | — | 114 | ||||||||||||||||||||||||
Marketable securities | — | 28 | — | 28 | — | 16 | — | 16 | ||||||||||||||||||||||||
Available for sale financial assets | ||||||||||||||||||||||||||||||||
Investments in listed securities | — | — | — | — | — | 9 | — | 9 | ||||||||||||||||||||||||
Investments in unlisted securities | — | — | 143 | 143 | — | — | 45 | 45 | ||||||||||||||||||||||||
Financial liabilities at fair value | ||||||||||||||||||||||||||||||||
Derivative financial liabilities | — | (165 | ) | — | (165 | ) | — | (74 | ) | — | (74 | ) | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Total | — | (27 | ) | 143 | 116 | — | 65 | 45 | 110 | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table analyses the movements in level 3 fair value measurements:
2015 | 2014 | |||||||
All figures in £ millions | Investments in unlisted securities | Investments in unlisted securities | ||||||
At beginning of year | 45 | 94 | ||||||
Exchange differences | 3 | 6 | ||||||
Additions | 101 | 3 | ||||||
Fair value movements | — | — | ||||||
Disposals | (6 | ) | (58 | ) | ||||
|
|
|
| |||||
At end of year | 143 | 45 | ||||||
|
|
|
|
The fair value of the 11% stake in The Economist is valued by reference to the disposal transaction terms. The fair value of the remaining investments in unlisted securities is determined by reference to the financial performance of the underlying asset and amounts realised on the sale of similar assets.
Notes to the consolidated financial statements continued
19. Financial risk management continued
Financial instruments – sensitivity analysis
As at 31 December 2015 the sensitivity of the carrying value of the Group’s financial instruments to fluctuations in interest rates and exchange rates is as follows:
All figures in £ millions | Carrying value | Impact of 1% increase in interest rates | Impact of 1% decrease in interest rates | Impact of 10% strengthening in sterling | Impact of 10% weakening in sterling | |||||||||||||||
Investments in listed securities | — | — | — | — | — | |||||||||||||||
Investments in unlisted securities | 143 | — | — | (4 | ) | 5 | ||||||||||||||
Cash and cash equivalents | 1,703 | — | — | (67 | ) | 82 | ||||||||||||||
Marketable securities | 28 | — | — | — | — | |||||||||||||||
Derivative financial instruments | (55 | ) | (93 | ) | 99 | 14 | (18 | ) | ||||||||||||
Bonds | (2,284 | ) | 97 | (103 | ) | 208 | (254 | ) | ||||||||||||
Other borrowings | (46 | ) | — | — | 5 | (6 | ) | |||||||||||||
Other net financial assets | 644 | — | — | (57 | ) | 68 | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total financial instruments | 133 | 4 | (4 | ) | 99 | (123 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
The table shows the sensitivities of the fair values of each class of financial instruments to an isolated change in either interest rates or foreign exchange rates. The class ‘Other net financial assets’ comprises trade receivables less trade payables.
The sensitivities of derivative instruments are calculated using established estimation techniques such as discounted cash flow and option valuation models. Where modelling an interest rate decrease of 1% led to negative interest rates, these points on the yield curve were adjusted to 0%. A large proportion of the movements shown above would impact equity rather than the income statement, due to the location and functional currency of the entities in which they arise and the availability of net investment hedge treatment. The changes in valuations are estimates of the impact of changes in market variables and are not a prediction of future events or anticipated gains or losses.
20. Intangible assets – Pre-publicationpre-publication
All figures in £ millions | 2015 | 2014 | ||||||
Cost | ||||||||
At beginning of year | 2,138 | 1,933 | ||||||
Exchange differences | 66 | 80 | ||||||
Additions | 347 | 358 | ||||||
Disposal through business disposal | (90 | ) | — | |||||
Disposals | (260 | ) | (234 | ) | ||||
Acquisition through business combination | — | 1 | ||||||
|
|
|
| |||||
At end of year | 2,201 | 2,138 | ||||||
|
|
|
| |||||
Amortisation | ||||||||
At beginning of year | (1,318 | ) | (1,216 | ) | ||||
Exchange differences | (47 | ) | (60 | ) | ||||
Charge for the year | (281 | ) | (292 | ) | ||||
Disposal through business disposal | 26 | — | ||||||
Disposals | 260 | 234 | ||||||
Transfer to receivables | — | 16 | ||||||
|
|
|
| |||||
At end of year | (1,360 | ) | (1,318 | ) | ||||
|
|
|
| |||||
Carrying amounts | ||||||||
|
|
|
| |||||
At end of year | 841 | 820 | ||||||
|
|
|
|
Notes to the consolidated financial statements continued
20. Intangible assets – Pre-publication continued
All figures in £ millions | 2017 | 2016 | ||||||
Cost | ||||||||
At beginning of year | 2,417 | 2,201 | ||||||
Exchange differences | (168 | ) | 380 | |||||
Additions | 362 | 395 | ||||||
Disposal through business disposal | (1 | ) | (8 | ) | ||||
Disposals | (248 | ) | (565 | ) | ||||
Transfer from intangible assets | — | 14 | ||||||
Transfer to assets classified as held for sale | (508 | ) | — | |||||
|
|
|
| |||||
At end of year | 1,854 | 2,417 | ||||||
|
|
|
| |||||
Amortisation | ||||||||
At beginning of year | (1,393 | ) | (1,360 | ) | ||||
Exchange differences | 109 | (250 | ) | |||||
Charge for the year | (338 | ) | (350 | ) | ||||
Disposal through business disposal | — | 4 | ||||||
Disposals | 248 | 565 | ||||||
Transfer from intangible assets | — | (2 | ) | |||||
Transfer to assets classified as held for sale | 261 | — | ||||||
|
|
|
| |||||
At end of year | (1,113 | ) | (1,393 | ) | ||||
|
|
|
| |||||
Carrying amounts | ||||||||
|
|
|
| |||||
At end of year | 741 | 1,024 | ||||||
|
|
|
|
Included in the above are pre-publication assets amounting to £580m (2014: £546m)£504m (2016: £694m) which will be realised in more than one year.
Amortisation is included in the income statement in cost of goods sold. There was no amortisation within discontinued operations in either year.
Disposal through business disposal amounts relate to the disposal of PowerSchool, see note 31 for further information.
21. Inventories
All figures in £ millions | 2015 | 2014 | 2017 | 2016 | ||||||||||||
Raw materials | 8 | 9 | 4 | 5 | ||||||||||||
Work in progress | 8 | 10 | 2 | 6 | ||||||||||||
Finished goods | 195 | 205 | 142 | 224 | ||||||||||||
|
|
|
| |||||||||||||
211 | 224 | 148 | 235 | |||||||||||||
|
|
|
|
The cost of inventories relating to continuing operations recognised as an expense and included in the income statement in cost of goods sold amounted to £331m (2014: £379m)£324m (2016: £340m). In 2015, £33m (2014: £38m)2017, £38m (2016: £48m) of inventory provisions was charged in the income statement. None of the inventory is pledged as security.
Pearson plc Consolidated Financial Statements
Notes to the consolidated financial statements continued
22. Trade and other receivables
All figures in £ millions | 2015 | 2014 | 2017 | 2016 | ||||||||||||
Current | ||||||||||||||||
Trade receivables | 938 | 963 | 739 | 961 | ||||||||||||
Royalty advances | 20 | 18 | 8 | 22 | ||||||||||||
Prepayments and accrued income | 118 | 107 | ||||||||||||||
Prepayments | 82 | 124 | ||||||||||||||
Accrued income | 1 | 15 | ||||||||||||||
Other receivables | 208 | 222 | 280 | 235 | ||||||||||||
|
|
|
| |||||||||||||
1,284 | 1,310 | 1,110 | 1,357 | |||||||||||||
|
|
|
| |||||||||||||
Non-current | ||||||||||||||||
Trade receivables | 25 | 26 | 21 | 21 | ||||||||||||
Royalty advances | 13 | 8 | 20 | 10 | ||||||||||||
Prepayments and accrued income | 43 | 30 | ||||||||||||||
Prepayments | 15 | 13 | ||||||||||||||
Accrued income | 10 | 31 | ||||||||||||||
Other receivables | 34 | 18 | 37 | 29 | ||||||||||||
|
|
|
| |||||||||||||
115 | 82 | 103 | 104 | |||||||||||||
|
|
|
|
The carrying value of the Group’s trade and other receivables approximates its fair value. Trade receivables are stated at fair value, net of provisions for bad and doubtful debts and anticipated future sales returns. The movements onin the provision for bad and doubtful debts are as follows:
All figures in £ millions | 2015 | 2014 | ||||||
At beginning of year | (73 | ) | (58 | ) | ||||
Exchange differences | 3 | — | ||||||
Income statement movements | (31 | ) | (21 | ) | ||||
Utilised | 32 | 17 | ||||||
Acquisition through business combination | — | (11 | ) | |||||
Disposal through business disposal | 5 | — | ||||||
|
|
|
| |||||
At end of year | (64 | ) | (73 | ) | ||||
|
|
|
|
Notes to the consolidated financial statements continued
22. Trade and other receivables continued
All figures in £ millions | 2017 | 2016 | ||||||
At beginning of year | (112 | ) | (64 | ) | ||||
Exchange differences | 7 | (17 | ) | |||||
Income statement movements | (38 | ) | (53 | ) | ||||
Utilised | 21 | 22 | ||||||
Disposal through business disposal | 1 | — | ||||||
Transfer to assets classified as held for sale | 5 | — | ||||||
|
|
|
| |||||
At end of year | (116 | ) | (112 | ) | ||||
|
|
|
|
Concentrations of credit risk with respect to trade receivables are limited due to the Group’s large number of customers, who are internationally dispersed.
The ageing of the Group’s trade receivables is as follows:
All figures in £ millions | 2015 | 2014 | 2017 | 2016 | ||||||||||||
Within due date | 754 | 869 | 661 | 812 | ||||||||||||
Up to three months past due date | 253 | 203 | 187 | 232 | ||||||||||||
Three to six months past due date | 58 | 40 | 48 | 55 | ||||||||||||
Six to nine months past due date | 19 | 15 | 18 | 21 | ||||||||||||
Nine to 12 months past due date | 13 | 15 | 13 | 14 | ||||||||||||
More than 12 months past due date | 16 | 11 | 3 | 7 | ||||||||||||
|
|
|
| |||||||||||||
Total trade receivables | 1,113 | 1,153 | 930 | 1,141 | ||||||||||||
Less: provision for sales returns | (150 | ) | (164 | ) | (170 | ) | (159 | ) | ||||||||
|
|
|
| |||||||||||||
Net trade receivables | 963 | 989 | 760 | 982 | ||||||||||||
|
|
|
|
Pearson plc Consolidated Financial Statements
Notes to the consolidated financial statements continued
22. Trade and other receivables continued
The Group reviews its bad debt provision at least twice a year following a detailed review of receivable balances and historical payment profiles. Management believes all the remaining receivable balances are fully recoverable.
23. Provisions for other liabilities and charges
All figures in £ millions | Deferred consideration | Property | Disposals and closures | Legal and other | Total | Deferred consideration | Property | Disposals and closures | Legal and other | Total | ||||||||||||||||||||||||||||||
At 1 January 2015 | 57 | 7 | 20 | 51 | 135 | |||||||||||||||||||||||||||||||||||
At 1 January 2017 | 56 | 4 | 10 | 36 | 106 | |||||||||||||||||||||||||||||||||||
Exchange differences | 3 | — | — | (4 | ) | (1 | ) | (5 | ) | — | — | (2 | ) | (7 | ) | |||||||||||||||||||||||||
Charged to income statement | — | — | — | 12 | 12 | — | — | — | 4 | 4 | ||||||||||||||||||||||||||||||
Released to income statement | (1 | ) | — | — | (4 | ) | (5 | ) | — | — | — | (7 | ) | (7 | ) | |||||||||||||||||||||||||
Utilised | (6 | ) | — | (2 | ) | (8 | ) | (16 | ) | |||||||||||||||||||||||||||||||
Disposal through business disposal | — | (1 | ) | — | (1 | ) | (2 | ) | — | (1 | ) | 3 | (2 | ) | — | |||||||||||||||||||||||||
Utilised | (6 | ) | — | — | (20 | ) | (26 | ) | ||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
At 31 December 2015 | 53 | 6 | 20 | 34 | 113 | |||||||||||||||||||||||||||||||||||
At 31 December 2017 | 45 | 3 | 11 | 21 | 80 | |||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
Analysis of provisions:
2015 | ||||||||||||||||||||
All figures in £ millions | Deferred consideration | Property | Disposals and closures | Legal and other | Total | |||||||||||||||
Current | 5 | 3 | 15 | 19 | 42 | |||||||||||||||
Non-current | 48 | 3 | 5 | 15 | 71 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
53 | 6 | 20 | 34 | 113 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
2014 | ||||||||||||||||||||
Current | 7 | 4 | 20 | 22 | 53 | |||||||||||||||
Non-current | 50 | 3 | — | 29 | 82 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
57 | 7 | 20 | 51 | 135 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
Notes to the consolidated financial statements continued
23. Provisions for other liabilities and charges continued
2017 | ||||||||||||||||||||
All figures in £ millions | Deferred consideration | Property | Disposals and closures | Legal and other | Total | |||||||||||||||
Current | 5 | 1 | 11 | 8 | 25 | |||||||||||||||
Non-current | 40 | 2 | — | 13 | 55 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
45 | 3 | 11 | 21 | 80 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
2016 | ||||||||||||||||||||
Current | 6 | 1 | 8 | 12 | 27 | |||||||||||||||
Non-current | 50 | 3 | 2 | 24 | 79 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
56 | 4 | 10 | 36 | 106 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
Deferred consideration primarily relates to the formation of a venture in a North America business in 2011. The provision will be utilised over a number of years as payments are based on a royalty rate. Disposals and closures include liabilities related to the disposal of Penguin.Penguin with the provisions utilised as the disposals and closures are completed. Legal and other includes legal claims, contract disputes and potential contract losses.losses with the provisions utilised as the cases are settled. Restructuring provisions were not material in either 2017 or 2016.
Pearson plc Consolidated Financial Statements
Notes to the consolidated financial statements continued
24. Trade and other liabilities
All figures in £ millions | 2015 | 2014 | 2017 | 2016 | ||||||||||||
Trade payables | 319 | 329 | 265 | 333 | ||||||||||||
Social security and other taxes | 22 | 21 | 21 | 25 | ||||||||||||
Accruals | 371 | 501 | 447 | 507 | ||||||||||||
Deferred income | 766 | 801 | 322 | 883 | ||||||||||||
Interest payable | 19 | 28 | 45 | 31 | ||||||||||||
Liability to purchase own shares | 151 | — | ||||||||||||||
Other liabilities | 249 | 231 | 224 | 272 | ||||||||||||
|
|
|
| |||||||||||||
1,746 | 1,911 | 1,475 | 2,051 | |||||||||||||
|
|
|
| |||||||||||||
Less: non-current portion | ||||||||||||||||
Accruals | 20 | 22 | 26 | 17 | ||||||||||||
Deferred income | 262 | 201 | 35 | 319 | ||||||||||||
Interest payable | — | 19 | ||||||||||||||
Other liabilities | 74 | 68 | 72 | 86 | ||||||||||||
|
|
|
| |||||||||||||
356 | 310 | 133 | 422 | |||||||||||||
|
|
|
| |||||||||||||
Current portion | 1,390 | 1,601 | 1,342 | 1,629 | ||||||||||||
|
|
|
|
The carrying value of the Group’s trade and other liabilities approximates its fair value.
The deferred income balance comprises principally multi-year obligations to deliver workbooks to adoption customers in school businesses; advance payments in assessment, testing and training businesses; subscription income in school and college businesses; and obligations to deliver digital content in future periods.
The liability to purchase own shares relates to a liability arising under a buyback agreement for the purchase of the company’s own shares (see note 27).
25. Retirement benefit and other post-retirement obligations
Background
The Group operates a number of defined benefit and defined contribution retirement plans throughout the world.
The largest plan is the Pearson Group Pension Plan (UK Group plan) in the UK, which is sectionalised to provide both defined benefit and defined contribution pension benefits. The defined benefit section was closed to new members from 1 November 2006. The defined contribution section, opened in 2003, is open to new and existing employees. Finally, there is a separate section within the UK Group plan set up for auto-enrolment. The defined benefit section of the UK Group plan is a final salary pension plan which provides benefits to members in the form of a guaranteed level of pension payable for life. The level of benefits depends on the length of service and final pensionable pay. The UK Group plan is funded with benefit payments from trustee administeredtrustee-administered funds. The UK Group plan is administered in accordance with the Trust Deed and Rules in the interests of its beneficiaries by Pearson Group Pension Trustee Limited.
At 31 December 2017, the UK Group plan had approximately 24,000 members, analysed in the following table:
All figures in % | Active | Deferred | Pensioners | Total | ||||||||||||
Defined benefit | 1 | 26 | 35 | 62 | ||||||||||||
Defined contribution | 8 | 30 | — | 38 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | 9 | 56 | 35 | 100 | ||||||||||||
|
|
|
|
|
|
|
|
Pearson plc Consolidated Financial Statements
Notes to the consolidated financial statements continued
25. Retirement benefit and other post-retirement obligations continued
Background continued
At 31 December 2015 the UK Group plan has approximately 25,000 members, analysed in the following table:
All figures in % | Active | Deferred | Pensioners | Total | ||||||||||||
Defined benefit | 1 | 27 | 34 | 62 | ||||||||||||
Defined contribution | 14 | 24 | — | 38 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | 15 | 51 | 34 | 100 | ||||||||||||
|
|
|
|
|
|
|
|
The other major defined benefit plans are based in the US. These are also final salary pension plans which provide benefits to members in the form of a guaranteed pension payable for life, with the level of benefits dependent on length of service and final pensionable pay. The majority of the US plans are funded.
The Group also has several post-retirement medical benefit plans (PRMBs), principally in the US. PRMBs are unfunded but are accounted for and valued similarly to defined benefit pension plans.
The defined benefit schemes expose the Group to actuarial risks, such as life expectancy, inflation risks, and investment risk including asset volatility and changes in bond yields. The Group is not exposed to any unusual, entity specificentity-specific or plan-specific risks.
The defined contribution section of the UK Group plan specific risks.operates a Reference Scheme Test (RST) pension underpin for its members. Where a member’s fund value is insufficient to purchase the RST pension upon retirement, the UK Group plan is liable for the shortfall to cover the member’s RST pension. During the year, the UK Group plan revised its approach to securing the RST underpin by converting a member’s fund value into a pension in the UK Group plan rather than purchasing an annuity with an insurer. A liability of £32m (2016: £181m) in respect of the underpin is included in the UK Group plan’s defined benefit obligation, calculated as the present value of projected payments less the fund value. The UK Group plan’s conversion factors are lower than the respective insurer annuity values and this has driven a reduction in the underpin liability, resulting in an actuarial gain through other comprehensive income and an increase in the surplus at 31 December 2017. From 1 January 2018, members who have sufficient funds to purchase an RST pension will be able to convert their fund value into a pension in the UK Group plan as an alternative to purchasing an annuity with an insurer. The Group does not recognise the assets and liabilities for members of the defined contribution section of the UK Group plan whose fund values are expected to be sufficient to purchase an RST pension without assistance from the UK Group plan. The defined contribution section of the UK Group plan had gross assets of £442m at 31 December 2017.
Assumptions
The principal assumptions used for the UK Group plan and the US PRMB are shown below. Weighted average assumptions have been shown for the other plans, which primarily relate to US pension plans.
2015 | 2014 | 2013 | 2017 | 2016 | 2015 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
All figures in % | UK Group plan | Other plans | PRMB | UK Group plan | Other plans | PRMB | UK Group plan | Other plans | PRMB | UK Group plan | Other plans | PRMB | UK Group plan | Other plans | PRMB | UK Group plan | Other plans | PRMB | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Inflation | 3.1 | 2.5 | 2.5 | 3.0 | 2.5 | 2.5 | 3.4 | 2.5 | 2.5 | 3.2 | 1.6 | 1.5 | 3.3 | 1.6 | 1.5 | 3.1 | 2.5 | 2.5 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Rate used to discount plan liabilities | 3.7 | 4.0 | 4.0 | 3.6 | 3.7 | 3.7 | 4.4 | 4.4 | 4.4 | 2.5 | 3.0 | 3.0 | 2.5 | 3.8 | 3.9 | 3.7 | 4.0 | 4.0 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Expected rate of increase in salaries | 3.6 | 3.0 | 3.0 | 3.5 | 3.9 | 4.0 | 3.9 | 3.9 | 4.0 | 3.7 | 3.0 | 3.0 | 3.8 | 3.0 | 3.0 | 3.6 | 3.0 | 3.0 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Expected rate of increase for pensions in payment and deferred pensions | 1.9 to 5.10 | — | — | 1.9 to 5.05 | — | — | 2.3 to 5.1 | — | — | 2.1 to 5.1 | — | — | 2.2 to 5.1 | — | — | 1.9 to 5.1 | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Initial rate of increase in healthcare rate | — | — | 7.0 | — | — | 7.0 | — | — | 7.5 | — | — | 6.5 | — | — | 6.8 | — | — | 7.0 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Ultimate rate of increase in healthcare rate | — | — | 5.0 | — | — | 5.0 | — | — | 5.0 | — | — | 5.0 | — | — | 5.0 | — | — | 5.0 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pearson plc Consolidated Financial Statements
Notes to the consolidated financial statements continued
25. Retirement benefit and other post-retirement obligations continued
Assumptions continued
The UK discount rate is based on corporate bond yields adjusted to reflect the duration of liabilities. In 2017, the Group revised the portfolio of corporate bonds used to exclude bonds with an implicit government guarantee. Under the previous methodology, the 2017 UK discount rate would have been lower by around 0.1%.
The US discount rate is set by reference to a US bond portfolio matching model.
The inflation rate for the UK Group plan of 3.1%3.2% reflects the RPI rate. In line with changes to legislation in 2010, certain benefits have been calculated with reference to CPI as the inflationary measure and in these instances a rate of 2.1%2.2% has been used.
The expected rate of increase in salaries has been set at 3.6%3.7% for 20152017 with a short-term assumption of 2.0% for three years.
For the UK plan, the mortality base table assumptions have been updated and are derived from the SAPS ‘all pensioners’ tablesS2 for males and the SAPS ‘normal health pensioners’ tables for females, adjusted to reflect the observed experience of the plan, with CMI model improvement factors. A 1.5% long-term rate improvement on the CMI model is applied for both males and females.
Notes to the consolidated financial statements continued
25. Retirement benefit and other post-retirement obligations continued
Assumptions continued
For the US plans, the mortality table (RP – 2014)2017) and 2014 Improvement2017 improvement scale (MP – 2014)2017) with no adjustments havegenerational projection for male and female annuitants has been adopted from 2014, reflecting the mortality assumption most prevalent in the US.adopted.
Using the above tables, the remaining average life expectancy in years of a pensioner retiring at age 65 on the balance sheet date for the UK Group plan and US plans is as follows:
UK | US | UK | US | |||||||||||||||||||||||||||||
All figures in years | 2015 | 2014 | 2015 | 2014 | 2017 | 2016 | 2017 | 2016 | ||||||||||||||||||||||||
Male | 23.5 | 24.4 | 21.2 | 21.6 | 23.6 | 23.5 | 20.8 | 21.2 | ||||||||||||||||||||||||
Female | 25.6 | 24.5 | 23.2 | 23.8 | 25.7 | 25.6 | 22.8 | 23.2 |
The remaining average life expectancy in years of a pensioner retiring at age 65, 20 years after the balance sheet date, for the UK and US Group plans is as follows:
UK | US | UK | US | |||||||||||||||||||||||||||||
All figures in years | 2015 | 2014 | 2015 | 2014 | 2017 | 2016 | 2017 | 2016 | ||||||||||||||||||||||||
Male | 25.5 | 26.6 | 22.9 | 23.3 | 25.7 | 25.5 | 22.5 | 22.9 | ||||||||||||||||||||||||
Female | 27.8 | 26.4 | 24.9 | 25.5 | 27.9 | 27.8 | 24.4 | 24.9 |
Although the Group anticipates that plan surpluses will be utilised during the life of the plan to address member benefits, the Group recognises its pension surplus in full in respect of the UK Group plan on the basis that it is management’s judgement that there are no substantive restrictions on the return of residual plan assets in the event of a winding up of the plan after all member obligations have been met.
Pearson plc Consolidated Financial statement informationStatements
The amounts recognised in the income statement are as follows:
2015 | ||||||||||||||||||||||||
All figures in £ millions | UK Group plan | Defined benefit other | Sub-total | Defined contribution | PRMB | Total | ||||||||||||||||||
Current service cost | 20 | 2 | 22 | 74 | — | 96 | ||||||||||||||||||
Curtailments | (3 | ) | — | (3 | ) | — | — | (3 | ) | |||||||||||||||
Administration expenses | 5 | — | 5 | — | — | 5 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total operating expense | 22 | 2 | 24 | 74 | — | 98 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Interest on plan assets | (98 | ) | (5 | ) | (103 | ) | — | — | (103 | ) | ||||||||||||||
Interest on plan liabilities | 90 | 7 | 97 | — | 2 | 99 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Net finance (income)/expense | (8 | ) | 2 | (6 | ) | — | 2 | (4 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Net income statement charge | 14 | 4 | 18 | 74 | 2 | 94 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Notes to the consolidated financial statements continued
25. Retirement benefit and other post-retirement obligations continued
Financial statement informationAssumptions continued
2014 | ||||||||||||||||||||||||
All figures in £ millions | UK Group plan | Defined benefit other | Sub-total | Defined contribution | PRMB | Total | ||||||||||||||||||
Current service cost | 20 | 2 | 22 | 69 | 2 | 93 | ||||||||||||||||||
Curtailments | (5 | ) | — | (5 | ) | — | (13 | ) | (18 | ) | ||||||||||||||
Administration expenses | 4 | — | 4 | — | — | 4 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total operating expense | 19 | 2 | 21 | 69 | (11 | ) | 79 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Interest on plan assets | (103 | ) | (7 | ) | (110 | ) | — | — | (110 | ) | ||||||||||||||
Interest on plan liabilities | 98 | 8 | 106 | — | 3 | 109 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Net finance (income)/expense | (5 | ) | 1 | (4 | ) | — | 3 | (1 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Net income statement charge/(income) | 14 | 3 | 17 | 69 | (8 | ) | 78 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
2013 | ||||||||||||||||||||||||
All figures in £ millions | UK Group plan | Defined benefit other | Sub-total | Defined contribution | PRMB | Total | ||||||||||||||||||
Current service cost | 22 | 3 | 25 | 72 | 4 | 101 | ||||||||||||||||||
Curtailments | — | — | — | — | (4 | ) | (4 | ) | ||||||||||||||||
Administration expenses | 4 | — | 4 | — | — | 4 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total operating expense | 26 | 3 | 29 | 72 | — | 101 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Interest on plan assets | (95 | ) | (6 | ) | (101 | ) | — | — | (101 | ) | ||||||||||||||
Interest on plan liabilities | 94 | 7 | 101 | — | 3 | 104 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Net finance (income)/expense | (1) | 1 | — | — | 3 | 3 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Net income statement charge | 25 | 4 | 29 | 72 | 3 | 104 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Included within the 2015 results are discontinued operations consisting of a £5m charge (2014: £nil, 2013: £7m) relating to defined benefit schemes and a £8m charge (2014: £8m charge, 2013: £14m) relating to defined contribution schemes.
The amounts recognised in the balance sheetincome statement are as follows:
2015 | 2014 | |||||||||||||||||||||||||||||||
All figures in £ millions | UK Group plan | Other funded plans | Other unfunded plans | Total | UK Group plan | Other funded plans | Other Unfunded plans | Total | ||||||||||||||||||||||||
Fair value of plan assets | 2,803 | 135 | — | 2,938 | 2,714 | 164 | — | 2,878 | ||||||||||||||||||||||||
Present value of defined benefit obligation | (2,466 | ) | (157 | ) | (18 | ) | (2,641 | ) | (2,524 | ) | (196 | ) | (23 | ) | (2,743 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Net pension asset/(liability) | 337 | (22 | ) | (18 | ) | 297 | 190 | (32 | ) | (23 | ) | 135 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Other post-retirement medical benefit obligation | (76 | ) | (81 | ) | ||||||||||||||||||||||||||||
Other pension accruals | (23 | ) | (27 | ) | ||||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Net retirement benefit asset | 198 | 27 | ||||||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Analysed as: | ||||||||||||||||||||||||||||||||
Retirement benefit assets | 337 | 190 | ||||||||||||||||||||||||||||||
Retirement benefit obligations | (139 | ) | (163 | ) | ||||||||||||||||||||||||||||
|
|
|
|
2017 | ||||||||||||||||||||||||
All figures in £ millions | UK Group plan | Defined benefit other | Sub-total | Defined contribution | PRMB | Total | ||||||||||||||||||
Current service cost | 8 | 1 | 9 | 57 | (1 | ) | 65 | |||||||||||||||||
Administration expenses | 9 | 1 | 10 | — | — | 10 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total operating expense | 17 | 2 | 19 | 57 | (1 | ) | 75 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Interest on plan assets | (84 | ) | (5 | ) | (89 | ) | — | — | (89 | ) | ||||||||||||||
Interest on plan liabilities | 77 | 7 | 84 | — | 2 | 86 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Net finance (income)/expense | (7 | ) | 2 | (5 | ) | — | 2 | (3 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Net income statement charge | 10 | 4 | 14 | 57 | 1 | 72 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
2016 | ||||||||||||||||||||||||
All figures in £ millions | UK Group plan | Defined benefit other | Sub-total | Defined contribution | PRMB | Total | ||||||||||||||||||
Current service cost | 8 | 2 | 10 | 67 | — | 77 | ||||||||||||||||||
Curtailments | — | — | — | — | (2 | ) | (2 | ) | ||||||||||||||||
Administration expenses | 6 | — | 6 | — | — | 6 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total operating expense | 14 | 2 | 16 | 67 | (2 | ) | 81 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Interest on plan assets | (104 | ) | (6 | ) | (110 | ) | — | — | (110 | ) | ||||||||||||||
Interest on plan liabilities | 89 | 7 | 96 | — | 3 | 99 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Net finance (income)/expense | (15 | ) | 1 | (14 | ) | — | 3 | (11 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Net income statement charge | (1 | ) | 3 | 2 | 67 | 1 | 70 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
2015 | ||||||||||||||||||||||||
All figures in £ millions | UK Group plan | Defined benefit other | Sub-total | Defined contribution | PRMB | Total | ||||||||||||||||||
Current service cost | 20 | 2 | 22 | 74 | — | 96 | ||||||||||||||||||
Curtailments | (3 | ) | — | (3 | ) | — | — | (3 | ) | |||||||||||||||
Administration expenses | 5 | — | 5 | — | — | 5 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total operating expense | 22 | 2 | 24 | 74 | — | 98 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Interest on plan assets | (98 | ) | (5 | ) | (103 | ) | — | — | (103 | ) | ||||||||||||||
Interest on plan liabilities | 90 | 7 | 97 | — | 2 | 99 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Net finance (income)/expense | (8 | ) | 2 | (6 | ) | — | 2 | (4 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Net income statement charge | 14 | 4 | 18 | 74 | 2 | 94 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses in 2015 included a charge of £5m for defined benefit schemes and a charge of £8m for defined contribution schemes in respect of discontinued operations. There were no discontinued operations in 2016 or 2017.
Pearson plc Consolidated Financial Statements
Notes to the consolidated financial statements continued
25. Retirement benefit and other post-retirement obligations continued
Financial statement informationAssumptions continued
The amounts recognised in the balance sheet are as follows:
2017 | 2016 | |||||||||||||||||||||||||||||||
All figures in £ millions | UK Group plan | Other funded plans | Other unfunded plans | Total | UK Group plan | Other funded plans | Other unfunded plans | Total | ||||||||||||||||||||||||
Fair value of plan assets | 3,337 | 155 | — | 3,492 | 3,339 | 158 | — | 3,497 | ||||||||||||||||||||||||
Present value of defined | ||||||||||||||||||||||||||||||||
benefit obligation | (2,792 | ) | (161 | ) | (20 | ) | (2,973 | ) | (3,181 | ) | (183 | ) | (22 | ) | (3,386 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Net pension asset/(liability) | 545 | (6 | ) | (20 | ) | 519 | 158 | (25 | ) | (22 | ) | 111 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Other post-retirement medical benefit obligation | (67 | ) | (77 | ) | ||||||||||||||||||||||||||||
Other pension accruals | (11 | ) | (15 | ) | ||||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Net retirement benefit asset | 441 | 19 | ||||||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Analysed as: | �� | |||||||||||||||||||||||||||||||
Retirement benefit assets | 545 | 158 | ||||||||||||||||||||||||||||||
Retirement benefit obligations | (104 | ) | (139 | ) | ||||||||||||||||||||||||||||
|
|
|
|
The following gains/(losses) have been recognised in other comprehensive income:
All figures in £ millions | 2015 | 2014 | 2013 | 2017 | 2016 | 2015 | ||||||||||||||||||
Amounts recognised for defined benefit plans | 104 | 36 | 70 | 175 | (277 | ) | 104 | |||||||||||||||||
Amounts recognised for post-retirement medical benefit plans | 6 | (13 | ) | 9 | — | 9 | 6 | |||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Total recognised in year | 110 | 23 | 79 | 175 | (268 | ) | 110 | |||||||||||||||||
|
|
|
|
|
|
The fair value of plan assets comprises the following:
2015 | 2014 | 2017 | 2016 | |||||||||||||||||||||||||||||||||||||||||||||
All figures in % | UK Group plan | Other funded plans | Total | UK Group plan | Other funded plans | Total | UK Group plan | Other funded plans | Total | UK Group plan | Other funded plans | Total | ||||||||||||||||||||||||||||||||||||
Insurance | 29 | — | 29 | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
Equities | 12 | 2 | 14 | 26 | 2 | 28 | 1 | 1 | 2 | 2 | 1 | 3 | ||||||||||||||||||||||||||||||||||||
Bonds | 8 | 2 | 10 | 42 | 3 | 45 | — | 3 | 3 | 9 | 1 | 10 | ||||||||||||||||||||||||||||||||||||
Property | 9 | — | 9 | 9 | — | 9 | 8 | — | 8 | 8 | — | 8 | ||||||||||||||||||||||||||||||||||||
Qualifying investment fund | 50 | — | 50 | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
Pooled asset investment funds | 44 | — | 44 | 67 | — | 67 | ||||||||||||||||||||||||||||||||||||||||||
Other | 17 | — | 17 | 17 | 1 | 18 | 14 | — | 14 | 12 | — | 12 |
Pearson plc Consolidated Financial Statements
Notes to the consolidated financial statements continued
25. Retirement benefit and other post-retirement obligations continued
Assumptions continued
The plan assets do not include any of the Group’s own financial instruments, or any property occupied by the Group.
The table below further disaggregates the UK Group plan assets into additional categories and those assets which have a quoted market price in an active market and those that do not:
2015 | 2014 | 2017 | 2016 | |||||||||||||||||||||||||||||
All figures in % | Quoted market price | No quoted market price | Quoted market price | No quoted market price | Quoted market price | No quoted market price | Quoted market price | No quoted market price | ||||||||||||||||||||||||
UK equities | — | 1 | 5 | 1 | ||||||||||||||||||||||||||||
Insurance | 29 | — | — | — | ||||||||||||||||||||||||||||
Non-UK equities | 11 | 2 | 20 | 2 | — | 2 | — | 3 | ||||||||||||||||||||||||
Fixed-interest securities | 6 | — | 19 | — | 3 | — | 10 | — | ||||||||||||||||||||||||
Index-linked securities | 4 | — | 26 | — | ||||||||||||||||||||||||||||
Property | — | 9 | — | 9 | — | 8 | — | 8 | ||||||||||||||||||||||||
Qualifying investment fund | 50 | — | — | — | ||||||||||||||||||||||||||||
Pooled asset investment funds | 44 | — | 67 | — | ||||||||||||||||||||||||||||
Other | — | 17 | — | 18 | — | 14 | — | 12 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Total | 71 | 29 | 70 | 30 | 76 | 24 | 77 | 23 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
The liquidity profile of the UK Group plan assets is as follows:
All figures in % | 2015 | 2014 | 2017 | 2016 | ||||||||||||
Liquid – call <1 month | 73 | 72 | 50 | 75 | ||||||||||||
Less liquid – call 1-3 months | 2 | 2 | — | — | ||||||||||||
Liquid – call >3 months | 25 | 26 | ||||||||||||||
Illiquid – call >3 months | 50 | 25 |
Pearson plc Consolidated Financial Statements
Notes to the consolidated financial statements continued
25. Retirement benefit and other post-retirement obligations continued
Financial statement informationAssumptions continued
Changes in the values of plan assets and liabilities of the retirement benefit plans are as follows:
2015 | 2014 | 2017 | 2016 | |||||||||||||||||||||||||||||||||||||||||||||
All figures in £ millions | UK Group plan | Other plans | Total | UK Group plan | Other plans | Total | UK Group plan | Other plans | Total | UK Group plan | Other plans | Total | ||||||||||||||||||||||||||||||||||||
Fair value of plan assets | ||||||||||||||||||||||||||||||||||||||||||||||||
Opening fair value of plan assets | 2,714 | 164 | 2,878 | 2,353 | 156 | 2,509 | 3,339 | 158 | 3,497 | 2,803 | 135 | 2,938 | ||||||||||||||||||||||||||||||||||||
Exchange differences | — | 2 | 2 | — | 4 | 4 | — | (8 | ) | (8 | ) | — | 24 | 24 | ||||||||||||||||||||||||||||||||||
Interest on plan assets | 98 | 5 | 103 | 103 | 7 | 110 | 84 | 5 | 89 | 104 | 6 | 110 | ||||||||||||||||||||||||||||||||||||
Return on plans assets excluding interest | (8 | ) | (4 | ) | (12 | ) | 286 | 9 | 295 | |||||||||||||||||||||||||||||||||||||||
Return on plan assets excluding interest | (140 | ) | 10 | (130 | ) | 445 | 8 | 453 | ||||||||||||||||||||||||||||||||||||||||
Contributions by employer | 72 | 5 | 77 | 62 | 4 | 66 | 234 | 8 | 242 | 99 | 2 | 101 | ||||||||||||||||||||||||||||||||||||
Contributions by employee | 2 | — | 2 | 2 | — | 2 | ||||||||||||||||||||||||||||||||||||||||||
Benefits paid | (95 | ) | (17 | ) | (112 | ) | (92 | ) | (16 | ) | (108 | ) | (188 | ) | (18 | ) | (206 | ) | (112 | ) | (17 | ) | (129 | ) | ||||||||||||||||||||||||
Transfer | 20 | (20 | ) | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
Other | 8 | — | 8 | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||
Closing fair value of plan assets | 2,803 | 135 | 2,938 | 2,714 | 164 | 2,878 | 3,337 | 155 | 3,492 | 3,339 | 158 | 3,497 | ||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||
Present value of defined benefit obligation | ||||||||||||||||||||||||||||||||||||||||||||||||
Opening defined benefit obligation | (2,524 | ) | (219 | ) | (2,743 | ) | (2,267 | ) | (191 | ) | (2,458 | ) | (3,181 | ) | (205 | ) | (3,386 | ) | (2,466 | ) | (175 | ) | (2,641 | ) | ||||||||||||||||||||||||
Exchange differences | — | (3 | ) | (3 | ) | — | (5 | ) | (5 | ) | — | 13 | 13 | — | (32 | ) | (32 | ) | ||||||||||||||||||||||||||||||
Current service cost | (20 | ) | (2 | ) | (22 | ) | (20 | ) | (2 | ) | (22 | ) | (8 | ) | (1 | ) | (9 | ) | (8 | ) | (2 | ) | (10 | ) | ||||||||||||||||||||||||
Administration expenses | (5 | ) | — | (5 | ) | (4 | ) | — | (4 | ) | (9 | ) | (1 | ) | (10 | ) | (6 | ) | — | (6 | ) | |||||||||||||||||||||||||||
Curtailments | 3 | — | 3 | 5 | — | 5 | ||||||||||||||||||||||||||||||||||||||||||
Interest cost | (90 | ) | (7 | ) | (97 | ) | (98 | ) | (8 | ) | (106 | ) | ||||||||||||||||||||||||||||||||||||
Interest on plan liabilities | (77 | ) | (7 | ) | (84 | ) | (89 | ) | (7 | ) | (96 | ) | ||||||||||||||||||||||||||||||||||||
Actuarial gains/(losses) – experience | 107 | 2 | 109 | 11 | (1 | ) | 10 | 126 | 6 | 132 | 12 | — | 12 | |||||||||||||||||||||||||||||||||||
Actuarial gains/(losses) – demographic | (33 | ) | 1 | (32 | ) | — | (8 | ) | (8 | ) | 133 | 1 | 134 | (47 | ) | 2 | (45 | ) | ||||||||||||||||||||||||||||||
Actuarial gains/(losses) – financial | 33 | 6 | 39 | (241 | ) | (20 | ) | (261 | ) | 44 | (5 | ) | 39 | (689 | ) | (8 | ) | (697 | ) | |||||||||||||||||||||||||||||
Contributions by employee | (2 | ) | — | (2 | ) | (2 | ) | — | (2 | ) | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||
Transfer | (30 | ) | 30 | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
Other | (8 | ) | — | (8 | ) | — | — | — | ||||||||||||||||||||||||||||||||||||||||
Benefits paid | 95 | 17 | 112 | 92 | 16 | 108 | 188 | 18 | 206 | 112 | 17 | 129 | ||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||
Closing defined benefit obligation | (2,466 | ) | (175 | ) | (2,641 | ) | (2,524 | ) | (219 | ) | (2,743 | ) | (2,792 | ) | (181 | ) | (2,973 | ) | (3,181 | ) | (205 | ) | (3,386 | ) | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average duration of the defined benefit obligation is 17.116.9 years for the UK and 8.78.1 years for the US.
Changes in the value of the US PRMB are as follows:
All figures in £ millions | 2015 | 2014 | 2017 | 2016 | ||||||||||||
Opening defined benefit obligation | (81 | ) | (77 | ) | (77 | ) | (76 | ) | ||||||||
Exchange differences | (3 | ) | (4 | ) | 5 | (14 | ) | |||||||||
Current service cost | — | (2 | ) | 1 | — | |||||||||||
Curtailments | — | 13 | — | 2 | ||||||||||||
Interest cost | (2 | ) | (3 | ) | ||||||||||||
Interest on plan liabilities | (2 | ) | (3 | ) | ||||||||||||
Actuarial gains/(losses) – experience | 2 | — | 1 | 8 | ||||||||||||
Actuarial gains/(losses) – demographic | 2 | (7 | ) | 1 | 2 | |||||||||||
Actuarial gains/(losses) – financial | 2 | (6 | ) | (2 | ) | (1 | ) | |||||||||
Benefits paid | 4 | 5 | 6 | 5 | ||||||||||||
|
|
|
| |||||||||||||
Closing defined benefit obligation | (76 | ) | (81 | ) | (67 | ) | (77 | ) | ||||||||
|
|
|
|
Pearson plc Consolidated Financial Statements
Notes to the consolidated financial statements continued
25. Retirement benefit and other post-retirement obligations continued
Funding
The UK Group plan is self-administered with the plan’s assets being held independently of the Group in trust. The trustee of the plan is required to act in the best interest of the plan’s beneficiaries. The most recent triennial actuarial valuation for funding purposes was completed as at 1 January 2015 and this valuation revealed a technical provisions funding shortfall of £27m which was eliminated by contributions paid during 2015.
As a consequence of the disposal of the FT Group, an agreement has been made between Pearson and the Plan Trusteeplan trustee to accelerate the funding of the plan. As a result, the plan so that it becomesis expected to be fully funded on a ‘self-sufficiency’ basis by 2019, inclusive of £202m paid in 2017 in relation to the near future.Penguin Random House merger in 2013. This is a much higher level of funding than technical provisions. As a result, the plan expects to be able to provide benefits (in accordance with the plan rules) with a very low level of reliance on future funding from Pearson. A commitment has also been made to maintain that level of funding in future years. In addition to a substantial company contribution following the Penguin Random House merger (to be paid before July 2017), an upfront contribution will be made to the plan following the disposal of the FT Group. This is expected to be approximately £90m and there will be further annual contributions to eliminate any remaining shortfall in the self-sufficiency funding.
At 31 December 2015, assetsAssets of the plan are divided into two elements: matching assets, which are assets that produce cash flows that can be expected to match the cash flows for a proportion of the membership, and include a Liability Drivenliability-driven investment mandate (UK Bonds,bonds, interest rate/inflation swaps and other derivative instruments), inflation-linked property and infrastructure; and return seeking assets, which are assets invested with a longer-term horizon to generate the returns needed to provide the remaining expected cash flows for the beneficiaries, and include equities,diversified growth funds, property and alternative asset classes. During the fourth quarter of 2015 theThe plan’s long-term investment strategy was updatedallocates 85% to an allocationmatching assets and 15% to return seeking assets.
In October 2017, the UK Group plan purchased pensioner buy-in policies with both Aviva and Legal & General totalling £1.2bn. The buy-ins cover around a third of 84.2% Matching Assetsits total liabilities and 15.8% Return Seeking Assets as at 31 December 2015.are split equally between the two insurers. The buy-ins transfer significant longevity risk to Aviva and Legal & General, reducing the pension risks being underwritten by the Group and providing additional security for members.
Regular contributions to the plan in respect of the defined benefit sections are estimated to be £8m£6m for 2016.
The Group expects to contribute $10m in 2016 and $10m in 2017 to its US defined benefit pension plans.2018.
Sensitivities
The effect of a one percentage point increase and decrease in the discount rate on the defined benefit obligation and the total pension expense is as follows:
2015 | 2017 | |||||||||||||||
All figures in £ millions | 1% increase | 1% decrease | 1% increase | 1% decrease | ||||||||||||
Effect: | ||||||||||||||||
(Decrease)/increase in defined benefit obligation – UK Group plan | (372 | ) | 495 | (423 | ) | 575 | ||||||||||
(Decrease)/increase in defined benefit obligation – US plan | (16 | ) | 19 | (14 | ) | 16 |
The effect of members living one year more or one year less on the defined benefit obligation is as follows:
2015 | 2017 | |||||||||||||||
All figures in £ millions | 1 year increase | 1 year decrease | One year increase | One year decrease | ||||||||||||
Effect: | ||||||||||||||||
Increase/(decrease) in defined benefit obligation – UK Group plan | 100 | (96 | ) | 145 | (152 | ) | ||||||||||
Increase/(decrease) in defined benefit obligation – US plan | 7 | (7 | ) | 8 | (9 | ) |
Pearson plc Consolidated Financial Statements
Notes to the consolidated financial statements continued
25. Retirement benefit and other post-retirement obligations continued
Sensitivities continued
The effect of a half percentage point increase and decrease in the inflation rate is as follows:
2015 | 2017 | |||||||||||||||
All figures in £ millions | 0.5% increase | 0.5% decrease | 0.5% increase | 0.5% decrease | ||||||||||||
Effect: | ||||||||||||||||
Increase/(decrease) in defined benefit obligation – UK Group plan | 113 | (103 | ) | 144 | (132 | ) | ||||||||||
Increase/(decrease) in defined benefit obligation – US plan | — | — | — | — |
The above sensitivity analyses are based on a change in an assumption while holding all other assumptions constant, although in practice this is unlikely to occur and changes in some assumptions may be correlated. When calculating these sensitivities, the same method has been applied to calculate the defined benefit obligation as has been applied when calculating the liability recognised in the balance sheet. This methodology is the same as prior periods.
26. Share-based payments
The Group recognised the following charges in the income statement in respect of its equity-settled share-based payment plans:
All figures in £ millions | 2015 | 2014 | 2013 | 2017 | 2016 | 2015 | ||||||||||||||||||
Pearson plans | 26 | 32 | 37 | 33 | 22 | 26 |
Share-basedShare based payment charges included in discontinued operations amounted to £3m (2014: £3m, 2013: £5m)£nil (2016: £nil, 2015: £3m).
The Group operates the following equity-settled employee option and share plans:
Worldwide Save for Shares Plan Since 1994, the Group has operated a Save-As-You-Earn plan for UK employees. In 1998, the Group introduced a Worldwide Save for Shares Plan. Under these plans, employees can save a portion of their monthly salary over periods of three or five years. At the end of this period, the employee has the option to purchase ordinary shares with the accumulated funds at a purchase price equal to 80% of the market price prevailing at the time of the commencement of the employee’s participation in the plan. Options that are not exercised within six months of the end of the savings period lapse unconditionally.
Employee Stock Purchase Plan In 2000, the Group established an Employee Stock Purchase Plan which allows all employees in the US to save a portion of their monthly salary over six-month periods. At the end of the period, the employee has the option to purchase ADRsAmerican Depository Receipts (ADRs) with their accumulated funds at a purchase price equal to 85% of the lower of the market priceprices prevailing at the beginning or end of the period.
Long-Term Incentive Plan ThisThe plan was first introduced in 2001 renewed in 2006 and again in 2011. The plan consists of restricted shares. The vesting of restricted shares is normally dependent on continuing service over a three to five-year period, and in the case of Executive Directors and senior management upon the satisfaction of corporate performance targets over a three-year period. These targets may be based on market and/or non-market performance criteria. Restricted shares awarded to Executive Directors in September 2017, and to Executive Directors and senior management in May 2014 and May 20152016, vest dependent on relative total shareholder return, return on invested capital and earnings per share growth. Restricted shares awarded to senior management in November 2014 vest dependent on earnings per share growth. Other restricted shares awarded in 2014 and 2015 vest depending on continuing service over a three-year period.
Pearson plc Consolidated Financial Statements
Notes to the consolidated financial statements continued
26. Share-based payments continued
growth. Restricted shares awarded to senior management in March 2016 and March 2017 vest dependent on earnings per share growth. Other restricted shares awarded in 2016 and 2017 vest depending on continuing service over a three-year period.
Management Incentive Plan The plan was introduced in 2017 combining the Group’s Annual Incentive Plan and Long-Term Incentive Plan for senior management. The number of shares to be granted to participants is dependent on Group performance in the calendar year preceding the date of grant (on the same basis as the Annual Incentive Plan). Subsequently, the shares vest dependent on continuing service over a three-year period, and additionally in the case of Pearson Executive Management upon satisfaction of non market-based performance criteria as determined by the Remuneration Committee. Restricted shares awarded as part of the 2017 Management Incentive Plan will be granted in April 2018.
The number and weighted average exercise prices of share options granted under the Group’s plans are as follows:
2015 | 2014 | |||||||||||||||||||||||||||||||
Number of share options | Weighted average exercise price | Number of share options | Weighted average exercise price | 2017 | 2016 | |||||||||||||||||||||||||||
000s | £ | 000s | £ | Number of share options 000s | Weighted average exercise price £ | Number of share options 000s | Weighted average exercise price £ | |||||||||||||||||||||||||
Outstanding at beginning of year | 3,507 | 8.48 | 2,792 | 8.73 | 2,978 | 8.14 | 3,250 | 9.24 | ||||||||||||||||||||||||
Granted during the year | 1,024 | 11.49 | 1,985 | 8.11 | 1,619 | 5.50 | 1,544 | 6.94 | ||||||||||||||||||||||||
Exercised during the year | (578 | ) | 8.78 | (727 | ) | 8.24 | (9 | ) | 7.00 | (49 | ) | 7.07 | ||||||||||||||||||||
Forfeited during the year | (696 | ) | 9.12 | (538 | ) | 8.76 | (1,451 | ) | 8.04 | (1,695 | ) | 9.14 | ||||||||||||||||||||
Expired during the year | (7 | ) | 8.85 | (5 | ) | 7.43 | (156 | ) | 9.09 | (72 | ) | 8.95 | ||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Outstanding at end of year | 3,250 | 9.24 | 3,507 | 8.48 | 2,981 | 6.84 | 2,978 | 8.14 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Options exercisable at end of year | 138 | 8.89 | 43 | 8.24 | 350 | 8.18 | 247 | 9.06 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
Options were exercised regularly throughout the year. The weighted average share price during the year was £11.86 (2014: £11.41)£6.71 (2016: £8.23). Early exercises arising from redundancy, retirement or death are treated as an acceleration of vesting and the Group therefore recognises in the income statement the amount that otherwise would have been recognised for services received over the remainder of the original vesting period.
The options outstanding at the end of the year have weighted average remaining contractual lives and exercise prices as follows:
2015 | 2014 | 2017 | 2016 | |||||||||||||||||||||||||||||
Range of exercise prices £ | Number of share options 000s | Weighted average contractual life Years | Number of share options 000s | Weighted average contractual life Years | Number of share options 000s | Weighted average contractual life Years | Number of share options 000s | Weighted average contractual life Years | ||||||||||||||||||||||||
0-5 | — | — | — | — | ||||||||||||||||||||||||||||
5-10 | 2,361 | 2.08 | 3,507 | 2.68 | ||||||||||||||||||||||||||||
0–5 | — | — | — | — | ||||||||||||||||||||||||||||
5–10 | 2,697 | 2.52 | 2,548 | 2.31 | ||||||||||||||||||||||||||||
>10 | 889 | 3.26 | — | — | 284 | 1.24 | 430 | 2.25 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
3,250 | 2.40 | 3,507 | 2.68 | 2,981 | 2.40 | 2,978 | 2.31 | |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
In 20152017 and 20142016, options were granted under the Worldwide Save for Shares Plan. The weighted average estimated fair value for the options granted was calculated using a Black-Scholes option pricing model.
Pearson plc Consolidated Financial Statements
Notes to the consolidated financial statements continued
26. Share-based payments continued
The weighted average estimated fair values and the inputs into the Black-Scholes model are as follows:
2015 Weighted average | 2014 Weighted average | |||||||
Fair value | £ | 1.99 | £ | 2.41 | ||||
Weighted average share price | £ | 13.37 | £ | 11.09 | ||||
Weighted average exercise price | £ | 11.49 | £ | 8.11 | ||||
Expected volatility | 23.00 | % | 21.27 | % | ||||
Expected life | 3.7 years | 3.9 years | ||||||
Risk-free rate | 0.90 | % | 1.3 | % | ||||
Expected dividend yield | 4.44 | % | 4.33 | % | ||||
Forfeiture rate | 3.2 | % | 3.4 | % |
Notes to the consolidated financial statements continued
26. Share-based payments continued
2017 Weighted average | 2016 Weighted average | |||||||
Fair value | £ | 1.24 | £ | 1.01 | ||||
Weighted average share price | £ | 6.83 | £ | 7.85 | ||||
Weighted average exercise price | £ | 5.50 | £ | 6.94 | ||||
Expected volatility | 34.75 | % | 27.38 | % | ||||
Expected life | 3.7 years | 3.7 years | ||||||
Risk-free rate | 0.20 | % | 0.58 | % | ||||
Expected dividend yield | 7.61 | % | 7.49 | % | ||||
Forfeiture rate | 3.2 | % | 3.2 | % |
The expected volatility is based on the historical volatility of the company’s share price over the previous three to seven years depending on the vesting term of the options.
The following shares were granted under restricted share arrangements:
2015 | 2014 | |||||||||||||||
Number of shares 000s | Weighted average fair value £ | Number of shares 000s | Weighted average fair value £ | |||||||||||||
Long-Term Incentive Plan | 1,942 | 12.27 | 5,875 | 11.44 |
2017 | 2016 | |||||||||||||||
Number of shares 000s | Weighted average fair value £ | Number of shares 000s | Weighted average fair value £ | |||||||||||||
Long-Term Incentive Plan | 6,453 | 6.61 | 6,833 | 8.24 |
The fair value of shares granted under the Long-Term Incentive Plan that vest unconditionally is determined using the share price at the date of grant. The number of shares expected to vest is adjusted, based on historical experience, to account for potential forfeitures. Restricted shares grantedParticipants under the Annual Bonus Share Matching Plan are valued using the share price at the date of grant. Participants under both plansplan are entitled to dividends during the vesting period and therefore the share price is not discounted.
Restricted shares with a market performance condition were valued by an independent actuary using a Monte Carlo model. Restricted shares with a non-market performance condition were fair valued based on the share price at the date of grant. Non-market performance conditions are taken into consideration by adjusting the number of shares expected to vest based on the most likely outcome of the relevant performance criteria.
27. Share capital and share premium
Number of shares 000s | Ordinary shares £m | Share premium £m | ||||||||||
At 1 January 2014 | 818,580 | 205 | 2,568 | |||||||||
Issue of ordinary shares – share option schemes | 1,303 | — | 11 | |||||||||
|
|
|
|
|
| |||||||
At 31 December 2014 | 819,883 | 205 | 2,579 | |||||||||
Issue of ordinary shares – share option schemes | 1,185 | — | 11 | |||||||||
|
|
|
|
|
| |||||||
At 31 December 2015 | 821,068 | 205 | 2,590 | |||||||||
|
|
|
|
|
|
Number of shares 000s | Share capital £m | Share premium £m | ||||||||||
At 1 January 2016 | 821,068 | 205 | 2,590 | |||||||||
Issue of ordinary shares – share option schemes | 1,059 | — | 7 | |||||||||
|
|
|
|
|
| |||||||
At 31 December 2016 | 822,127 | 205 | 2,597 | |||||||||
Issue of ordinary shares – share option schemes | 923 | — | 5 | |||||||||
Purchase of own shares | (20,996 | ) | (5 | ) | — | |||||||
|
|
|
|
|
| |||||||
At 31 December 2017 | 802,054 | 200 | 2,602 | |||||||||
|
|
|
|
|
|
The ordinary shares have a par value of 25p per share (2014:(2016: 25p per share). All issued shares are fully paid. All shares have the same rights.
Pearson plc Consolidated Financial Statements
Notes to the consolidated financial statements continued
27. Share capital and share premium continued
The £300m share buyback programme announced in October 2017 was completed on 16 February 2018. In 2017, the Group’s brokers purchased 21m shares at a value of £153m of which £149m had been cancelled at 31 December 2017. Cash payments of £149m had been made in respect of the purchases with the outstanding £4m settlement made at the beginning of January 2018. This £4m together with the remaining value of the buyback programme of £147m was recorded as a liability at 31 December 2017 (see note 24). A further 22m shares were purchased under the programme in 2018 (see note 37). The shares bought back are being cancelled and the nominal value of these shares is transferred to a capital redemption reserve. The nominal value of shares cancelled at 31 December 2017 was £5m.
The Group manages its capital to ensure that entities in the Group will be able to continue as a going concern while maximising the return to shareholders through the optimisation of the debt and equity balance.
The capital structure of the Group consists of debt (see note 18), cash and cash equivalents (see note 17) and equity attributable to equity holders of the parent, comprising issued capital, reserves and retained earnings.
The Group reviews its capital structure on a regular basis and will balance its overall capital structure through payments of dividends, new share issues as well as the issue of new debt or the redemption of existing debt in line with the financial risk policies outlined in note 19.
Notes to the consolidated financial statements continued
28. Treasury shares
Pearson plc | Pearson plc | |||||||||||||||
Number of shares 000s | £m | Number of shares 000s | £m | |||||||||||||
At 1 January 2014 | 9,282 | 98 | ||||||||||||||
At 1 January 2016 | 6,705 | 72 | ||||||||||||||
Purchase of treasury shares | 907 | 9 | 3,000 | 27 | ||||||||||||
Release of treasury shares | (2,997 | ) | (32 | ) | (1,986 | ) | (20 | ) | ||||||||
|
|
|
| |||||||||||||
At 31 December 2014 | 7,192 | 75 | ||||||||||||||
At 31 December 2016 | 7,719 | 79 | ||||||||||||||
Purchase of treasury shares | 1,987 | 23 | — | — | ||||||||||||
Release of treasury shares | (2,474 | ) | (26 | ) | (1,725 | ) | (18 | ) | ||||||||
|
|
|
| |||||||||||||
At 31 December 2015 | 6,705 | 72 | ||||||||||||||
At 31 December 2017 | 5,994 | 61 | ||||||||||||||
|
|
|
|
The Group holds Pearson plc shares in trust to satisfy its obligations under its restricted share plans (see note 26).
These shares, representing 0.8% (2014:(2016: 0.9%) of called-up share capital, are treated as treasury shares for accounting purposes and have a par value of 25p per share.
The nominal value of Pearson plc treasury shares amounts to £1.7m (2014: £1.8m)£1.5m (2016: £1.9m) . Dividends on treasury shares are waived.
At 31 December 20152017, the market value of Pearson plc treasury shares was £49.3m (2014: £85.6m)£44m (2016: £63m).
Pearson plc Consolidated Financial Statements
Notes to the consolidated financial statements continued
29. Other comprehensive income
2015 | 2017 | |||||||||||||||||||||||||||||||||||||||||||
Attributable to equity holders of the company | Non controlling interest | Total | Attributable to equity holders of the company | Non- controlling interest | Total | |||||||||||||||||||||||||||||||||||||||
All figures in £ millions | Translation reserve | Retained earnings | Total | Fair value reserve | Translation reserve | Retained earnings | Total | |||||||||||||||||||||||||||||||||||||
Items that may be reclassified to the income statement | ||||||||||||||||||||||||||||||||||||||||||||
Net exchange differences on translation of foreign operations – Group | (83 | ) | — | (83 | ) | (2 | ) | (85 | ) | — | (158 | ) | — | (158 | ) | — | (158 | ) | ||||||||||||||||||||||||||
Net exchange differences on translation of foreign operations – associate | 16 | — | 16 | — | 16 | |||||||||||||||||||||||||||||||||||||||
Currency translation adjustment disposed – subsidiaries | (10 | ) | — | (10 | ) | — | (10 | ) | ||||||||||||||||||||||||||||||||||||
Net exchange differences on translation of foreign | — | (104 | ) | — | (104 | ) | — | (104 | ) | |||||||||||||||||||||||||||||||||||
Currency translation adjustment disposed | — | (51 | ) | — | (51 | ) | — | (51 | ) | |||||||||||||||||||||||||||||||||||
Attributable tax | — | — | 9 | 9 | — | 9 | ||||||||||||||||||||||||||||||||||||||
Fair value gain on other financial assets | 13 | — | — | 13 | — | 13 | ||||||||||||||||||||||||||||||||||||||
Attributable tax | — | 5 | 5 | — | 5 | — | — | (4 | ) | (4 | ) | — | (4 | ) | ||||||||||||||||||||||||||||||
Items that are not reclassified to the income statement | ||||||||||||||||||||||||||||||||||||||||||||
Remeasurement of retirement benefit obligations – Group | — | 110 | 110 | — | 110 | — | — | 175 | 175 | — | 175 | |||||||||||||||||||||||||||||||||
Remeasurement of retirement benefit obligations – associate | — | 8 | 8 | — | 8 | |||||||||||||||||||||||||||||||||||||||
Remeasurement of retirement benefit obligations – associates | — | — | 7 | 7 | — | 7 | ||||||||||||||||||||||||||||||||||||||
Attributable tax | — | (24 | ) | (24 | ) | — | (24 | ) | — | — | (42 | ) | (42 | ) | — | (42 | ) | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||
Other comprehensive expense for the year | (77 | ) | 99 | 22 | (2 | ) | 20 | |||||||||||||||||||||||||||||||||||||
Other comprehensive income/(expense) for the year | 13 | (313 | ) | 145 | (155 | ) | — | (155 | ) | |||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
2016 | ||||||||||||||||||||||||
Attributable to equity holders of the company | Non- controlling interest | Total | ||||||||||||||||||||||
All figures in £ millions | Fair value reserve | Translation reserve | Retained earnings | Total | ||||||||||||||||||||
Items that may be reclassified to the income statement | ||||||||||||||||||||||||
Net exchange differences on translation of foreign | — | 909 | — | 909 | 1 | 910 | ||||||||||||||||||
Net exchange differences on translation of foreign | — | 3 | — | 3 | — | 3 | ||||||||||||||||||
Currency translation adjustment disposed | — | — | — | — | — | — | ||||||||||||||||||
Attributable tax | — | — | (5 | ) | (5 | ) | — | (5 | ) | |||||||||||||||
Items that are not reclassified to the income statement | ||||||||||||||||||||||||
Remeasurement of retirement benefit obligations – Group | — | — | (268 | ) | (268 | ) | — | (268 | ) | |||||||||||||||
Remeasurement of retirement benefit obligations – associates | — | — | (8 | ) | (8 | ) | — | (8 | ) | |||||||||||||||
Attributable tax | — | — | 58 | 58 | — | 58 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Other comprehensive income/(expense) for the year | — | 912 | (223 | ) | 689 | 1 | 690 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Pearson plc Consolidated Financial Statements
Notes to the consolidated financial statements continued
29. Other comprehensive income continued
2014 | ||||||||||||||||||||
Attributable to equity holders of the company | Non controlling interest | Total | ||||||||||||||||||
All figures in £ millions | Translation reserve | Retained earnings | Total | |||||||||||||||||
Items that may be reclassified to the income statement | ||||||||||||||||||||
Net exchange differences on translation of foreign operations – Group | 150 | — | 150 | — | 150 | |||||||||||||||
Net exchange differences on translation of foreign operations – associate | 25 | — | 25 | — | 25 | |||||||||||||||
Currency translation adjustment disposed – subsidiaries | (2 | ) | — | (2 | ) | — | (2 | ) | ||||||||||||
Attributable tax | — | (6 | ) | (6 | ) | — | (6 | ) | ||||||||||||
Items that are not reclassified to the income statement | ||||||||||||||||||||
Remeasurement of retirement benefit obligations – Group | — | 23 | 23 | — | 23 | |||||||||||||||
Remeasurement of retirement benefit obligations – associate | — | (15 | ) | (15 | ) | — | (15 | ) | ||||||||||||
Attributable tax | — | (1 | ) | (1 | ) | — | (1 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Other comprehensive expense for the year | 173 | 1 | 174 | — | 174 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
2013 | 2015 | |||||||||||||||||||||||||||||||||||||||
Attributable to equity holders of the company | Non- controlling Interest | Total | Attributable to equity holders of the company | Non- controlling interest | Total | |||||||||||||||||||||||||||||||||||
All figures in £ millions | Translation reserve | Retained earnings | Total | Translation reserve | Retained earnings | Total | ||||||||||||||||||||||||||||||||||
Items that may be reclassified to the income statement | ||||||||||||||||||||||||||||||||||||||||
Net exchange differences on translation of foreign operations – Group | (202 | ) | — | (202 | ) | (4 | ) | (206 | ) | (83 | ) | — | (83 | ) | (2 | ) | (85 | ) | ||||||||||||||||||||||
Net exchange differences on translation of foreign operations – associate | (11 | ) | — | (11 | ) | — | (11 | ) | 16 | — | 16 | — | 16 | |||||||||||||||||||||||||||
Currency translation adjustment disposed – subsidiaries | (18 | ) | — | (18 | ) | — | (18 | ) | (10 | ) | — | (10 | ) | — | (10 | ) | ||||||||||||||||||||||||
Attributable tax | — | 6 | 6 | — | 6 | — | 5 | 5 | — | 5 | ||||||||||||||||||||||||||||||
Items that are not reclassified to the income statement | ||||||||||||||||||||||||||||||||||||||||
Remeasurement of retirement benefit obligations – Group | — | 79 | 79 | — | 79 | — | 110 | 110 | — | 110 | ||||||||||||||||||||||||||||||
Remeasurement of retirement benefit obligations – associate | — | — | — | — | — | — | 8 | 8 | — | 8 | ||||||||||||||||||||||||||||||
Attributable tax | — | (23 | ) | (23 | ) | — | (23 | ) | — | (24 | ) | (24 | ) | — | (24 | ) | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Other comprehensive expense for the year | (231 | ) | 62 | (169 | ) | (4 | ) | (173 | ) | |||||||||||||||||||||||||||||||
Other comprehensive income/(expense) for the year | (77 | ) | 99 | 22 | (2 | ) | 20 | |||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
30. Business combinations
There were no significant acquisitions in 2015. On 11 February 2014, the Group acquired 100% of Grupo Multi, the leading adult English language training company in Brazil. Fair values for the assets and liabilities arising from the Grupo Multi acquisition and other smaller acquisitions completed in the year are set out below.
Notes to the consolidated financial statements continued
30. Business combinations continued
2017 or 2016.
Fair values for the assets and liabilities arising from acquisitions completed in the year are as follows:
2015 | 2014 | |||||||||||
All figures in £ millions | Notes | Total fair value | Total fair value | |||||||||
Property, plant and equipment | 10 | — | 2 | |||||||||
Intangible assets | 11 | 1 | 260 | |||||||||
Intangible assets – pre-publication | 20 | — | 1 | |||||||||
Inventories | — | 4 | ||||||||||
Trade and other receivables | — | 36 | ||||||||||
Cash and cash equivalents (excluding overdrafts) | — | 3 | ||||||||||
Financial liabilities – borrowings | — | (49 | ) | |||||||||
Provisions for other liabilities and charges | 23 | — | (14 | ) | ||||||||
Trade and other liabilities | — | (24 | ) | |||||||||
Current income tax liabilities | — | (20 | ) | |||||||||
|
|
|
| |||||||||
Net assets acquired at fair value | 1 | 199 | ||||||||||
Goodwill | 11 | — | 238 | |||||||||
|
|
|
| |||||||||
Total | 1 | 437 | ||||||||||
|
|
|
| |||||||||
Satisfied by: | ||||||||||||
Cash | (1 | ) | (437 | ) | ||||||||
|
|
|
| |||||||||
Total consideration | (1 | ) | (437 | ) | ||||||||
|
|
|
|
2017 | 2016 | |||||||||||
All figures in £ millions | Notes | Total fair value | Total fair value | |||||||||
Intangible assets | 11 | — | 10 | |||||||||
Net assets acquired at fair value | — | 10 | ||||||||||
Goodwill | 11 | — | 3 | |||||||||
Total | — | 13 | ||||||||||
Satisfied by: | ||||||||||||
Cash | — | (7 | ) | |||||||||
|
|
|
| |||||||||
Other liabilities | — | (6 | ) | |||||||||
|
|
|
| |||||||||
Total consideration | — | (13 | ) | |||||||||
|
|
|
|
The goodwillGoodwill of £3m arising on these acquisitions results from cost and revenue synergies and from assets and benefits that cannot be separately recognised.
There is no goodwill arising on 2015 acquisitions. Goodwill of £240m arising on 20142016 acquisitions is expected to be deductible for tax purposes.
Intangible assets acquired in 20142016 have the following useful economic lives: customer lists, contracts and relationships four years; trademarks and brands 2015 years, and other acquired intangibles 12six years.
All figures in £ millions | 2015 | 2014 | 2013 | 2017 | 2016 | 2015 | ||||||||||||||||||
Cash flow on acquisitions | ||||||||||||||||||||||||
Cash – current year acquisitions | (1 | ) | (437 | ) | (25 | ) | — | (7 | ) | (1 | ) | |||||||||||||
Deferred payments for prior year acquisitions and other items | (6 | ) | (5 | ) | (6 | ) | (11 | ) | (7 | ) | (6 | ) | ||||||||||||
Cash and cash equivalents acquired | — | 3 | 2 | |||||||||||||||||||||
Acquisition costs and other acquisition liabilities paid | (2 | ) | (9 | ) | (19 | ) | — | (1 | ) | (2 | ) | |||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Net cash outflow | (9 | ) | (448 | ) | (48 | ) | (11 | ) | (15 | ) | (9 | ) | ||||||||||||
|
|
|
|
|
|
Pearson plc Consolidated Financial Statements
Notes to the consolidated financial statements continued
31. Disposals including business closures
In August 2017, the Group completed the sale of the test preparation business in China (GEDU) and in October 2017 the sale of a 22% share in Penguin Random House, retaining a 25% share (see note 12).
2015 | 2014 | 2013 | ||||||||||||||||||||||||||||||||||||||||||
All figures in £ millions | FT Group | PowerSchool | Other | Total | Mergermarket | Penguin | Other | Total | Penguin | Other | Total | |||||||||||||||||||||||||||||||||
Disposal of subsidiaries | ||||||||||||||||||||||||||||||||||||||||||||
Property, plant and equipment | (15 | ) | (2 | ) | — | (17 | ) | (2 | ) | — | (1 | ) | (3 | ) | (39 | ) | (3 | ) | (42 | ) | ||||||||||||||||||||||||
Intangible assets | (46 | ) | (19 | ) | (5 | ) | (70 | ) | (12 | ) | — | — | (12 | ) | (43 | ) | — | (43 | ) | |||||||||||||||||||||||||
Investments in joint ventures and associates | (8 | ) | — | — | (8 | ) | — | — | — | — | (22 | ) | — | (22 | ) | |||||||||||||||||||||||||||||
Other financial assets | (1 | ) | — | (1 | ) | |||||||||||||||||||||||||||||||||||||||
Intangible assets – pre-publication | — | (64 | ) | — | (64 | ) | — | — | — | — | (20 | ) | (6 | ) | (26 | ) | ||||||||||||||||||||||||||||
Inventories | (1 | ) | — | — | (1 | ) | — | — | — | — | (91 | ) | (3 | ) | (94 | ) | ||||||||||||||||||||||||||||
Trade and other receivables | (72 | ) | (16 | ) | (3 | ) | (91 | ) | (23 | ) | — | (2 | ) | (25 | ) | (447 | ) | (6 | ) | (453 | ) | |||||||||||||||||||||||
Cash and cash equivalents (excluding overdrafts) | (29 | ) | — | (4 | ) | (33 | ) | (19 | ) | — | (11 | ) | (30 | ) | (34 | ) | (3 | ) | (37 | ) | ||||||||||||||||||||||||
Net deferred income tax (assets)/liabilities | (2 | ) | — | 3 | 1 | 1 | — | — | 1 | (22 | ) | — | (22 | ) | ||||||||||||||||||||||||||||||
Retirement benefit obligations | 7 | — | — | 7 | — | — | — | — | — | 4 | 4 | |||||||||||||||||||||||||||||||||
Provisions for other liabilities and charges | 2 | — | — | 2 | 4 | — | — | 4 | 7 | — | 7 | |||||||||||||||||||||||||||||||||
Trade and other liabilities | 109 | 35 | 6 | 150 | 69 | — | 12 | 81 | 224 | 10 | 234 | |||||||||||||||||||||||||||||||||
Current income tax liabilities | 1 | — | — | 1 | 6 | — | — | 6 | — | — | — | |||||||||||||||||||||||||||||||||
Non-controlling interest | — | — | — | — | — | — | (2 | ) | (2 | ) | 3 | — | 3 | |||||||||||||||||||||||||||||||
Attributable goodwill | (50 | ) | (119 | ) | (6 | ) | (175 | ) | (156 | ) | — | (1 | ) | (157 | ) | (370 | ) | (6 | ) | (376 | ) | |||||||||||||||||||||||
Cumulative translation adjustment | 4 | 6 | 10 | 2 | — | 2 | 18 | — | 18 | |||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
Net assets disposed | (100 | ) | (179 | ) | (9 | ) | (288 | ) | (130 | ) | — | (5 | ) | (135 | ) | (837 | ) | (13 | ) | (850 | ) | |||||||||||||||||||||||
Cash received | 858 | 222 | 9 | 1,089 | 375 | — | — | 375 | — | 3 | 3 | |||||||||||||||||||||||||||||||||
Deferred proceeds | — | — | — | — | — | — | 6 | 6 | — | — | — | |||||||||||||||||||||||||||||||||
Fair value of associate acquired | 1,160 | — | 1,160 | |||||||||||||||||||||||||||||||||||||||||
Costs | (47 | ) | (13 | ) | (9 | ) | (69 | ) | (1 | ) | 29 | (2 | ) | 26 | (121 | ) | (14 | ) | (135 | ) | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
Gain/(loss) on disposal | 711 | 30 | (9 | ) | 732 | 244 | 29 | (1 | ) | 272 | 202 | (24 | ) | 178 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All figures in £ millions | 2015 | 2014 | 2013 | |||||||||
Cash flow from disposals | ||||||||||||
Cash – current year disposals | 1,089 | 375 | 3 | |||||||||
Cash and cash equivalents disposed | (33 | ) | (30 | ) | (37 | ) | ||||||
Costs and other disposal liabilities paid | (26 | ) | (18 | ) | (98 | ) | ||||||
|
|
|
|
|
| |||||||
Net cash inflow | 1,030 | 327 | (132 | ) | ||||||||
|
|
|
|
|
|
Notes | 2017 | 2016 | 2015 | |||||||||||||||||||||||||||||||||||||
All figures in £ millions | GEDU | Penguin Random House | Other | Total | Total | FT Group | PowerSchool | Other | Total | |||||||||||||||||||||||||||||||
Disposal of subsidiaries and associates | ||||||||||||||||||||||||||||||||||||||||
Property, plant and equipment | 10 | (7 | ) | — | — | (7 | ) | (3 | ) | (15 | ) | (2 | ) | — | (17 | ) | ||||||||||||||||||||||||
Intangible assets | 11 | (2 | ) | — | (7 | ) | (9 | ) | — | (46 | ) | (19 | ) | (5 | ) | (70 | ) | |||||||||||||||||||||||
Investments in joint ventures and associates | — | (352 | ) | — | (352 | ) | — | (7 | ) | — | — | (7 | ) | |||||||||||||||||||||||||||
Other financial assets | — | — | — | — | — | 92 | — | — | 92 | |||||||||||||||||||||||||||||||
Net deferred income tax (assets)/liabilities | 13 | (1 | ) | (2 | ) | — | (3 | ) | (10 | ) | (2 | ) | — | 3 | 1 | |||||||||||||||||||||||||
Intangible assets – pre-publication | 20 | — | — | (1 | ) | (1 | ) | (4 | ) | — | (64 | ) | — | (64 | ) | |||||||||||||||||||||||||
Inventories | (1 | ) | — | (1 | ) | (2 | ) | — | (1 | ) | — | — | (1 | ) | ||||||||||||||||||||||||||
Trade and other receivables | (16 | ) | — | — | (16 | ) | (6 | ) | (72 | ) | (16 | ) | (6 | ) | (94 | ) | ||||||||||||||||||||||||
Current income tax (receivable)/payable | — | (5 | ) | — | (5 | ) | — | 1 | — | — | 1 | |||||||||||||||||||||||||||||
Cash and cash equivalents (excluding overdrafts) | (13 | ) | — | — | (13 | ) | (9 | ) | (29 | ) | — | (4 | ) | (33 | ) | |||||||||||||||||||||||||
Trade and other liabilities | 33 | — | 1 | 34 | 21 | 113 | 35 | 6 | 154 | |||||||||||||||||||||||||||||||
Retirement benefit obligations | — | — | — | — | — | 7 | — | — | 7 | |||||||||||||||||||||||||||||||
Provision for other liabilities and charges | — | — | — | — | — | 2 | — | — | 2 | |||||||||||||||||||||||||||||||
Attributable goodwill | — | — | — | — | — | (50 | ) | (119 | ) | (6 | ) | (175 | ) | |||||||||||||||||||||||||||
Cumulative currency translation adjustment | 29 | 3 | 48 | — | 51 | — | 4 | 6 | 10 | |||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
Net assets disposed | (4 | ) | (311 | ) | (8 | ) | (323 | ) | (11 | ) | (3 | ) | (179 | ) | (12 | ) | (194 | ) | ||||||||||||||||||||||
Cash received | 54 | 413 | 1 | 468 | 7 | 1,235 | 222 | 11 | 1,468 | |||||||||||||||||||||||||||||||
Costs | (6 | ) | (6 | ) | (5 | ) | (17 | ) | (16 | ) | (47 | ) | (13 | ) | (9 | ) | (69 | ) | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
Gain/(loss) on disposal | 44 | 96 | (12 | ) | 128 | (20 | ) | 1,185 | 30 | (10 | ) | 1,205 | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IncludedThe amount included as other financial assets in 2015 related to an 11% share in the gain on sale of PowerSchool is the write down of related software assets of £70m. The write down of the software assets reflects the reduced market opportunity for softwareEconomist which was to be integrated with PowerSchoolretained and held at fair value within other financial assets on the recognition that adoption of such software in US schools is now unlikely to occur at the rate originally envisaged.balance sheet.
Pearson plc Consolidated Financial Statements
Notes to the consolidated financial statements continued
31. Disposals including business closures continued
All figures in £ millions | 2017 | 2016 | 2015 | |||||||||
Cash flow from disposals | ||||||||||||
Cash – current year disposals | 468 | 11 | 1,468 | |||||||||
Cash and cash equivalents disposed | (13 | ) | (9 | ) | (33 | ) | ||||||
Costs and other disposal liabilities paid | (25 | ) | (52 | ) | (26 | ) | ||||||
|
|
|
|
|
| |||||||
Net cash inflow/(outflow) | 430 | (50 | ) | 1,409 | ||||||||
|
|
|
|
|
| |||||||
Analysed as: | ||||||||||||
Cash inflow/(outflow) from sale of subsidiaries | 19 | (54 | ) | 1,030 | ||||||||
Cash inflow from sale of associates | 411 | 4 | 379 |
32. Held for sale
The gain on disposal of Penguin in 2013 arises from the measurement at fair valueassets and liabilities related to Wall Street English language teaching businesses (WSE), part of the associate investment acquired in Penguin Random House. DeterminationCore and Growth segments, and the K-12 school courseware business (K-12), part of fair value is described in note 12.the North America segment, have been presented as held for sale following the approval by the Group’s management to sell both businesses.
Notes | 2017 | 2016 | ||||||||||||||||||
WSE | K-12 | Total | Total | |||||||||||||||||
Non-current assets | ||||||||||||||||||||
Property, plant and equipment | 10 | 16 | — | 16 | — | |||||||||||||||
Intangible assets | 11 | 15 | 166 | 181 | — | |||||||||||||||
Deferred income tax assets | — | 68 | 68 | — | ||||||||||||||||
Trade and other receivables | 4 | 23 | 27 | — | ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||
35 | 257 | 292 | — | |||||||||||||||||
Current assets | ||||||||||||||||||||
Intangible assets – pre-publication | 20 | 8 | 239 | 247 | — | |||||||||||||||
Inventories | — | 46 | 46 | — | ||||||||||||||||
Trade and other receivables | 12 | 36 | 48 | — | ||||||||||||||||
Cash and cash equivalents (excluding overdrafts) | 17 | 127 | — | 127 | — | |||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||
147 | 321 | 468 | — | |||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||
Assets classified as held for sale | 182 | 578 | 760 | — | ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||
Non-current liabilities | ||||||||||||||||||||
Deferred income tax liabilities | (2 | ) | — | (2 | ) | — | ||||||||||||||
Other liabilities | (10 | ) | (274 | ) | (284 | ) | — | |||||||||||||
|
|
|
|
|
|
|
| |||||||||||||
(12 | ) | (274 | ) | (286 | ) | — | ||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||
Current liabilities | ||||||||||||||||||||
Trade and other liabilities | (152 | ) | (150 | ) | (302 | ) | — | |||||||||||||
|
|
|
|
|
|
|
| |||||||||||||
(152 | ) | (150 | ) | (302 | ) | — | ||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||
Liabilities classified as held for sale | (164 | ) | (424 | ) | (588 | ) | — | |||||||||||||
|
|
|
|
|
|
|
| |||||||||||||
Net assets classified as held for sale | 18 | 154 | 172 | — | ||||||||||||||||
|
|
|
|
|
|
|
|
Pearson plc Consolidated Financial Statements
Disposal of associatesNotes to the consolidated financial statements continued
On 16 October 2015, the Group sold 39% of its 50% stake in The Economist resulting in a gain on disposal of £473m. The gain comprises proceeds of £377m, gain on revaluation of remaining 11% investment to fair value of £92m and liabilities disposed of £4m.
32.33. Cash generated from operations
All figures in £ millions | Notes | 2015 | 2014 | 2013 | Notes | 2017 | 2016 | 2015 | ||||||||||||||||||||||||
Profit | 823 | 470 | 539 | |||||||||||||||||||||||||||||
Profit/(loss) | 408 | (2,335 | ) | 823 | ||||||||||||||||||||||||||||
Adjustments for: | ||||||||||||||||||||||||||||||||
Income tax | (24 | ) | 110 | 90 | 13 | (222 | ) | (24 | ) | |||||||||||||||||||||||
Depreciation | 10 | 75 | 74 | 82 | 10 | 90 | 95 | 75 | ||||||||||||||||||||||||
Amortisation and impairment of acquired intangibles and goodwill | 11 | 1,051 | 264 | 168 | 11 | 138 | 2,733 | 1,051 | ||||||||||||||||||||||||
Amortisation of software | 11 | 74 | 63 | 59 | 11 | 85 | 84 | 74 | ||||||||||||||||||||||||
Net finance costs | 29 | 93 | 75 | 6 | 30 | 60 | 29 | |||||||||||||||||||||||||
Share of results of joint ventures and associates | 12 | (68 | ) | (51 | ) | (54 | ) | 12 | (78 | ) | (97 | ) | (68 | ) | ||||||||||||||||||
Profit on disposal of subsidiaries, associates, investments and fixed assets | (1,194 | ) | (272 | ) | (187 | ) | (116 | ) | 40 | (1,194 | ) | |||||||||||||||||||||
Acquisition costs | — | 6 | 12 | |||||||||||||||||||||||||||||
Net foreign exchange adjustment from transactions | 22 | 27 | (40 | ) | (26 | ) | 43 | 22 | ||||||||||||||||||||||||
Share-based payment costs | 26 | 26 | 32 | 37 | 26 | 33 | 22 | 26 | ||||||||||||||||||||||||
Pre-publication | (57 | ) | (52 | ) | (77 | ) | (35 | ) | (19 | ) | (57 | ) | ||||||||||||||||||||
Inventories | 10 | 6 | 18 | 24 | 17 | 10 | ||||||||||||||||||||||||||
Trade and other receivables | (99 | ) | (69 | ) | (50 | ) | 133 | 156 | (99 | ) | ||||||||||||||||||||||
Trade and other liabilities | (80 | ) | 72 | 72 | 6 | 61 | (80 | ) | ||||||||||||||||||||||||
Retirement benefit obligations | (57 | ) | (58 | ) | (57 | ) | (232 | ) | (106 | ) | (57 | ) | ||||||||||||||||||||
Provisions for other liabilities and charges | (13 | ) | (11 | ) | (3 | ) | (11 | ) | (10 | ) | (13 | ) | ||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||
Net cash generated from operations | 518 | 704 | 684 | 462 | 522 | 518 | ||||||||||||||||||||||||||
|
|
|
|
|
|
Net cash generated from operations is translated at an exchange rate approximating the rate at the date of cash flow. The difference between this rate and the average rate used to translate profit gives rise to a currency adjustment in the reconciliation between net profit and net cash generated from operations. This adjustment reflects the timing difference between recognition of profit and the related cash receipts or payments.
In the cash flow statement, proceeds from sale of property, plant and equipment comprise:
All figures in £ millions | 2015 | 2014 | 2013 | 2017 | 2016 | 2015 | ||||||||||||||||||
Net book amount | 6 | 12 | 19 | 12 | 9 | 6 | ||||||||||||||||||
Loss on sale of property, plant and equipment | (4 | ) | (3 | ) | 9 | (12 | ) | (5 | ) | (4 | ) | |||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Proceeds from sale of property, plant and equipment | 2 | 9 | 28 | — | 4 | 2 | ||||||||||||||||||
|
|
|
|
|
|
33. Purchase of non-controlling interest
There were no purchases of non-controlling interests in 2015 or 2014. In 2013 the Group purchased non-controlling interestsThe movements in the South African business for £65m,Group’s current and in the Indian business for £11m.non-current borrowings are as follows:
2016 | Financing cash flows | Foreign exchange movements | Fair value and other movements | 2017 | ||||||||||||||||
Financial liabilities | ||||||||||||||||||||
Non-current borrowings | 2,517 | (1,292 | ) | (149 | ) | (10 | ) | 1,066 | ||||||||||||
Current borrowings | 9 | (7 | ) | (1 | ) | 3 | 4 | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | 2,526 | (1,299 | ) | (150 | ) | (7 | ) | 1,070 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
Pearson plc Consolidated Financial Statements
Notes to the consolidated financial statements continued
33. Cash generated from operations continued
2015 | Financing cash flows | Foreign exchange movements | Fair value and other movements | 2016 | ||||||||||||||||
Financial liabilities | ||||||||||||||||||||
Non-current borrowings | 2,106 | (3 | ) | 416 | (2 | ) | 2,517 | |||||||||||||
Current borrowings | 247 | (248 | ) | 5 | 5 | 9 | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | 2,353 | (251 | ) | 421 | 3 | 2,526 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
Non-current borrowings include bonds, derivative financial instruments and finance leases. Current borrowings include loans repayable within one year and finance leases, but exclude overdrafts classified within cash and cash equivalents.
34. Contingencies
There are contingent Group liabilities that arise in the normal course of business in respect of indemnities, warranties and guarantees in relation to former subsidiaries and in respect of guarantees in relation to subsidiaries, joint ventures and associates. In addition, there are contingent liabilities of the Group in respect of legal claims, contract disputes, royalties, copyright fees, permissions and other rights. None of these claims are expected to result in a material gain or loss to the Group.
On 24 November 2017, the European Commission published an opening decision that the United Kingdom controlled foreign company group financing partial exemption (FCPE) constitutes State Aid. No final decision has yet been published, and it may be challenged by the UK tax authorities. The Group has benefited from FCPE in 2017 and prior periods in total by approximately £90m. At present the Group believes no provision is required in respect of this issue.
35. Commitments
At the balance sheet date there were no commitments for capital expenditure contracted for but not yet incurred.
The Group leases various offices and warehouses under non-cancellable operating lease agreements. The leases have varying terms and renewal rights. The Group also leases various plant and equipment under operating lease agreements, also with varying terms. Lease expenditure charged to the income statement was £156m (2014: £157m)£178m (2016: £186m).
The future aggregate minimum lease payments in respect of operating leases are as follows:
All figures in £ millions | 2015 | 2014 | 2017 | 2016 | ||||||||||||
Not later than one year | 164 | 161 | 156 | 174 | ||||||||||||
Later than one year and not later than two years | 146 | 150 | 139 | 147 | ||||||||||||
Later than two years and not later than three years | 143 | 126 | 121 | 129 | ||||||||||||
Later than three years and not later than four years | 130 | 122 | 100 | 115 | ||||||||||||
Later than four years and not later than five years | 123 | 115 | 86 | 96 | ||||||||||||
Later than five years | 685 | 701 | 599 | 661 | ||||||||||||
|
|
|
| |||||||||||||
1,391 | 1,375 | 1,201 | 1,322 | |||||||||||||
|
|
|
|
Pearson plc Consolidated Financial Statements
Notes to the consolidated financial statements continued
35. Commitments continued
In the event that the Group has excess capacity in its leased offices and warehouses it will enter into sub-lease contracts in order to offset costs. The future aggregate minimum sub-lease payments expected to be received under non-cancellable sub-leases are as follows:
All figures in £ millions | 2017 | 2016 | ||||||
Not later than one year | 45 | 44 | ||||||
Later than one year and not later than two years | 45 | 46 | ||||||
Later than two years and not later than three years | 40 | 44 | ||||||
Later than three years and not later than four years | 35 | 39 | ||||||
Later than four years and not later than five years | 33 | 34 | ||||||
Later than five years | 138 | 155 | ||||||
|
|
|
| |||||
336 | 362 | |||||||
|
|
|
|
36. Related party transactions
Joint ventures and associates
Amounts advanced to joint ventures and associates during the year and at the balance sheet date are set out in note 12. Apart from transactions with the Group’s joint ventures and associates, there were no other material related party transactions.
Key management personnel
Key management personnel are deemed to be the members of the Pearson Executive.executive (see p11). It is this committeeCommittee which had responsibility for planning, directing and controlling the activities of the Group in 2015.2017. Key management personnel compensation is disclosed below:
All figures in £ millions | 2015 | 2014 | ||||||||||||||
All figures in £millions | 2017 | 2016 | ||||||||||||||
Short-term employee benefits | 7 | 10 | 12 | 6 | ||||||||||||
Retirement benefits | 1 | 1 | 1 | 1 | ||||||||||||
Share-based payment costs | 1 | 2 | 2 | 1 | ||||||||||||
|
|
|
| |||||||||||||
Total | 9 | 13 | 15 | 8 | ||||||||||||
|
|
|
|
There were no other material related party transactions. No guarantees have been provided to related parties.
37. Events after the balance sheet date
During January 2018, the Group successfully executed market tenders to repurchase €250m of its €500m euro 1.875% notes due May 2021 and €200m of its €500m euro 1.375% notes due May 2025.
On 16 February, the Group completed its £300m share buyback programme. In aggregate between 18 October 2017 and 16 February 2018, the Group repurchased 42,835,577 shares, including 21,839,676 repurchased since 31 December 2017 at a cost of £151m.
Penguin Random House Venture Combined Financial Statements
Report of Independent Auditors
To Penguin Random House LLC, Wilmington (USA), and Penguin Random House Ltd, London (UK)
We have audited the accompanying combined financial statements of Penguin Random House Venture as described in note 1 to these combined financial statements which comprise the combined balance sheets as of December 31, 2017 and 2016, and the related combined income statements, combined statements of comprehensive income, combined statements of cash flows and combined statements of changes in equity and the notes to the combined financial statements for the years then ended.
Management’s Responsibility for the Combined Financial Statements
Management of Penguin Random House LLC, New York City (US), and Penguin Random House Ltd, London (UK), is responsible for the preparation and fair presentation of the combined financial statements in accordance with International Financial Reporting Standards as issued by the IASB; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of combined financial statements that are free from material misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on the combined financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the combined financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the combined financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the combined financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the Company’s preparation and fair presentation of the combined financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the combined financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of Penguin Random House as of December 31, 2017 and 2016, and the results of its operations and its cash flows for the years then ended in accordance with International Financial Reporting Standards as issued by the IASB.
Emphasis of matter
We draw attention to the fact that, as described in note 1 to the combined financial statements, Penguin Random House businesses included in the combined financial statements have not operated as a separate group of companies. These combined financial statements are, therefore, not necessarily indicative of results that would have occurred if Penguin Random House had operated as a separate group of companies during the year presented or of future results of Penguin Random House. Our opinion is not modified with respect to this matter.
Other matter
The accompanying combined balance sheet of Penguin Random House Venture as of December 31, 2015, and the related combined income statement, combined statement of comprehensive income, combined statement of cash flows and combined statement of changes in equity for the year ended December 31, 2015 are presented for purposes of complying with Rule3-09 of SEC RegulationS-X; however, Rule3-09 does not require the 2015 combined financial statements to be audited and they are therefore not covered by this report.
Bielefeld, March 26, 2018
PricewaterhouseCoopers GmbH
Wirtschaftsprüfungsgesellschaft
Werner Ballhaus Wirtschaftsprüfer (German Public Auditor) | Christian Landau Wirtschaftsprüfer (German Public Auditor) |
Penguin Random House Venture Combined Financial Statements
Combined Income Statement
in € millions | Notes | 2017 | 2016 | 2015 (unaudited) | ||||||||||||
Revenues | 1 | 3,075 | 3,100 | 3,438 | ||||||||||||
|
|
|
|
|
| |||||||||||
Other operating income | 2 | 33 | 56 | 75 | ||||||||||||
Cost of materials | 3 | (630 | ) | (679 | ) | (751 | ) | |||||||||
Royalties | 16 | (631 | ) | (626 | ) | (706 | ) | |||||||||
Personnel costs | 4 | (715 | ) | (723 | ) | (801 | ) | |||||||||
Amortization/depreciation, impairment losses and reversals on intangible assets and property, plant and equipment | 5 | (75 | ) | (76 | ) | (89 | ) | |||||||||
Other operating expenses | 6 | (655 | ) | (648 | ) | (780 | ) | |||||||||
Results from investments accounted for using the equity method | 12 | — | — | (1 | ) | |||||||||||
Impairment losses and reversals on investments accounted for using the equity method | 12 | (10 | ) | — | (5 | ) | ||||||||||
Results from financial assets | (1 | ) | — | — | ||||||||||||
Results from disposals of investments | 2 | — | 1 | |||||||||||||
|
|
|
|
|
| |||||||||||
EBIT (earnings before interest and taxes) | 393 | 404 | 381 | |||||||||||||
|
|
|
|
|
| |||||||||||
Interest income | 7 | 3 | 1 | 1 | ||||||||||||
Interest expenses | 7 | (13 | ) | (4 | ) | (6 | ) | |||||||||
Other financial income | 8 | 1 | 2 | — | ||||||||||||
Other financial expenses | 8 | (8 | ) | (3 | ) | (4 | ) | |||||||||
|
|
|
|
|
| |||||||||||
Financial result | (17 | ) | (4 | ) | (9 | ) | ||||||||||
|
|
|
|
|
| |||||||||||
Earnings before taxes | 376 | 400 | 372 | |||||||||||||
|
|
|
|
|
| |||||||||||
Income tax expense | 9 | (10 | ) | (27 | ) | (29 | ) | |||||||||
|
|
|
|
|
| |||||||||||
Group profit or loss | 366 | 373 | 343 | |||||||||||||
|
|
|
|
|
| |||||||||||
attributable to: | ||||||||||||||||
Penguin Random House shareholders | 366 | 373 | 343 | |||||||||||||
Non-controlling interests | — | — | — | |||||||||||||
|
|
|
|
|
|
Penguin Random House Venture Combined Financial Statements
Combined Statement of Comprehensive Income
in € millions | Notes | 2017 | 2016 | 2015 (unaudited) | ||||||||||||
Group profit or loss | 366 | 373 | 343 | |||||||||||||
|
|
|
|
|
| |||||||||||
Items that will not be reclassified subsequently to profit or loss | ||||||||||||||||
Remeasurement component of defined benefit plans | 20 | (21 | ) | 23 | ||||||||||||
Share of other comprehensive income of investments accounted for using the equity method | — | — | — | |||||||||||||
Items that will be reclassified subsequently to profit or loss when specific conditions are met | ||||||||||||||||
Currency translation differences | ||||||||||||||||
– changes recognized in equity | (161 | ) | (19 | ) | 165 | |||||||||||
– reclassification adjustments for gains (losses) included in profit or loss | — | — | (4 | ) | ||||||||||||
Cash flow hedges | ||||||||||||||||
– changes in fair value recognized in equity | (1 | ) | (1 | ) | 2 | |||||||||||
– reclassification adjustments for gains (losses) included in profit or loss | — | — | — | |||||||||||||
Share of other comprehensive income of investments accounted for using the equity method | (2 | ) | 11 | (6 | ) | |||||||||||
|
|
|
|
|
| |||||||||||
Other comprehensive income net of tax | 18 | (144 | ) | (30 | ) | 180 | ||||||||||
|
|
|
|
|
| |||||||||||
Group total comprehensive income | 222 | 343 | 523 | |||||||||||||
|
|
|
|
|
| |||||||||||
attributable to: | ||||||||||||||||
Penguin Random House shareholders | 222 | 344 | 523 | |||||||||||||
Non-controlling interests | — | (1 | ) | — | ||||||||||||
|
|
|
|
|
|
Penguin Random House Venture Combined Financial Statements
in € millions | Notes | 12/31/2017 | 12/31/2016 | 12/31/2015 (unaudited) | ||||||||||||
Assets | ||||||||||||||||
Non-current assets | ||||||||||||||||
Goodwill | 10 | 815 | 859 | 875 | ||||||||||||
Other intangible assets | 10 | 380 | 446 | 488 | ||||||||||||
Property, plant and equipment | 11 | 150 | 169 | 190 | ||||||||||||
Investments accounted for using the equity method | 12 | 12 | 25 | 20 | ||||||||||||
Other financial assets | 13 | 9 | 7 | 7 | ||||||||||||
Trade and other receivables | 15 | 4 | 5 | 6 | ||||||||||||
Othernon-financial assets | 16 | 282 | 295 | 315 | ||||||||||||
Deferred tax assets | 9 | 42 | 31 | 33 | ||||||||||||
|
|
|
|
|
| |||||||||||
1,694 | 1,837 | 1,934 | ||||||||||||||
|
|
|
|
|
| |||||||||||
Current assets | ||||||||||||||||
Inventories | 14 | 253 | 263 | 301 | ||||||||||||
Trade and other receivables | 15 | 777 | 734 | 730 | ||||||||||||
Other financial assets | 13 | 1 | 3 | 5 | ||||||||||||
Othernon-financial assets | 16 | 430 | 452 | 412 | ||||||||||||
Current income tax receivables | 16 | 13 | 14 | |||||||||||||
Cash and cash equivalents | 17 | 376 | 312 | 294 | ||||||||||||
|
|
|
|
|
| |||||||||||
1,853 | 1,777 | 1,756 | ||||||||||||||
|
|
|
|
|
| |||||||||||
Assets held for sale | — | 9 | — | |||||||||||||
|
|
|
|
|
| |||||||||||
3,547 | 3,623 | 3,690 | ||||||||||||||
|
|
|
|
|
| |||||||||||
Equity and liabilities | ||||||||||||||||
Equity | 18 | |||||||||||||||
Combined shareholders’ equity | 979 | 2,183 | 2,143 | |||||||||||||
Non-controlling interests | 3 | 3 | 4 | |||||||||||||
|
|
|
|
|
| |||||||||||
982 | 2,186 | 2,147 | ||||||||||||||
|
|
|
|
|
| |||||||||||
Non-current liabilities | ||||||||||||||||
Provisions for pensions and similar obligations | 19 | 24 | 47 | 26 | ||||||||||||
Other provisions | 20 | 29 | 27 | 3 | ||||||||||||
Deferred tax liabilities | 9 | 19 | 17 | 27 | ||||||||||||
Financial debt | 21 | 666 | 1 | 3 | ||||||||||||
Trade and other payables | 22 | 91 | 114 | 127 | ||||||||||||
Othernon-financial liabilities | 22 | 32 | 32 | 38 | ||||||||||||
|
|
|
|
|
| |||||||||||
861 | 238 | 224 | ||||||||||||||
|
|
|
|
|
| |||||||||||
Current liabilities | ||||||||||||||||
Other provisions | 20 | 20 | 17 | 20 | ||||||||||||
Financial debt | 21 | 438 | 103 | 148 | ||||||||||||
Trade and other payables | 22 | 1,107 | 916 | 983 | ||||||||||||
Othernon-financial liabilities | 22 | 124 | 145 | 141 | ||||||||||||
Current income tax payables | 15 | 16 | 27 | |||||||||||||
|
|
|
|
|
| |||||||||||
1,704 | 1,197 | 1,319 | ||||||||||||||
|
|
|
|
|
| |||||||||||
Liabilities related to assets held for sale | — | 2 | — | |||||||||||||
|
|
|
|
|
| |||||||||||
3,547 | 3,623 | 3,690 | ||||||||||||||
|
|
|
|
|
|
Penguin Random House Venture Combined Financial Statements
Combined Statement of Cash Flows
in € millions | 2017 | 2016 | 2015 (unaudited) | |||||||||
EBIT (earnings before interest and taxes) | 393 | 404 | 381 | |||||||||
Taxes paid | (20 | ) | (20 | ) | (28 | ) | ||||||
Depreciation andwrite-ups ofnon-current assets | 86 | 76 | 94 | |||||||||
Results from disposals of investments | (2 | ) | — | (1 | ) | |||||||
Change in provisions for pensions and similar obligations | 8 | 10 | 14 | |||||||||
Change in other provisions | 6 | 21 | (22 | ) | ||||||||
Contributions to defined benefit plans | (16 | ) | (17 | ) | (21 | ) | ||||||
Change in net working capital | (138 | ) | (41 | ) | (92 | ) | ||||||
Other effects | (11 | ) | (15 | ) | (5 | ) | ||||||
|
|
|
|
|
| |||||||
Cash flow from operating activities | 306 | 418 | 320 | |||||||||
|
|
|
|
|
| |||||||
Investments in: | ||||||||||||
– intangible assets | (12 | ) | (15 | ) | (18 | ) | ||||||
– property, plant and equipment | (22 | ) | (15 | ) | (24 | ) | ||||||
– financial assets | (4 | ) | (2 | ) | (5 | ) | ||||||
– purchase prices for consolidated investments (net of acquired cash) | (40 | ) | (1 | ) | 4 | |||||||
Disposals of subsidiaries and other business units | 4 | 6 | 10 | |||||||||
Disposals of other fixed assets | 1 | 1 | 21 | |||||||||
|
|
|
|
|
| |||||||
Cash flow from investing activities | (73 | ) | (26 | ) | (12 | ) | ||||||
|
|
|
|
|
| |||||||
Proceeds from other financial debt | 1,277 | 188 | 283 | |||||||||
Redemption of other financial debt | (207 | ) | (231 | ) | (312 | ) | ||||||
Interest paid | (8 | ) | (7 | ) | (8 | ) | ||||||
Interest received | 3 | 1 | 1 | |||||||||
Dividends to Penguin Random House shareholders | (1,206 | ) | (317 | ) | (410 | ) | ||||||
Change in equity | 9 | 12 | 41 | |||||||||
|
|
|
|
|
| |||||||
Cash flow from financing activities | (132 | ) | (354 | ) | (405 | ) | ||||||
|
|
|
|
|
| |||||||
Change in cash and cash equivalents | 101 | 38 | (97 | ) | ||||||||
Exchange rate effects and other changes in cash and cash equivalents | (39 | ) | (18 | ) | 34 | |||||||
Cash and cash equivalents 1/1 | 314 | 294 | 357 | |||||||||
|
|
|
|
|
| |||||||
Cash and cash equivalents 12/31 | 376 | 314 | 294 | |||||||||
|
|
|
|
|
| |||||||
Less cash and cash equivalents included within assets held for sale | — | (2 | ) | — | ||||||||
|
|
|
|
|
| |||||||
Cash and cash equivalents 12/31 (according to the combined | 376 | 312 | 294 | |||||||||
|
|
|
|
|
|
Details on the cash flow statement are presented in note 25 “Cash Flow Statement.”
Penguin Random House Venture Combined Financial Statements
Combined Statement of Changes in Equity
in € millions | Combined equity, membership capital and combined retained earnings | Accumulated other comprehensive income1) | Combined shareholders’ equity | Non- controlling interests | Total | |||||||||||||||||||||||
Currency translation differences | Cash flow hedges | Share of other comprehensive income of investments accounted for using the equity method | ||||||||||||||||||||||||||
Balance as of 1/1/2015 (unaudited) | 1,852 | 126 | — | — | 1,978 | 4 | 1,982 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Group profit or loss | 343 | — | — | — | 343 | — | 343 | |||||||||||||||||||||
Other comprehensive income | 23 | 161 | 2 | (6 | ) | 180 | — | 180 | ||||||||||||||||||||
Group total comprehensive income | 366 | 161 | 2 | (6 | ) | 523 | — | 523 | ||||||||||||||||||||
Dividend distributions | (410 | ) | — | — | — | (410 | ) | — | (410 | ) | ||||||||||||||||||
Contributions by owners2) | 41 | — | — | — | 41 | — | 41 | |||||||||||||||||||||
Equity transactions with shareholders | (369 | ) | — | — | — | (369 | ) | — | (369 | ) | ||||||||||||||||||
Other changes | 11 | — | — | — | 11 | — | 11 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Balance as of 12/31/2015 (unaudited) | 1,860 | 287 | 2 | (6 | ) | 2,143 | 4 | 2,147 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Balance as of 1/1/2016 | 1,860 | 287 | 2 | (6 | ) | 2,143 | 4 | 2,147 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Group profit or loss | 373 | — | — | — | 373 | — | 373 | |||||||||||||||||||||
Other comprehensive income | (21 | ) | (18 | ) | (1 | ) | 11 | (29 | ) | (1 | ) | (30 | ) | |||||||||||||||
Group total comprehensive income | 352 | (18 | ) | (1 | ) | 11 | 344 | (1 | ) | 343 | ||||||||||||||||||
Dividend distributions | (317 | ) | — | — | — | (317 | ) | — | (317 | ) | ||||||||||||||||||
Contributions by owners2) | 12 | — | — | — | 12 | — | 12 | |||||||||||||||||||||
Equity transactions with shareholders | (305 | ) | — | — | — | (305 | ) | — | (305 | ) | ||||||||||||||||||
Other changes | 1 | — | — | — | 1 | — | 1 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Balance as of 12/31/2016 | 1,908 | 269 | 1 | 5 | 2,183 | 3 | 2,186 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Balance as of 1/1/2017 | 1,908 | 269 | 1 | 5 | 2,183 | 3 | 2,186 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Group profit or loss | 366 | — | — | — | 366 | — | 366 | |||||||||||||||||||||
Other comprehensive income | 20 | (161 | ) | (1 | ) | (2 | ) | (144 | ) | — | (144 | ) | ||||||||||||||||
Group total comprehensive income | 386 | (161 | ) | (1 | ) | (2 | ) | 222 | — | 222 | ||||||||||||||||||
Dividend distributions3) | (1,435 | ) | — | — | — | (1,435 | ) | — | (1,435 | ) | ||||||||||||||||||
Contributions by owners2) | 9 | — | — | — | 9 | — | 9 | |||||||||||||||||||||
Equity transactions with shareholders | (1,426 | ) | — | — | — | (1,426 | ) | — | (1,426 | ) | ||||||||||||||||||
Other changes | — | — | — | — | — | — | — | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Balance as of 12/31/2017 | 868 | 108 | — | 3 | 979 | 3 | 982 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1) | As of December 31, 2017, and as of December 31, 2015, no assets were classified as held for sale in accordance with IFRS 5. As of December 31, 2016, no significant amounts related to assets classified as held for sale. |
2) | The amount related mainly to capital contributions. Further information is presented in note 26 “Related Party Disclosures.” |
3) | Compared with the previous years, the increased level of dividend distributions to Penguin Random House shareholders results from special dividend distributions in connection with the acquisition of another 22 percent interest in Penguin Random House by Bertelsmann from Pearson. Further details are presented in the section “Background.” |
Penguin Random House Venture Combined Financial Statements
General Principles
Background
Penguin Random House is a consumer book publishing company, which operates in the core business fields of print and digital consumer book publishing in over 20 countries across five continents. Penguin Random House employs more than 10,000 people globally across almost 250 editorially and creatively independent imprints and publishing houses that collectively publish more than 15,000 new titles annually. Penguin Random House sells directly to bookshops and through wholesalers. Retail bookshops normally maintain relationships with both publishers and wholesalers and use the channel that best serves the specific requirements of an order. Penguin Random House also sells through online retailers such as Amazon.com, through its own websites and direct to the customer via digital sales agents.
The Penguin Random House Venture (hereafter referred to as “Penguin Random House” or “Group”) was established when Bertelsmann SE & Co. KGaA (hereafter referred to as “Bertelsmann” or “Bertelsmann Group”) and Pearson plc (hereafter referred to as “Pearson”), combined their respective trade publishing groups Random House (with exception of the German-speaking publishing business) and Penguin Books Group. The transaction agreed between Bertelsmann and Pearson in October 2012 for the combination of their trade publishing groups was concluded on July 1, 2013. Initially, controlling shareholder Bertelsmann held a 53 percent interest in this new publishing company Penguin Random House, withnon-controlling interests Pearson holding 47 percent. On October 5, 2017, Bertelsmann acquired in addition to its existing interest another 22 percent of Penguin Random House from Pearson. The remaining 25 percent share remains with Pearson. As part of the agreement with Pearson, Bertelsmann executed different loans in US dollars to Penguin Random House, that are mainly intended to finance special dividend distributions of €1,021 million to the shareholders. Thereof, a special dividend distribution of €591 million relates to Bertelsmann (of which €419 million was paid in the financial year 2017 and a further €172 million is payable in the financial year 2018) and of €430 million relates to Pearson (of which €373 million was paid in the financial year 2017 and a further €57 million is payable in the financial year 2018).
Description of Penguin Random House
Legally Penguin Random House consists of two legal groups: Penguin Random House LLC (hereafter referred to as “PRH LLC”), a Delaware limited liability company registered in Wilmington, Delaware, United States, and headquartered in New York City, New York, United States, and Penguin Random House Limited (hereafter referred to as “PRH Limited”), a company limited by shares, headquartered in London, United Kingdom. PRH LLC bundles all of the book publishing units in the United States, while PRH Limited comprises all other book publishing units (in Canada, Australia, New Zealand, India, South Africa, the United Kingdom, Spain, Latin America and in the Asian region, among others). Despite the separate legal structures of PRH LLC and PRH Limited, Bertelsmann and Pearson regard Penguin Random House as one business unit as it is managed together.
For periods up to and including the financial year ended December 31, 2017, both PRH LLC and PRH Limited prepared special purpose financial information comprising consolidated financial statements for each legal group due to IAS 28 accounting purposes of the minority shareholder. The latter consists of income statement, statement of comprehensive income, balance sheet, statement of changes in equity and selected explanatory notes that did not represent a complete set of consolidated financial statements in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board. However, it is technically able to produce Combined Financial Statements for PRH LLC and PRH Limited in accordance with IFRS. The combined statement of changes in equity reflects the LLC and Limited legal structures respectively.
The ultimate parent company of Penguin Random House preparing consolidated financial statements, Bertelsmann SE & Co. KGaA, includes in its consolidated financial statements those of Penguin Random House.
Penguin Random House Venture Combined Financial Statements
Notes continued
Description of Penguin Random House continued
Bertelsmann SE & Co. KGaA is a company incorporated under German law whose registered office is established at Carl-Bertelsmann-Strasse 270,D-33311 Gütersloh, Germany. Consolidated financial statements for Bertelsmann SE & Co. KGaA can be obtained at its registered office.
Basis of Preparation of the Combined Financial Statements
These Combined Financial Statements have been prepared pursuant to Rule3-09 of SEC RegulationS-X for purposes of a filing on Form20-F of Pearson plc as Penguin Random House is an equity investee of Pearson plc. Due to the governance structure, the shareholder arrangements between Pearson and Bertelsmann, various operational matters, and the disclosures that Pearson and Bertelsmann provide to their respective shareholders, Penguin Random House has prepared Combined Financial Statements as these are generally appropriate for entities under common management.
The accompanying Penguin Random House Combined Financial Statements are prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and the related interpretations (IFRIC) of the IFRS Interpretations Committee (IFRS IC). Penguin Random House uses one set of global accounting policies, which are IFRS compliant. The principal accounting policies adopted in the preparation of the Combined Financial Statements are set out in the section “Accounting and Measurement Policies.” These policies have been consistently applied to all the years presented, unless otherwise stated. Information as of December 31, 2015, and for the year ended have not been audited. The Combined Financial Statements were authorized for issue by Markus Dohle (CEO Penguin Random House) and James Johnston (Deputy CFO Penguin Random House) on March 23, 2018.
The IFRSs provide no guidelines for the preparation of combined financial statements, which are therefore subject to the rules given in IAS 8.12. This article requires consideration of the most recent pronouncements of other standard-setting bodies, other financial reporting requirements and recognized industry practices. For the purposes of the Combined Financial Statements, all income, expenses, assets, liabilities and other comprehensive income were directly included in the Combined Financial Statements. As the legal perspective was applied, the taxes related to the transparent entities of the legal group PRH LLC, which are incurred on the level of the shareholders, were not accounted for in the Combined Financial Statements. In addition, it was agreed as a general principle by the shareholders that each shareholder shall assume or retain all liabilities relating to covered employee benefits provided under the covered plans that arise on or prior to closing and that Penguin Random House should assume or retain all liabilities relating to covered employee benefits that arise after the closing and relate to any continuing employee. For processing reasons, parts of the employee matter liabilities that arise prior to closing remain legally within Penguin Random House and payments for these liabilities by Penguin Random House are part of a reimbursement mechanism by the shareholders. Bertelsmann Group supports Penguin Random House with administrative services. Those services have been charged by Bertelsmann Group to Penguin Random House and are therefore included in the Combined Financial Statements and in the related party disclosures (note 26).
Although the functional currencies of PRH LLC and PRH Limited are US dollar and British pound, respectively, the special purpose financial information of PRH LLC and PRH Limited are always prepared in euro for the minority shareholder. Due to consistency of presentation, Penguin Random House considers it appropriate to prepare the Combined Financial Statements in euro as well. Therefore, unless otherwise stated, all amounts in the Combined Financial Statements are presented in millions of euros (€ million).
Penguin Random House Venture Combined Financial Statements
Notes continued
Basis of Preparation of the Combined Financial Statements continued
The Combined Financial Statements have been prepared under the historical cost convention except for the following material items in the combined balance sheet:
Derivative financial instruments are measured at fair value;
Non-derivative financial instruments at fair value through profit or loss are measured at fair value;
The defined benefit assets and liabilities are measured in accordance with IAS 19.
For the sake of clarity, certain items are aggregated in the combined income statement, combined statement of comprehensive income, combined balance sheet, combined statement of cash flows and combined statement of changes in equity. These items are disclosed and explained in greater detail in the notes.
Impact of New International Financial Reporting Standards
The first-time application of new international financial reporting standards and interpretations does not have a material impact on Penguin Random House.
Impact of Issued International Financial Reporting Standards That Are Not Yet Effective
Penguin Random House has not opted for early adoption of any standards, interpretations or amendments that have been issued by the IASB or IFRS IC but are not yet mandatory. Significant new standards for Penguin Random House are IFRS 9 “Financial Instruments”, IFRS 15 “Revenue from Contracts with Customers” and IFRS 16 “Leases”.
IFRS 9 ”Financial Instruments“ contains revised regulations for the classification and measurement of financial assets, new requirements for impairment of financial instruments and new requirements for hedge accounting. For Penguin Random House, IFRS 9 will be applied for the first time in the financial year 2018. The analyses conducted by the Bertelsmann Group to determine the extent to which Penguin Random House is impacted by the new regulations of IFRS 9 were completed in 2017. For Penguin Random House, the new requirements of IFRS 9 primarily concern the impairment of financial assets, in particular the impairment of trade receivables. In the future, Penguin Random House will use a risk scoring model based on qualitative and quantitative risk factors for its major customers. For insignificant customers impairment, matrices will be used to determine the loss allowances on trade receivables on the basis of historic bad debt losses, maturity bands and expected credit losses. The impairment matrices are created for business-unit-specific groups of receivables, each with similar default patterns. In addition, separate risk assessments are prepared. Due to the changed calculation of loss allowances, there is only an immaterial effect, which will be recognized in retained earnings as of January 1, 2018. In addition, there is no material effect on the classification and in turn on the measurement of financial instruments. The analysis of debt instruments, consisting of mainly trade accounts receivables and other receivables, indicated that, in the vast majority of cases, these were held in order to collect the contractual cash flows representing exclusively principal and interest payments. Thus, the majority of the debt instruments continues to be measured at amortized cost except for certain debt instruments where the contractual cash flows do not represent exclusively principal and interest payments, in which case IFRS 9 requires a measurement at fair value. As of December 31, 2017, financial assets totaling €2 million are classified as available for sale and measured at cost. They are individually and in aggregate immaterial for the PRH Group and mainly relate to subsidiaries not included in the Combined Financial Statements for materiality reasons. With application of IFRS 9 these financial assets will be accounted for at fair value through other comprehensive income. As changes in fair value are recognized in other comprehensive income for these instruments, they will no longer be recycled to the income statement when these instruments are sold. No material impacts are anticipated from the new
Penguin Random House Venture Combined Financial Statements
Notes continued
Impact of Issued International Financial Reporting Standards That Are Not Yet Effective continued
regulations for hedge accounting. Application of IFRS 9 must be generally retrospective, but various exceptions are granted, particularly in the area of hedge accounting. The previous year’s figures will not be restated due to the existing practical relief under IFRS 9.
IFRS 15 “Revenue from Contracts with Customers” includes new comprehensive regulations for the recognition of revenue that are independent of a specific industry or transaction. The new standard replaces the current risk and reward approach with a contract-based five-step model. In addition to substantially more extensive application guidance for the accounting treatment of revenue from contracts with customers, there are more detailed disclosure requirements in the notes. Application of the standard is mandatory for financial years beginning on or after January 1, 2018. Penguin Random House has decided to apply the modified retrospective method for initial application, according to which IFRS 15 will be applied prospectively on a Group-wide basis from January 1, 2018, recognizing the cumulative effect of first-time application in retained earnings. For its first-time application, Penguin Random House will apply the expedients provided in the standard for the modified retrospective method. As part of the implementation of IFRS 15, Bertelsmann initiated and successfully conducted a Group-wide project tailored to the individual needs of Penguin Random House. On the basis of defined and analyzed core business models within Penguin Random House, these analyses were rolled out to existing customer contracts and a decentralized review of sales processes was conducted to identify the need for adaptions. This will serve as the basis for ensuring the process-related requirements of IFRS 15 are fulfilled. At the end of 2017, Penguin Random House assessed the anticipated impact of implementing IFRS 15 on the balance sheet, income statement and notes for each business model based on the revenues generated in 2017 and on balance sheet figures as of December 31, 2017. As a result of the impact assessment, expected returns of physical books sold are no longer offset against receivables but have to be presented as a return liability. This is expected to result in an increase of the total assets reported on the balance sheet of about €305 million. This corresponds to a percentage of the Group’s total assets of 8.6 percent and will be considered in the opening balances for January 1, 2018. Return assets are presented asnon-financial assets rather than in inventory.
With regard to certaine-book sales underlying contracts, presentation of revenue and expenses will change as a result of the new standard. Based on a more specific concept of the term “customer” – or, more specifically as a result of a more specific definition of the term “customer,” the control concept underlying IFRS 15 and the application of the enhanced principal/agent approach – revenue will be recognized in the amount of the retail price to the end consumer in the future. Any commissions for the online retailer are recognized as an expense. Consequently, the expected increase in the item “Revenues” will correspond directly with an increase in the item “Other operating expenses” with no impact on the item “Group profit and loss;” the increase of both line items “Revenues” and “Other operating expenses” is expected to represent a decrease of approximately 0.7 percentage points of the EBITDA margin. This change in revenue recognition does not have an impact on the opening balances for January 1, 2018. Based on the increased requirements regarding presentation in balance sheet and income statement and regarding disclosure requirements, adjustments to the reporting system, the chart of accounts and notes schedules have been prepared and published. The Group opted to apply the following practical expedients from January 1, 2018:
The costs of obtaining a contract will not be recognized if the underlying asset is amortized within a period of not more than 12 months.
The consideration will not be adjusted for the effects of a material financing component if the financing component pertains to a period of not more than 12 months.
IFRS 16 “Leases”, issued in January 2016, Pearson announcedsets out principles for recognition, measurement, presentation and disclosure requirements for leases. IFRS 16 replaces the current standards and interpretations of IAS 17 Leases,
Penguin Random House Venture Combined Financial Statements
Notes continued
Impact of Issued International Financial Reporting Standards That Are Not Yet Effective continued
IFRIC 4 Determining Whether an Arrangement Contains a Lease,SIC-15 Operating Leases – Incentives andSIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. The changes mainly affect lessee accounting and generally require lessees to recognize contractual rights and obligations on the lessee’s balance sheet. The standard replaces the straight-line recognition of operating lease expense for those leases applying IAS 17 with the recognition of depreciation expenses for theright-of-use asset and interest expenses on the lease liability (included within the financial result). In addition, IFRS 16 includes more extensive disclosures in the notes for lessees. Compared to the current accounting rules under IAS 17, the IFRS 16 regulations for lessors are mostly unchanged. Application of the standard is mandatory for financial years beginning on or after January 1, 2019. For the initial application of IFRS 16, there is an option to choose a full retrospective approach or a modified retrospective approach. IFRS 16 will be introduced in Penguin Random House as part of a Bertelsmann Group-wide transformation project. Under this project, initially Penguin Random House’s material lease agreements were analyzed to determine the approach for the initial application of IFRS 16, among other things. The analysis of material leases has not been completed. The effects on the Combined Financial Statements will be quantified as part of the further analysis of all lease agreements. As of December 31, 2017, the present value of the rental and lease commitments fromnon-cancellable leases, which were classified as operating leases in accordance with IAS 17, amount to €447 million and will probably lead to the recognition ofright-of-use assets in accordance with IFRS 16. However, no decision has been made within Penguin Random House concerning the election to apply the accounting options for short-term leases with a lease term of up to one year and for leases forlow-value assets, as well as for the approach for initial application of IFRS 16. It is to be assumed that, due to the recognition of the right to use the underlying leased objects and the recognition of the lease liability, the first-time adoption of IFRS 16 will have a significant impact on the combined balance sheet of Penguin Random House. In the combined income statement of Penguin Random House, the amortization of theright-of-use assets and the interest expense for the lease liabilities will be recognized in place of the other operating expenses for operating leases. Accordingly, the introduction of IFRS 16 will result in an improvement of thenon-GAAP financial measure EBITDA. In the combined statement of cash flows, IFRS 16 will result in an improvement of cash flows from operating activities, while the repayment component of lease payments will reduce the cash flows from financing activities. A reliable estimate of the amount of the financial effect can only be made after the conclusion of the Group-wide examination of the lease contracts.
Penguin Random House has not opted for early application of the standards of IFRS 9, IFRS 15 and IFRS 16.
Impact of US tax reform
The US tax reform (Tax Cuts and Jobs Act) signed into law on December 22, 2017, contains extensive changes to the US tax system. The key changes becoming effective from January 1, 2018, are, for example, the reduction of the US federal corporate income tax rate of 35 percent to 21 percent, the interest deduction limitation, the Base-Erosion and Anti-Abuse Tax (“BEAT“) and the alternative minimum tax (“AMT”). A preliminary analysis has been conducted to determine the extent to which Penguin Random House is impacted by the new tax system. As the legal group PRH LLC is operated as a group oftax-transparent entities, the key changes of the US tax reform are not expected to have material impacts on the income tax result of the Combined Financial Statements asUS-related current and deferred taxes are accounted for in the partner’s financial statements. However, the US tax law changes might have other tax and accounting consequences, such as impairment testing, hedge accounting and potential future changes on state and local tax regulations. The extent of the impact and the areas affected will depend on any further legislative procedure in the United States and will be part of the further analysis.
Penguin Random House Venture Combined Financial Statements
Consolidation
Principles of Consolidation
The Penguin Random House Combined Financial Statements combine the financial statements of the two legal groups, PRH LLC and PRH Limited, and their subsidiaries, joint ventures and associates. PRH LLC and PRH Limited are parent companies in the respective legal groups.
Subsidiaries are companies controlled by either PRH LLC or PRH Limited in accordance with IFRS 10. Control exists if Penguin Random House has the power over the investee as well as the exposure, or rights, to variable returns from its involvement with the investee and is able to exercise its power over the investee such that it can affect the amount of these returns. Consolidation begins on the date on which the possibility to exercise control exists and ends when Penguin Random House loses the possibility to exercise control. Profit or loss and each component of total comprehensive income are attributed to the shareholders of the parent company and thenon-controlling interests, even if this results in thenon-controlling interests having a deficit balance.
In accordance with IFRS 3, business combinations are accounted for using the acquisition method. Accordingly, the acquisition date fair value of the consideration transferred is offset against the fair value of equity on the acquisition date. Acquisition-related costs are generally recognized in profit or loss. If applicable, contingent consideration is measured at the fair value that applies on the acquisition date. If the aggregate of the consideration transferred, the amount of anynon-controlling interests in the acquiree and the acquisition date fair value of a previously held equity interest in the acquiree exceeds the fair value of the identifiable net assets, the excess is carried as goodwill. Negative differences are reflected in profit or loss in the period in which the acquisition is made. Deferred taxes from assets acquired and liabilities assumed in a business combination are carried and measured in accordance with IAS 12. Subsequent measurement of the acquired assets and the liabilities assumed or entered into is performed in line with the applicable IFRSs.Non-controlling interests are also measured at the proportionate fair value of the assets and liabilities. If the consideration transferred for the business combination or the fair values attributable to the identifiable assets and liabilities of the company acquired can only be provisionally identified on the date of initial accounting, the business combination is accounted for using these provisional values. Initial accounting is completed in accordance with IFRS 3.45, taking into account theone-year measurement period. Comparative information for reporting periods prior to the completion of initial accounting is presented as if it had already been completed on the acquisition date.
Changes in the parent’s ownership interest in a subsidiary that do not lead to a loss of control are accounted for as equity transactions. After the loss of control of a subsidiary, it is deconsolidated in accordance with the requirements of IFRS 10. Any investment retained in the former subsidiary and any amounts owed by or to the former subsidiary are accounted for in accordance with the applicable IFRSs from the date when control is lost.
In accordance with IFRS 11, joint ventures are joint arrangements in which the parties that have joint control of the arrangement have rights to the net assets of the joint venture. Joint ventures are accounted for using the equity method in accordance with IAS 28. In addition, associates are included in the Combined Financial Statements using the equity method. Associates are companies over which Penguin Random House exercises a significant influence. This is generally the case for voting rights between 20 percent and 50 percent. Smaller shareholdings are accounted for using the equity method if there is a significant influence in accordance with IAS 28.6.
According to the equity method, interests in a joint venture or an associate are initially recognized at cost. These acquisition costs are then adjusted for changes to the Penguin Random House’s interest in the net assets of the joint venture or the associate after the acquisition date. The same method used for fully consolidated subsidiaries is applied when accounting for the difference between the acquisition cost at the acquisition date and the share of net assets acquired. Losses from interests in a joint venture or an associate that exceed their carrying amounts are not recognized unless there is an obligation to make additional contributions. When changing the accounting
Penguin Random House Venture Combined Financial Statements
Consolidation continued
Principles of Consolidation continued
treatment of investments to the equity method, IFRS 3 is applied in analogy so that the fair value of the previously held interest is used in determining the cost of the investment accounted for using the equity method on the transition date. The difference between the fair value and carrying amount of the previously held interest is recognized in profit or loss.
Penguin Random House recognizes immaterial investments in accordance with IAS 39.
Accounting and measurement policies are applied consistently for all companies consolidated within the Combined Financial Statements. Intercompany assets, liabilities, equity, income and expenses as well as cash flows relating to transactions between Group companies are eliminated. Deferred taxes on consolidation transactions recognized in profit or loss are accounted for in accordance with IAS 12. The Penguin Random House share of unrealized gains or losses on intragroup transactions between fully consolidated Group companies and investments accounted for using the equity method is eliminated.
Scope of Consolidation
The scope of consolidation consists of 88 (2016: 86; 2015: 90) companies. This includes 87 (2016: 85; 2015: 89) fully consolidated companies. In addition, one immaterial associate is accounted for using the equity method in the Combined Financial Statements (2016: 1; 2015: 1). Penguin Random House had no joint ventures in the financial years 2017, 2016 and 2015. A total of 26 (2016: 17; 2015: 17) companies without significant business operations were excluded from the scope of consolidation due to their negligible importance for the financial position and financial performance of Penguin Random House.
For the financial year 2017, the detailed list of fully consolidated subsidiaries (FC) and associates accounted for using the equity method (EM) is as follows:
Name | Country | Share | Consolidation Method | |||||
Arrow Books Limited | Great Britain | 100.00 | FC | |||||
Barrie & Jenkins Limited | Great Britain | 98.00 | FC | |||||
Bartlett Bliss Productions Limited | Great Britain | 100.00 | FC | |||||
Bellew & Higton Publishers Limited | Great Britain | 100.00 | FC | |||||
Business Books Limited | Great Britain | 100.00 | FC | |||||
Century Benham Limited | Great Britain | 100.00 | FC | |||||
Century Hutchinson Limited | Great Britain | 100.00 | FC | |||||
Century Hutchinson Publishing Limited | Great Britain | 100.00 | FC | |||||
Century Publishing Co. Limited | Great Britain | 100.00 | FC | |||||
Chatto and Windus Limited | Great Britain | 100.00 | FC | |||||
Children’s Character Books Limited | Great Britain | 75.00 | FC | |||||
Direct Group Grandes Obras, S.L. | Spain | 100.00 | FC | |||||
Distribuidora Penguin Random House S.A.S. | Colombia | 99.96 | FC | |||||
Dorling Kindersley Limited | Great Britain | 100.00 | FC | |||||
Dorling Kindersley Publishing Private Limited | India | 100.00 | FC | |||||
Dorling Kindersley Verlag GmbH | Germany | 100.00 | FC | |||||
Ediciones B Argentina S.A. | Argentina | 100.00 | FC | |||||
Ediciones B Mexico, S.A. de C.V. | Mexico | 100.00 | FC | |||||
Ediciones B Uruguay S.A. | Uruguay | 100.00 | FC | |||||
Editora Schwarcz S.A. | Brazil | 45.00 | EM |
Penguin Random House Venture Combined Financial Statements continued
Consolidation continued
Scope of Consolidation continued
Name | Country | Share | Consolidation Method | |||||
Editorial Sudamericana Uruguaya S.A. | Uruguay | 99.83 | FC | |||||
Frederick Warne & Co Limited | Great Britain | 100.00 | FC | |||||
Frederick Warne & Co. LLC | United States | 100.00 | FC | |||||
Golden Treasures LLC | United States | 100.00 | FC | |||||
Grantham Book Services Limited | Great Britain | 100.00 | FC | |||||
Hammond, Hammond and Company, Limited | Great Britain | 100.00 | FC | |||||
Herbert Jenkins Limited | Great Britain | 100.00 | FC | |||||
Hurst & Blackett Limited | Great Britain | 100.00 | FC | |||||
Hutchinson & Co. (Publishers) Limited | Great Britain | 100.00 | FC | |||||
Hutchinson Books Limited | Great Britain | 100.00 | FC | |||||
Hutchinson Childrens Books Limited | Great Britain | 100.00 | FC | |||||
Jackdaw Publications Limited | Great Britain | 100.00 | FC | |||||
Jonathan Cape Limited | Great Britain | 100.00 | FC | |||||
Ladybird Books Limited | Great Britain | 100.00 | FC | |||||
Mainstream Publishing Company (Edinburgh) Limited | Great Britain | 100.00 | FC | |||||
Market Self Chile SpA | Chile | 84.05 | FC | |||||
Market Self S.A. | Argentina | 84.05 | FC | |||||
Martin Secker and Warburg Limited | Great Britain | 100.00 | FC | |||||
Penguin (Beijing) Culture Development Co. Ltd. | China | 100.00 | FC | |||||
Penguin Australia Pty Ltd | Australia | 100.00 | FC | |||||
Penguin Books Benelux B.V. | Netherlands | 100.00 | FC | |||||
Penguin Books Deutschland GmbH | Germany | 100.00 | FC | |||||
Penguin Books Limited | Great Britain | 100.00 | FC | |||||
Penguin Books, S.A. | Spain | 100.00 | FC | |||||
Penguin Group (Hong Kong) Limited | China | 100.00 | FC | |||||
Penguin Random House Australia Pty Ltd | Australia | 100.00 | FC | |||||
Penguin Random House Canada Limited | Canada | 100.00 | FC | |||||
Penguin Random House Grupo Editorial (USA) LLC | United States | 100.00 | FC | |||||
Penguin Random House Grupo Editorial S.A. | Argentina | 98.10 | FC | |||||
Penguin Random House Grupo Editorial S.A. | Peru | 100.00 | FC | |||||
Penguin Random House Grupo Editorial S.A.S. | Colombia | 99.91 | FC | |||||
Penguin Random House Grupo Editorial, S.A. | Chile | 100.00 | FC | |||||
Penguin Random House Grupo Editorial, S.A. de C.V. | Mexico | 100.00 | FC | |||||
Penguin Random House Grupo Editorial, S.A.U. | Spain | 100.00 | FC | |||||
Penguin Random House Grupo Editorial, Unipessoal, Lda. | Portugal | 100.00 | FC | |||||
Penguin Random House India Private Limited | India | 100.00 | FC | |||||
Penguin Random House Ireland Limited | Ireland | 100.00 | FC | |||||
Penguin Random House Korea LLC | South Korea | 100.00 | FC | |||||
Penguin Random House Limited | Great Britain | 100.00 | FC | |||||
Penguin Random House LLC | United States | 100.00 | FC | |||||
Penguin Random House New Zealand Limited | New Zealand | 100.00 | FC | |||||
Penguin Random House South Africa (Pty) Ltd. | South Africa | 100.00 | FC | |||||
Plane Tree Publishers Limited | Great Britain | 100.00 | FC | |||||
Random House Children’s Entertainment LLC | United States | 100.00 | FC | |||||
Random House Properties Limited | Great Britain | 100.00 | FC | |||||
Random House Publishing Group Limited | Great Britain | 100.00 | FC |
Penguin Random House Venture Combined Financial Statements continued
Consolidation continued
Scope of Consolidation continued
Name | Country | Share | Consolidation Method | |||||
Random House Struik Proprietary Limited | South Africa | 100.00 | FC | |||||
Random House UK Ventures Limited | Great Britain | 100.00 | FC | |||||
RHA Holdings Pty Ltd | Australia | 100.00 | FC | |||||
Salspot Limited | Great Britain | 100.00 | FC | |||||
Sasquatch Books LLC | United States | 100.00 | FC | |||||
Sinclair – Stevenson Limited | Great Britain | 100.00 | FC | |||||
Smashing Ideas LLC | United States | 100.00 | FC | |||||
Snowdog Enterprises Limited | Great Britain | 100.00 | FC | |||||
Snowman Enterprises Limited | Great Britain | 100.00 | FC | |||||
Sputnik 84 LLC | United States | 100.00 | FC | |||||
Stanley Paul & Co Limited | Great Britain | 100.00 | FC | |||||
T. Werner Laurie, Limited | Great Britain | 100.00 | FC | |||||
The Bodley Head Limited | Great Britain | 100.00 | FC | |||||
The Book Service Limited | Great Britain | 100.00 | FC | |||||
The Cresset Press Limited | Great Britain | 100.00 | FC | |||||
The Harvill Press Limited | Great Britain | 100.00 | FC | |||||
The Hogarth Press Limited | Great Britain | 100.00 | FC | |||||
The Random House Group Limited | Great Britain | 100.00 | FC | |||||
Transworld Publishers Limited | Great Britain | 100.00 | FC | |||||
Ventura Publishing Limited | Great Britain | 100.00 | FC | |||||
Virgin Books Limited | Great Britain | 100.00 | FC | |||||
Woodlands Books Limited | Great Britain | 85.00 | FC |
Acquisitions and Disposals
In the financial year 2017, the cash flow from acquisition activities totaled€-40 million, which fully related to new acquisitions during the reporting period less cash and cash equivalents acquired. The consideration transferred in accordance with IFRS 3 amounted to €44 million taking into account contingent consideration of €4 million. In the financial years 2016 and 2015, Penguin Random House made no acquisitions. The cash flows from acquisition activities in 2016 of€-1 million and 2015 of €4 million relate to acquisitions in previous years.
In July 2017, Penguin Random House acquired an interest of 100 percent in the publishing group Ediciones B from Spain’s Grupo Zeta media group. Penguin Random House considers the acquisition as a reinforcement of Penguin Random House Grupo Editorial’s market position and cultural importance in Spain, Latin America and the entire Spanish-speaking world. The consideration transferred amounted to €37 million and was embarkingfully paid in cash. The purchase price allocation resulted innon-tax-deductible goodwill of €28 million, mainly representing synergy potential to be realized from efficiency optimization in direct and structural expenses. In the financial year 2017, transaction-related costs amounted to €2 million and have been recognized in profit or loss.
In addition, Penguin Random House made several acquisitions in the financial year 2017, none of which was material on a stand-alone basis. Payments net of acquired cash and cash equivalents amounted to€-4 million; the consideration transferred in accordance with IFRS 3 for these acquisitions amounted to €7 million taking into account contingent consideration of €3 million. The other acquisitions resulted in goodwill totaling €3 million, which reflects synergy potential and is tax deductible. Due to exercising an optional right in the United States, from a tax perspective the other acquisitions are treated as asset deals. On an individual level, the total consideration transferred in the amount of €7 million is tax deductible over 15 years. In the financial year 2017, transaction-related costs amounted to less than €1 million and have been recognized in profit or loss.
Penguin Random House Venture Combined Financial Statements
Consolidation continued
Acquisitions and Disposals continued
The purchase price allocations consider all the facts and circumstances prevailing as of the respective dates of acquisition that were known prior to preparation of the Consolidated Financial Statements. In accordance with IFRS 3, should further facts and circumstances become known within the12-month measurement period, the purchase price allocation will be adjusted accordingly.
The following table shows the fair values of the assets and liabilities of the acquisitions made in the financial year 2017 on their dates of initial consolidation based on the purchase price allocations:
Effects of Acquisitions
in € millions | Ediciones B | Other | Total | |||||||||
Non-current assets | ||||||||||||
Goodwill | 28 | 3 | 31 | |||||||||
Other intangible assets | 8 | 3 | 11 | |||||||||
Othernon-current assets | 2 | — | 2 | |||||||||
Current assets | ||||||||||||
Inventories | 7 | 2 | 9 | |||||||||
Trade and other receivables | 5 | 1 | 6 | |||||||||
Other current assets | 2 | 1 | 3 | |||||||||
Cash and cash equivalents | 1 | — | 1 | |||||||||
Liabilities | ||||||||||||
Financial debt | — | 1 | 1 | |||||||||
Other financial andnon-financial liabilities | 16 | 2 | 18 |
In the financial year 2017, since initial consolidation, all new acquisitions in accordance with IFRS 3 have contributed €22 million to revenue and an immaterial amount to Group profit or loss. If consolidated as of January 1, 2017, these would have contributed €40 million to revenue and€-8 million to Group profit or loss. On the acquisition date, the fair value of the acquired receivables was €6 million. Nearly the full amount is attributable to trade receivables and only an immaterial amount is attributable to other receivables. Trade receivables are impaired in the amount of €4 million resulting in a gross amount of trade receivables of €10 million.
The fair values of the identifiable assets, liabilities and contingent liabilities acquired are measured in accordance with IFRS 3, and primarily using the market price-oriented method. According to this method, assets and liabilities are measured at the prices observed in active markets. If measurement using the market price-oriented method is not feasible, the income approach is to be applied. Within the income approach following methods are usually applied: Multi-period excess earnings method (“MEEM”) and Relief from royalty method. According to the Multi-period excess earning method the fair value is at first determined as the present value of directly attributable cash flows, generated solely by the asset being valued. According to the Relief from royalty method the fair value is determined as the present value of the royalty savings as a result of the acquisition. The income method is used particularly in the valuation of imprints or backlists.
In November 2017, Penguin Random House sold its travel guidebook and reference publisher The Rough Guides Limited to Media Tune Holding AG, Switzerland. The sale resulted in an immaterial loss recognized in the item ”Results from disposals of investments.”
In October 2017, Penguin Random House completed the sale of Penguin Random House Pte. Ltd., Singapore and Penguin Books Malaysia Sdn Bhd, Malaysia to Times Publishing Limited. The sale resulted in a gain of
Penguin Random House Venture Combined Financial Statements
Consolidation continued
Effects of Acquisitions continued
€1 million recognized in the item ”Results from disposals of investments.” As of December 31, 2016, Penguin Random House management had seen the sale as highly probable due to the advance stage-negotiations and had therefore classified the assets and related liabilities of PRH Singapore and Malaysia as held for sale at the end of the reporting period 2016.
In June 2016, Penguin Random House sold its American travel content publisher Fodor’s to Internet Brands, a California-based online media and technology company. The sale resulted in a gain of €3 million recognized in the item ”Results from disposals of investments.”
In December 2015, Penguin Random House completed the sale of its self-publishing subsidiary Author Solutions to Najafi, a US investment firm. The sale resulted in a gain of €3 million recognized in the item ”Results from disposals of investments.” In 2016 Najafi and Penguin Random House reached a settlement agreement about the final purchase price, resulting in an additional payment by Penguin Random House of €3 million.
In August 2015, Penguin Random House sold its Australian online bookseller Bookworld to the online retailer Booktopia. The sale resulted in a loss of €1 million recognized in the item ”Results from disposals of investments.”
After considering the cash and cash equivalents disposed of, Penguin Random House generated cash flows in the amount of €4 million from disposals (2016: €6 million; 2015: €10 million). The disposals resulted in a gain from deconsolidation of €1 million (2016: €3 million; 2015: €1 million), which is recognized in the item “Results from disposals of investments.” The following table shows their impact on the assets and liabilities at the time of deconsolidation:
Effects of Disposals
in € millions | 2017 | 2016 | 2015 | |||||||||
Non-current assets | ||||||||||||
Goodwill | 1 | 1 | 4 | |||||||||
Other intangible assets | 2 | 1 | 30 | |||||||||
Property, plant and equipment | — | — | 2 | |||||||||
Othernon-current assets | 1 | — | 1 | |||||||||
Current assets | ||||||||||||
Inventories | 3 | 1 | 2 | |||||||||
Other current assets | 3 | — | 14 | |||||||||
Cash and cash equivalents | — | — | 2 | |||||||||
Liabilities | ||||||||||||
Financial debt | — | — | 5 | |||||||||
Other financial andnon-financial liabilities | 2 | — | 37 |
Information as of December 31, 2015, and for the year ended have not been audited.
Assets Held for Sale and Liabilities Related to Assets Held for Sale
As of December 31, 2017, no amounts related to assets classified as held for sale and related liabilities in accordance with IFRS 5.
Penguin Random House Venture Combined Financial Statements continued
Consolidation continued
Assets Held for Sale and Liabilities Related to Assets Held for Sale continued
The carrying amounts of the assets classified as held for sale and related liabilities as of December 31, 2016, are presented in the following table:
Assets Held for Sale and Related Liabilities
in € millions | 12/31/2016 | |||
Assets | ||||
Non-current assets | ||||
Goodwill | 1 | |||
Other intangible assets | 3 | |||
Property, plant and equipment | — | |||
Current assets | ||||
Inventories | 1 | |||
Other current assets | 2 | |||
Cash and cash equivalents | 2 | |||
Assets held for sale | 9 | |||
Equity and liabilities | ||||
Current liabilities | ||||
Trade payables | 1 | |||
Other current liabilities | 1 | |||
Liabilities related to assets held for sale | 2 |
The figures as of December 31, 2016, relate to the sale of Random House Pte. Ltd., Singapore and Penguin Books Malaysia Sdn Bhd, Malaysia completed in the financial year 2017. Further information is presented above.
As of December 31, 2015, no amounts related to assets classified as held for sale and related liabilities in accordance with IFRS 5.
The disposal groups mentioned above were measured at fair value less costs to sell. These are to be allocated to level 3 of the hierarchy ofnon-recurring fair values. Valuations for level 3 are based on information from the contract negotiations. The impairment losses were recognized in profit or loss in the item “Other operating expenses.”
Foreign Currency Translation
Transactions denominated in a currency other than a subsidiary’s functional currency are recorded in the functional currency at the exchange rate applicable on the day of their initial accounting. At the end of the reporting period, monetary assets and liabilities denominated in foreign currency are revalued into the functional currency using the closing rate applicable at that time. Gains and losses from these currency translations are recognized in profit or loss.Non-monetary balance sheet items in foreign currency are carried at the exchange rate applicable on the date of initial recognition.
Translation of Foreing Operations
The financial statements of subsidiaries, joint ventures and associates that were prepared in foreign currencies are translated into euros using the functional currency concept set out in IAS 21 before they are included in the Combined Financial Statements. Assets and liabilities are translated into the reporting currency at the closing rate
Penguin Random House Venture Combined Financial Statements
Consolidation continued
Translation of Foreing Operations continued
at the end of the reporting period, while income statement items are translated at the average rate for the financial year. Currency translation differences are recognized in other comprehensive income. Such differences arise from translating items in the balance sheet at a closing rate that differs from the previous closing rate and from using the average rate for the period and the closing rate at the end of the reporting period to translate the Group profit or loss. At the time of deconsolidation of Group companies, the respective accumulated currency translation differences recognized in other comprehensive income and accumulated in a separate component of equity are reclassified from equity to the income statement. The following euro exchange rates were used to translate the currencies most significant to Penguin Random House.
Euro Exchange Rates for Major Foreign Currencies
Average rates | Closing rates | |||||||||||||||||||||||||||
Foreign currency unit per €1 | 2017 | 2016 | 2015 | 12/31/2017 | 12/31/2016 | 12/31/2015 | ||||||||||||||||||||||
Australian dollar | AUD | 1.4733 | 1.4881 | 1.4771 | 1.5346 | 1.4596 | 1.4897 | |||||||||||||||||||||
Canadian dollar | CAD | 1.4645 | 1.4660 | 1.4178 | 1.5039 | 1.4188 | 1.5116 | |||||||||||||||||||||
British pound | GBP | 0.8766 | 0.8196 | 0.7256 | 0.8872 | 0.8562 | 0.7340 | |||||||||||||||||||||
US dollar | USD | 1.1295 | 1.1072 | 1.1089 | 1.1993 | 1.0541 | 1.0887 |
Information as of December 31, 2015, and for the year ended have not been audited.
Penguin Random House Venture Combined Financial Statements
Accounting and Measurement Policies
Recognition of Income and Expense
Revenues are measured at the fair value of the compensation received or receivable and reduced by anticipated reductions in price, trade discounts and similar other deductions.
Revenues from the sale of goods are recognized when Penguin Random House has transferred the significant risks and rewards associated with ownership of the goods to the purchaser and the amount of revenue can be reliably measured. Revenues from printed product sales are recognized, net of provision for estimated returns and rebates, accordingly; when a printed product is initially published, revenues are recognized at the official publication date. Revenues from digital product sales (which mainly relate toe-book sales) for which Penguin Random House has sufficient, accurate and reliable data from certain retailers are recognized on the basis of these notifications by the retailers in the month in which download of thee-book occurs. In the absence of such data, revenues frome-book sales are recognized on the estimated basis done by Penguin Random House. Cooperating advertising fees directly linked to sales transactions are recognized as deductions from revenues.
Revenues from services including distribution services are recognized based on their percentage of completion. Interest income and expenses are recognized on an accrual basis using the effective interest method in accordance with IAS 39. Dividends are only recognized in profit or loss when the shareholder’s legal entitlement to payment is established. Other income is recognized when the economic benefits are probable and the amount can be measured reliably. Expenses are deferred on the basis of underlying facts or the period of time to which they relate.
Goodwill
Goodwill resulting from a business combination is recognized in accordance with IFRS 3 at the date of acquisition. Goodwill is subject to impairment testing at least annually by comparing the carrying amount of the cash-generating unit to which goodwill has been allocated, with the recoverable amount of the cash-generating unit. If the carrying amount of a cash-generating unit exceeds its recoverable amount, an impairment loss is immediately recognized in profit or loss. Impairment, including impairment losses recognized during the year, is not reversed. Goodwill is tested for impairment each year as of December 31, as outlined in the “Impairment Losses” section, and if a triggering event arises.
Other Intangible Assets
Non-current internally generated intangible assets are capitalized at cost, if the requirements set out in IAS 38 have been met. Intangible assets acquired separately are carried at acquisition cost less accumulated amortization and accumulated impairment losses. Intangible assets acquired as part of a business combination are initially recognized at fair value at the acquisition date in accordance with IFRS 3. Intangible assets with finite useful life are amortized on a straight-line basis over their estimated useful life. Impairment losses and reversal of impairment losses are determined by applying the requirements for impairment testing (IAS 36). In general, capitalized software has a useful life of between three and five years. The estimate of useful life and amortization methods are reviewed annually and prospectively adjusted to reflect changes in expectations.
Intangible assets with indefinite useful life are not amortized. Instead, they are subject to at least annual impairment testing and written down to their recoverable amount if applicable. No significant intangibles with indefinitely useful lives exist.
Property, Plant and Equipment
Items of property, plant and equipment are carried at cost less accumulated depreciation and accumulated impairment losses. The cost of items of property, plant and equipment produced internally within Penguin
Penguin Random House Venture Combined Financial Statements
Accounting and Measurement Policies continued
Property, Plant and Equipment continued
Random House includes direct attributable costs, including, among others, cost of material, labor and other inputs used in the construction of the asset. For qualifying assets in accordance with IAS 23, borrowing costs are capitalized. The amounts involved are insignificant to Penguin Random House. All other borrowing costs are expensed in the period in which they occurred. Maintenance costs are carried as expenses of the period, whereas expenses for activities that lead to a longer useful life or improved use are generally capitalized. Items of property, plant and equipment are depreciated on a straight-line basis over their estimated useful life. Estimates of useful life and the depreciation method are reviewed annually in line with IAS 16 and are adjusted prospectively according to the changed expectations. In the financial year 2017, depreciation is generally based on the following useful lives:
buildings: ten to 50 years
technical equipment and machinery: four to 15 years
other equipment, fixtures, furniture and office equipment: three to 15 years
Land is not subject to depreciation.
Impairment Losses
Goodwill and intangible assets with indefinite useful life are tested for impairment at least annually. Intangible assets with a finite useful life and property, plant and equipment are tested for impairment at the end of each reporting period in accordance with IAS 36 if there are any indications of impairment.
An impairment loss is recognized when the recoverable amount of a cash-generating unit has fallen below its carrying amount. The recoverable amount is the higher of fair value less costs of disposal and value in use. Fair value less costs of disposal and the value in use are generally determined using the discounted cash flow method, which is based on future cash flow forecasts, which are part of company forecasts. For determining the value in use, estimated future cash inflows or outflows from future restructurings or from improvement or enhancement of the cash-generating units’ performance are excluded unless, as of the end of the reporting period, the cash-generating unit is committed to the restructuring programmeand related provisions have been made. For assets held for sale, only fair value less costs to simplifysell is used as a basis for comparison.
As long as an active market exists, the market price or the price in the most recent comparable transaction is used for measuring fair value. If there is no active market, fair value less costs of disposal is generally calculated using the discounted cash flow method. If it is not possible to allocate cash flows to assets, the relevant impairment losses are determined on the basis of cash flows attributable to the cash-generating unit to which the assets belong. Projected cash flows are based on internal estimates for three planning periods. Generally, two further detailed planning periods are applied in addition. Based on historical data, the company’s internal forecasts take into account expectations relating to the market development. For periods beyond this detailed horizon, a perpetual annuity is recognized, taking into account individual business-specific growth rates. Discounting is generally based on the weighted average cost of capital (WACC) after tax. Specific WACCs are derived for cash-generating units with different risk profiles. Management estimates of cash flow are based on factors including assumptions of economic trends and the associated risks, the regulatory environment, the competitive environment, market share, investments and growth rates. The growth rates applied are based on long-term real growth figures for the relevant economies, growth expectations for the relevant sectors and long-term inflation forecasts for the countries in which the cash-generating units operate. The values allocated to the key assumptions are in line with external sources of information. The figures obtained using the respective discount rates reflect the recoverable amount of the cash-generating units. Material changes in the market or competitive environment
Penguin Random House Venture Combined Financial Statements
Accounting and Measurement Policies continued
Impairment Losses continued
may impair the value of cash-generating units. If the reasons for an impairment loss recognized in prior periods no longer exist, the impairment loss is reversed up to a maximum of the carrying amount of the respective asset if the impairment loss had not been recognized. The latter does not apply to goodwill.
Leases
The operating leases entered into by Penguin Random House primarily relate to rental agreements for buildings. Based on the substance of transaction, the leased assets are allocated to the lessor. The lease installments constitute expenses for the period and are carried as “Other operating expenses” using the straight-line method over the term of the lease. If Penguin Random House bears all material rewards and risks as part of leasing agreements and is thus to be regarded as the economic owner (finance lease), the leased item is capitalized at its fair value at the inception of the lease term or the lower net present value of the future minimum lease payments. Payment obligations arising from finance leases are recognized as financial liabilities in the same amount. No material finance lease arrangements exist.
Financial Assets
Financial assets are recognized initially at fair value, taking into account transaction costs that are directly attributable to the acquisition of the financial asset. In the case of financial assets that are recognized at fair value through profit or loss, transaction costs are recognized directly in the income statement. Regular purchases and sales of financial assets are recognized on the trade date – the day on which Penguin Random House enters into an obligation to buy or sell the asset.
For subsequent measurement, financial assets are classified into the following categories and subcategories:
available-for-sale financial assets
financial assets recognized at fair value through profit or loss
primary and derivative financial assets held for trading
financial assets initially recognized at fair value through profit or loss
loans and receivables
originated loans and trade receivables
cash and cash equivalents
Available-for-sale financial assets:
Theavailable-for-sale category primarily includes current andnon-current securities and equity investments not classified asheld-to-maturity investments, as loans and receivables, or at fair value through profit or loss. In accordance with IAS 39,available-for-sale financial assets are measured at their fair value at the end of the reporting period to the extent that this value can be reliably measured. Otherwise these are measured at cost. With deferred taxes taken into consideration, gains and losses resulting from fluctuations in the fair value are recognized in other comprehensive income. However, if there is objective evidence of impairment, this is recognized in profit or loss. A significant or prolonged decline in the fair value of an equity instrument below its acquisition cost is also to be regarded as objective evidence of impairment. If these assets are sold, the accumulated gains and losses previously recognized in other comprehensive income are reclassified from equity to the income statement.
Penguin Random House Venture Combined Financial Statements
Accounting and Measurement Policies continued
Financial Assets continued
Primary and derivative financial assets held for trading:
In general, this category includes derivatives that do not meet the formal requirements of IAS 39 for hedge accounting. They are measured at their fair value. Gains or losses from changes to the fair values are recognized in profit or loss.
Financial assets initially recognized at fair value through profit or loss:
This category includes financial assets that are designated upon initial recognition at fair value through profit or loss. Changes in fair value are recognized in the other financial result.
Originated loans and trade receivables:
Originated loans and trade receivables arenon-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are carried at amortized cost using the effective interest method. Long-term interest-free orlow-interest loans and receivables are discounted. Foreign currency items are translated using the closing rate. If there is objective evidence of impairment, the carrying amount is reduced through use of an allowance account and the loss is recognized in profit or loss. No material originated loans exist.
Cash and cash equivalents:
Cash includes bank balances and cash on hand. Cash equivalents include short-term, highly liquid securities with a term to maturity on acquisition of a maximum of three months. Foreign currency items are translated using the closing rate.
Penguin Random House has noheld-to-maturity investments.
Measurement at fair value:
In the case of financial assets measured at fair value, the valuation technique applied depends on the respective inputs present in each case. If listed prices can be identified for identical assets on active markets, they are used for valuation (level 1). If this is not possible, the fair values of comparable market transactions are applied, and financial methods that are based on observable market data are used (level 2). If the fair values are not based on observable market data, they are identified using recognized financial methods (level 3).
Impairment losses and reversals:
The carrying amounts of financial assets not recognized at fair value through profit or loss are examined at the end of each reporting period to determine whether there is objective evidence of impairment. Such evidence exists in the following cases: information concerning financial difficulties of a customer or a group of customers; default or delinquency in interest or principal payments; the probability of being subject to bankruptcy or other financial restructuring; and recognizable facts that point to a measurable reduction in the estimated future cash flows, such as an unfavorable change in the borrower’s payment status or the economic situation that corresponds to the delayed performance. In the case of financial assets carried at amortized cost, the loss in case of impairment corresponds to the difference between the carrying amount and the present value of the anticipated future cash flows – discounted using the original effective interest rate for the financial asset. If it is established
Penguin Random House Venture Combined Financial Statements continued
Accounting and Measurement Policies continued
Financial Assets continued
that the fair value has increased at a later measurement date, the impairment loss previously recognized is reversed up to a maximum of amortized cost in profit or loss. Impairment losses are not reversed in the case of unlisted equity instruments that are classified asavailable-for-sale assets and carried at cost. In case of impairment onavailable-for-sale assets carried at cost, the amount of the impairment loss is measured as the difference between the carrying amount of the financial asset and the present value of the estimated future cash flows discounted using the risk-adjusted interest rate.
Inventories
Inventories – consisting principally of books – are recognized at the lower of historical cost and net realizable value at the end of the reporting period. Both raw materials and finished goods inventory are accounted for using the FIFO(first-in,first-out) cost-flow assumption. Weighted average costing can be used if it results in approximately the same cost as FIFO. Inventories originating from intragroup suppliers are adjusted to eliminate intragroup earnings and are measured at Penguin Random House’s cost.
Inventories are tested for recoverability at the end of each reporting period. For this purpose, net realizable value is determined. Net realizable value is defined as the estimated sales price less expected costs to complete and estimated selling expenses. A write-down is recognized if the net realizable value is lower than its historical cost. Write-downs are reversed if the circumstances causing their recognition no longer exist. The new carrying amount then represents the lower of historical cost and adjusted net realizable value.
An inventory obsolescence reserve for finished goods is calculated on atitle-by-title basis. The consumption of inventories is recognized in the income statement in the cost of materials.
Income Taxes
In accordance with IAS 12, current tax expense and income are determined based on the respective domestic taxable earnings of the year (taxable income). Current and deferred taxes are determined based on applicable regulations and tax laws of the countries in which the companies included in the Combined Financial Statements are domiciled. The presentation is based on the legal approach for own tax liabilities as they arise in the normal way. Current and deferred taxes fortax-transparent entities (e.g., partnerships, which are not taxed in their own right) are therefore recognized on the level of the respective owners based on their share of thetax-transparent entity’s profits. The income tax relating totax-transparent entities is therefore not included in the income tax line of the Combined Financial Statements.
Deferred tax assets and liabilities are recognized for temporary differences between the tax base and the carrying amounts shown on the IFRS combined balance sheet, and for as yet unused tax loss carryforwards and tax credits.
Deferred tax assets are recognized only to the extent it is probable that taxable income will be available against which the deductible temporary difference can be utilized. Deferred tax assets that are unlikely to be realized within a clearly predictable period are reduced by valuation allowances. Deferred tax liabilities are generally recognized for all taxable temporary differences. Deferred tax assets and liabilities resulting from business combinations are recognized with the exception of temporary differences on goodwill not recognizable for tax purposes. The tax rates applied for computation are based on the country-specific tax rates and tax laws that have been enacted or substantively enacted at the end of the reporting period and whose applicability is expected as of the date of reversal of the temporary differences and the use of tax loss carryforwards and tax credits, respectively. In general, deferred taxes are recognized in profit or loss unless they relate to items recognized in other comprehensive income. In this case, deferred taxes are recognized in other comprehensive income.
Penguin Random House Venture Combined Financial Statements
Accounting and Measurement Policies continued
Accumulated Other Comprehensive Income
Accumulated other comprehensive income includes foreign exchange gains and losses and unrealized gains and losses from the fair value measurement ofavailable-for-sale financial assets and derivatives used in cash flow hedges in accordance with IAS 39.
In addition, in accordance with IAS 28.10, changes in other comprehensive income for entities accounted for using the equity method are recognized. Remeasurement effects of defined benefit pension plans (actuarial gains and losses on the defined benefit obligation, differences between actual investment returns and the return implied by the net interest cost on the plan assets, and effects of the asset ceiling) are recognized in the retained earnings in the year in which these gains and losses have been incurred as part of the reconciliation of total comprehensive income for the period in the statement of changes in equity. Deferred taxes on the aforementioned items are recognized directly in other comprehensive income.
Provisions
Provisions for pensions and similar obligations are calculated using the projected unit credit method in accordance with IAS 19. This method involves the use of biometric calculation tables, current long-term market interest rates and current estimates of future increases in salaries and pensions.
The net interest expense included in pension expense is recognized in the financial result. Remeasurement effects of defined benefit pension plans (actuarial gains and losses on the defined benefit obligation, differences between actual investment returns and the return implied by the net interest cost on the plan assets, and effects of the asset ceiling) are recognized immediately in equity under other comprehensive income and are not reclassified to profit or loss in a subsequent period (recycled).
With the exception of the other personnel-related provisions calculated in accordance with IAS 19, all of the other provisions are established on the basis of IAS 37 where there is a legal or constructive obligation to a third party, the outflow of resources is probable and it is possible to reliably determine the amount of the obligation. Provisions are measured in the amount of the most likely outcome. Long-term provisions are discounted. The discount rates take into account current market expectations and, if necessary, specific risks for the liability. Income from the reversal of provisions is generally included in the income statement line item to which the provision was previously charged.
Liabilities
Trade payables and other primary financial liabilities are initially measured at their fair value less transaction costs. Subsequent measurement is based on amortized cost using the effective interest method (financial liabilities at amortized cost), unless the financial liability is classified as initially recognized at fair value through profit or loss. In the case of financial liabilities measured at fair value, the valuation technique applied depends on the respective inputs present in each case. If listed prices can be identified for identical assets on active markets, they are used for valuation (level 1). If this is not possible, the fair values of comparable market transactions are applied, and financial methods that are based on observable market data are used (level 2). If the fair values are not based on observable market data, they are identified using established financial methods (level 3). Penguin Random House has not yet exercised the option of classifying financial liabilities initially recognized at fair value through profit or loss. Foreign currency liabilities are translated at the exchange rate at the end of the reporting period. Finance lease liabilities, which are also recognized under financial liabilities, are carried at their net present value in accordance with IAS 17.
Penguin Random House Venture Combined Financial Statements
Accounting and Measurement Policies continued
Derivative Financial Instruments
As set out in IAS 39, all derivative financial instruments are recognized at fair value on the balance sheet. Derivative financial instruments are recognized as of the transaction date. When a derivative is designed as a hedging instrument, it is initially determined whether the respective hedging relationship qualifies for hedge accounting. For the purposes of hedge accounting, hedges are classified as cash flow hedges, fair value hedges and hedges of a net investment in foreign operations. Some derivatives do not meet the requirements included in IAS 39 for recognition as hedges, despite this being their economic purpose.
Changes in the fair values of derivatives are recognized as follows:
1. | Cash flow hedge: The effective portion of the changes in the fair value of derivatives used to hedge future cash flows is recognized in other comprehensive income. The amounts carried here are included in the initial measurement when an underlyingnon-financial asset or anon-financial liability is received (basis adjustment). In other cases, the reclassification of the previously recognized gains and losses from equity to the income statement is performed when the hedged underlying transaction affects profit or loss. The ineffective portion of the changes in the fair value of the hedging instrument is recognized in profit or loss. |
2. | Stand-alone derivatives (no hedge relationship): Changes in the fair value of derivatives that do not meet the criteria for recognition as hedges are recognized in profit or loss in accordance with theheld-for-trading category and are therefore classified as at fair value through profit or loss. |
In the financial years 2017, 2016 and 2015, no hedge transactions were recognized with fair value hedges or to hedge a net investment in foreign operations.
Non-current Assets Held for Sale and Related Liabilities
Non-current assets or disposal groups are classified as held for sale if the associated carrying amount will be recovered principally through a sale transaction and not from continued use. Thesenon-current assets and the associated liabilities are presented in separate line items in the balance sheet in accordance with IFRS 5. They are measured at the lower of the carrying amount and fair value less costs to sell. Depreciation/amortization is not recognized if anon-current asset is classified as held for sale or forms part of a disposal group that is classified as held for sale.
Components of entities that fulfill the requirements of IFRS 5.32 are classified as discontinued operations and thus are carried separately in the income statement and cash flow statement. All of the changes in amounts made during the reporting period that are directly connected with the sale of a discontinued operation in any preceding period are also stated in this separate category. If a component of an entity is no longer classified as held for sale, the results of this entity component that were previously carried under discontinued operations are reclassified to continuing operations for all of the reporting periods shown.
Significant Accounting Judgements, Estimates and Assumptions
The preparation of Combined Financial Statements requires the use of accounting judgments, estimates and assumptions that may impact the carrying amounts of assets, liabilities, income and expenses recognized. Amounts actually realized may differ from estimated amounts. The following section presents accounting judgements, estimates and assumptions that are material in the Penguin Random House Combined Financial Statements for understanding the uncertainties associated with financial reporting.
Recognition of income and expense: In the event of return rights, mostly for print products, estimates are made with regard to the anticipated return volume as revenues are recognized taking the anticipated returns
Penguin Random House Venture Combined Financial Statements
Accounting and Measurement Policies continued
Significant Accounting Judgements, Estimates and Assumptions continued
into account. Return curves and average return rates are used to identify the anticipated returns. The accounting assessment of advertising grants paid to the customers of Penguin Random House includes different factors and they could therefore be recognized as costs or be deducted from revenue. In general, these payments are recognized as deduction from revenue if transactions are entered into in close proximity to each other and/or their mutual existence is acknowledged in the separate contracts, there is lack of sufficient evidence to support fair value for each transaction and/or Penguin Random House would not have made the payment if it were not also selling a good or service to the customer. |
All advanced payments for royalties are recorded as assets and a liability is recorded for all outstanding obligations not yet paid but for which a legal obligation to pay exists. Sales estimates and assumptions on future sales success are made in connection with advances paid to authors to secure exploitation rights in their publications.
Author royalty earnings are applied against any outstanding advance until the total unearned advance is reduced to zero. Author royalty earnings after that point are recognized as a payable.
Published and unpublished advances are tested for impairment based on management estimates of future sales volumes and price changes considering the current market conditions and using historical data, if appropriate, like past sales of similar books or books by the same author, and other relevant factors in estimating sales. Penguin Random House has a long history of providing authors with royalty advances, and it tracks each advance earned with respect to the sale of the related publication. Penguin Random House applies this historical experience to its existing outstanding royalty advances to estimate the likelihood of recovery. Additionally, Penguin Random House management regularly reviews its portfolio of royalty advances to determine if individual royalty advances are not recoverable for discrete reasons, such as the death of an author prior to completion of a title or titles, a Penguin Random House decision to not publish a title, poor market demand or other relevant factors that could impact recoverability. Based on this information, the portion of any advance that Penguin Random House believes is not recoverable, is expensed.
Trade receivables and other receivables: Valuation allowances are recognized for doubtful receivables based on risk factors such as a customer’s financial difficulties or unfavorable changes in the economic situation, taking into account the maturity structure of the receivables.
Impairment losses: Goodwill and intangible assets with indefinite useful life are tested for impairment at least annually. Intangible assets with finite useful life and property, plant and equipment are tested for impairment in accordance with IAS 36 if there are indications that an asset may be impaired. Impairment loss has occurred when the carrying amount of an asset exceeds its recoverable amount. The recoverable amount is the higher of fair value less costs of disposal and value in use. Fair value less costs of disposal and the value in use are generally determined using the discounted cash flow method, which is based on future cash flow forecasts, which are part of company forecasts. The cash flow forecasts are based on the management’s best possible estimates with regard to future performance. Penguin Random House has used a combination of long-term trends, industry forecasts andin-house knowledge, with special emphasis on recent experience, in forming the assumptions about the development of the various relevant markets in which Penguin Random House operates. This is an area highly exposed to the general economic conditions. Penguin Random House’s business development is still subject to risks. In particular, the unclear conditions of Brexit and the associated uncertainty could adversely impact Penguin Random House’s economic environment and thus increase the risk from economic developments. The subdued growth expectations in the United Kingdom reflect the significant uncertainty over the outcome of the Brexit negotiations and future economic relations. Moreover, the devaluation of the local currency after the referendum on EU membership is having an increasingly adverse effect on the consumer climate. The state of the relevant
Penguin Random House Venture Combined Financial Statements
Accounting and Measurement Policies continued
Significant Accounting Judgements, Estimates and Assumptions continued
market is just one of the key operational drivers Penguin Random House uses when assessing individual business models. The most important assumptions include estimated growth rates, the weighted average cost of capital and tax rates. All of these different elements are variable, interrelated and difficult to isolate as the main driver of the various business models and respective valuations. Changes to these estimates as a result of more recent information could have a material impact on the amount of the possible impairment. Penguin Random House performs sensitivity analyses on the cash-generating units, especially on those where the headroom between the recoverable amount and the carrying value is low. Detailed information on the assumptions and estimates that are used in impairment testing for intangible assets (including goodwill) in Penguin Random House is presented in note 10 “Intangible Assets.” |
Pension obligations: Pension obligations are measured using the projected unit credit method. Using this approach, biometric calculations, the prevailing long-term capital market interest rates and, in particular, assumptions about future salary and pension increases are taken into account.
Provisions for onerous contracts and warranties are also based to a significant extent on management estimates with regard to their amount and probability of occurrence. Assessments of whether there is a present obligation, whether an outflow of resources is probable and whether it is possible to reliably determine the amount of the obligation are generally based on the expertise ofin-house or third- party specialists. More recent information could change the estimates and thus impact the financial position and financial performance of Penguin Random House. With regard to risk provisioning, a provision for potential losses from litigation is recognized when the risks of a loss are considered to be probable and when a reliable estimate of the anticipated financial impact is possible. For significant contingent liabilities for which the possibility of a future loss is more than remote but less than probable, Penguin Random House estimates the possible loss where the Group believes that an estimate can be made. At the end of the reporting period, there were no reportable contingent liabilities from litigation. Management regularly reviews the recognition, measurement and use of provisions and the disclosure requirements for contingent liabilities.
In the case of purchase price allocations, assumptions are also made regarding the measurement of assets and liabilities assumed as part of business combinations. This applies in particular with regard to the acquired intangible assets, as measurements are based on fair value. In general, this is the present value of the future cash flows after taking into account the present value of the tax amortization benefit. In addition, the definition of uniform useful lives within Penguin Random House is based on management’s assumptions. General information on useful lives is presented in the sections “Other Intangible Assets” and “Property, Plant and Equipment.”
Assessments of the ability to realize uncertain tax positions and future tax benefits are also based on assumptions and estimates. Recognition of an asset or liability from an uncertain tax position is performed in accordance with IAS 12 if payment or refund of an uncertain tax position is probable. Measurement of the uncertain tax position is at its most likely amount. Deferred tax assets are only carried to the extent that it is probable that they can be utilized against future taxable profits. When assessing the probability of the ability to use deferred tax assets in the future, various factors are taken into account, including past earnings, company forecasts, tax forecast strategies and loss carryforward periods. Information relating to the ability to realize tax benefits is presented in note 9 “Income Taxes.”
Penguin Random House Venture Combined Financial Statements continued
Accounting and Measurement Policies continued
Significant Accounting Judgements, Estimates and Assumptions continued
Assumptions are also made for measuring fair values of financial assets and financial liabilities. In this regard, Penguin Random House uses various financial methods that take into account the market conditions and risks in effect at the end of the respective reporting periods. The inputs to these models are taken from observable markets where possible, but where this is not feasible, measuring fair values is based on assumptions by management. These assumptions relate to input factors such as liquidity risk and default risks.
Estimates and the underlying assumptions are reviewed on an ongoing basis. In general, adjustments to estimates are taken into account in the period in which the change is made and in future periods.
Penguin Random House Venture Combined Financial Statements
Notes to the Income Statement and the Balance Sheet
1 Revenues
in € millions | 2017 | 2016 | 2015 | |||||||||
Revenues from printed products | 2,354 | 2,358 | 2,514 | |||||||||
Revenues from digital products | 572 | 615 | 741 | |||||||||
Other revenues | 149 | 127 | 183 | |||||||||
|
|
|
|
|
| |||||||
3,075 | 3,100 | 3,438 | ||||||||||
|
|
|
|
|
|
Information as of December 31, 2015, and for the year ended have not been audited.
Revenues from printed products mainly include revenues from printed book sales, whereas revenues from digital products mainly relate to revenues frome-books sales. The item “Other revenues” includes subrights income in the amount of €55 million (2016: €41 million; 2015: €44 million). Prior period amounts regarding subrights income have been reclassified from “Income from sideline operations” within “Other operating income” to “Revenues” to conform to the current period presentation. This reclassification reflects the way the management evaluates the Penguin Random House’s business performance and manages its operations.
2 Other Operating Income
in € millions | 2017 | 2016 | 2015 | |||||||||
Income from sideline operations | 24 | 46 | 42 | |||||||||
Income from reimbursements | 2 | 1 | 15 | |||||||||
Gains from disposals ofnon-current assets | — | — | 2 | |||||||||
Foreign exchange gains | — | 3 | — | |||||||||
Sundry operating income | 7 | 6 | 16 | |||||||||
|
|
|
|
|
| |||||||
33 | 56 | 75 | ||||||||||
|
|
|
|
|
|
Information as of December 31, 2015, and for the year ended have not been audited.
3 Cost of Materials
in € millions | 2017 | 2016 | 2015 | |||||||||
Consumption of finished goods and merchandise | 616 | 665 | 733 | |||||||||
Consumption of raw materials and supplies | 14 | 14 | 18 | |||||||||
|
|
|
|
|
| |||||||
630 | 679 | 751 | ||||||||||
|
|
|
|
|
|
Information as of December 31, 2015, and for the year ended have not been audited.
Penguin Random House Venture Combined Financial Statements
Notes to the Income Statement and the Balance Sheet continued
4 Personnel Costs
in € millions | 2017 | 2016 | 2015 | |||||||||
Wages and salaries | 581 | 583 | 645 | |||||||||
Statutory social security contributions | 50 | 49 | 52 | |||||||||
Expenses for pensions and similar obligations | 33 | 37 | 40 | |||||||||
Other employee benefits | 51 | 54 | 64 | |||||||||
|
|
|
|
|
| |||||||
715 | 723 | 801 | ||||||||||
|
|
|
|
|
|
Information as of December 31, 2015, and for the year ended have not been audited.
5 Amortization, Depreciation, Impairment and Reversals on Intangible Assets and Property, Plant and Equipment
in € millions | 2017 | 2016 | 2015 | |||||||||
Amortization/depreciation, impairment losses and reversals on | ||||||||||||
– intangible assets | 47 | 48 | 60 | |||||||||
– property, plant and equipment | 28 | 28 | 29 | |||||||||
|
|
|
|
|
| |||||||
75 | 76 | 89 | ||||||||||
|
|
|
|
|
|
Information as of December 31, 2015, and for the year ended have not been audited.
6 Other Operating Expenses
in € millions | 2017 | 2016 | 2015 | |||||||||
Administrative expenses | 235 | 253 | 286 | |||||||||
Allowances on receivables andnon-financial assets | 149 | 148 | 165 | |||||||||
Advertising costs | 112 | 101 | 130 | |||||||||
Selling expenses | 101 | 108 | 125 | |||||||||
Consulting and audit fees | 24 | 19 | 40 | |||||||||
Operating taxes | 10 | 10 | 10 | |||||||||
Foreign exchange losses | 5 | — | 5 | |||||||||
Losses on disposals ofnon-current assets | — | — | 1 | |||||||||
Sundry operating expenses | 19 | 9 | 18 | |||||||||
|
|
|
|
|
| |||||||
655 | 648 | 780 | ||||||||||
|
|
|
|
|
|
Information as of December 31, 2015, and for the year ended have not been audited.
The item “Administrative expenses” includes, among others, payments recognized as expenses from operating leases of €60 million (2016: €63 million; 2015: €68 million) and associated services and incidental costs of €3 million (2016: €3 million; 2015: €0 million). In addition, an immaterial amount of contingent lease payments is included in this item (2016: €0 million; 2015: €0 million).
Penguin Random House Venture Combined Financial Statements
Notes to the Income Statement and the Balance Sheet continued
7 Interest Income and Interest Expenses
in € millions | 2017 | 2016 | 2015 | |||||||||
Interest income | ||||||||||||
Interest income on cash and cash equivalents | 1 | 1 | 1 | |||||||||
Other interest income | 2 | — | — | |||||||||
|
|
|
|
|
| |||||||
3 | 1 | 1 | ||||||||||
|
|
|
|
|
| |||||||
Interest expenses | ||||||||||||
Interest expenses on financial debt | (10 | ) | (1 | ) | (2 | ) | ||||||
Other interest expenses | (3 | ) | (3 | ) | (4 | ) | ||||||
|
|
|
|
|
| |||||||
(13 | ) | (4 | ) | (6 | ) | |||||||
|
|
|
|
|
|
Information as of December 31, 2015, and for the year ended have not been audited.
8 Other Financial Income and Expenses
in € millions | 2017 | 2016 | 2015 | |||||||||
Other financial income | ||||||||||||
Non-operating foreign exchange gains | — | 2 | — | |||||||||
Other | 1 | — | — | |||||||||
|
|
|
|
|
| |||||||
1 | 2 | — | ||||||||||
|
|
|
|
|
| |||||||
Other financial expenses | ||||||||||||
Net interest on defined benefit plans | (1 | ) | — | (2 | ) | |||||||
Non-operating foreign exchange losses | — | — | — | |||||||||
Other | (7 | ) | (3 | ) | (2 | ) | ||||||
|
|
|
|
|
| |||||||
(8 | ) | (3 | ) | (4 | ) | |||||||
|
|
|
|
|
|
Information as of December 31, 2015, and for the year ended have not been audited.
To better reflect the economic content, income and expenses fromnon-operating foreign currency hedging transactions are offset against the results from the measurement of the hedged foreign currency items and are recognized asnon-operating foreign exchange gains or losses. In the financial year 2017, immaterial losses from thesenon-operating foreign currency transactions (2016: €0 million; 2015:€-5 million) were offset by income from foreign currency hedging transactions amounting to €7 million (2016: €10 million; 2015: €10 million). Gains from foreign currency transactions of €2 million (2016: €8 million; 2015: €1 million) were offset by expenses from foreign currency hedging transactions amounting to€-9 million (2016:€-16 million; 2015:€-6 million).
Penguin Random House Venture Combined Financial Statements
Notes to the Income Statement and the Balance Sheet continued
9 Income Taxes
Income taxes, broken down into current and deferred income taxes, are as follows:
Income Taxes
in € millions | 2017 | 2016 | 2015 | |||||||||
Earnings before income taxes | 376 | 400 | 372 | |||||||||
|
|
|
|
|
| |||||||
Current income taxes | (24 | ) | (26 | ) | (32 | ) | ||||||
Deferred income taxes | 14 | (1 | ) | 3 | ||||||||
|
|
|
|
|
| |||||||
Income taxes | (10 | ) | (27 | ) | (29 | ) | ||||||
|
|
|
|
|
| |||||||
Net income after income taxes | 366 | 373 | 343 | |||||||||
|
|
|
|
|
|
Information as of December 31, 2015, and for the year ended have not been audited.
Income taxes 2017 have not been impacted by the key changes of the US tax reform as the current and deferred taxes of the legal group PRH LLC, United States, are accounted for in the partner’s financial statements.
Tax loss carryforwards of €10 million (2016: €5 million; 2015: €7 million) were utilized in the financial year 2017, reducing current tax expenses by €3 million (2016: €1 million; 2015: €2 million). Of the tax loss carryforwards utilized, no amounts relate to US corporate income tax, €1 million (2016: €2 million; 2015: €4 million) was due to UK corporate income tax and €9 million (2016: €3 million; 2015: €3 million) was due to other foreign income taxes. These amounts include €6 million (2016: €1 million; 2015: €6 million) for tax loss carryforwards for which no deferred tax assets were recognized in the past. These amounts relate to other foreign income taxes in the amount of €6 million (2016: €1 million; 2015: €3 million) and to UK corporate income tax in the amount of €0 million (2016: €0 million; 2015: €3 million). This led to a reduction in current tax expense of €2 million (2016: €0 million; 2015: €2 million).
Penguin Random House Venture Combined Financial Statements
Notes to the Income Statement and the Balance Sheet continued
9 Income Taxes continued
Deferred tax assets and liabilities resulted from the following items and factors.
Deferred Taxes
12/31/2017 | thereof recognized in profit or loss in the financial year | 12/31/2016 | thereof recognized in profit or loss in the financial year | 12/31/2015 | thereof recognized in profit or loss in the financial year | |||||||||||||||||||||||||||||||
in € millions | Assets | Liabilities | Assets | Liabilities | Assets | Liabilities | ||||||||||||||||||||||||||||||
Intangible assets | 5 | 25 | 5 | 6 | 30 | 3 | 7 | 37 | 3 | |||||||||||||||||||||||||||
Property, plant and equipment | 4 | 3 | — | 3 | 3 | (1 | ) | 4 | 4 | — | ||||||||||||||||||||||||||
Financial assets | 1 | 5 | 2 | — | 6 | — | — | 6 | 4 | |||||||||||||||||||||||||||
Inventories | 4 | 1 | — | 4 | 1 | 1 | 2 | — | (2 | ) | ||||||||||||||||||||||||||
Receivables | 8 | 1 | (1 | ) | 9 | 1 | 1 | 11 | 1 | (2 | ) | |||||||||||||||||||||||||
Advance payments and other assets | 7 | — | 2 | 5 | 1 | 3 | 2 | 2 | (5 | ) | ||||||||||||||||||||||||||
Provisions | 20 | 12 | — | 23 | 11 | (3 | ) | 23 | 11 | 4 | ||||||||||||||||||||||||||
Liabilities | — | 3 | — | — | 2 | (3 | ) | 2 | 1 | — | ||||||||||||||||||||||||||
Advance payments and other liabilities | 7 | 3 | — | 7 | 2 | (2 | ) | 7 | 3 | — | ||||||||||||||||||||||||||
Loss carryforwards/tax credits | 20 | 6 | 14 | — | 13 | 1 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
Total | 76 | 53 | 14 | 71 | 57 | (1 | ) | 71 | 65 | 3 | ||||||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Offset | (34 | ) | (34 | ) | (40 | ) | (40 | ) | (38 | ) | (38 | ) | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Carrying amount | 42 | 19 | 31 | 17 | 33 | 27 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Information as of December 31, 2015, and for the year ended have not been audited.
No deferred tax liabilities were recognized for temporary differences in connection with investments in subsidiaries in the amount of €7 million (2016: €7 million; 2015: €9 million) as their reversal can be controlled, and it is probable that these temporary differences will not be reversed in the foreseeable future.
Current and deferred tax assets and liabilities are offset against each other if they relate to the same tax authority and meet the criteria for offsetting. The term of the deferred taxes on temporary differences is mostly long term.
Information on amounts of income tax relating to other comprehensive income is presented in note 18 “Equity.”
Deferred tax assets are recognized on temporary differences, tax loss carryforwards and tax credits when it is likely that they can be utilized in the foreseeable future. The recognizable amount is assessed primarily based on existing deferred tax liabilities from temporary differences and projected taxable income within a planning period.
Penguin Random House Venture Combined Financial Statements
Notes to the Income Statement and the Balance Sheet continued
9 Income Taxes continued
Temporary differences, tax loss carryforwards and tax credits for which no deferred taxes have been recognized can be carried forward as follows:
Expiration
in € millions | 12/31/2017 | 12/31/2016 | 12/31/2015 | |||||||||
Tax loss carryforwards | ||||||||||||
To be carried forward for more than 5 years | 3 | 24 | 26 | |||||||||
To be carried forward for up to 5 years | 1 | 1 | 2 | |||||||||
Temporary differences | 2 | 8 | 22 | |||||||||
Tax credits | ||||||||||||
To be carried forward for more than 5 years | — | 2 | 4 | |||||||||
To be carried forward for up to 5 years | — | 1 | 3 |
Information as of December 31, 2015, and for the year ended have not been audited.
A reconciliation of expected tax result to actual tax result is shown in the following table:
Reconciliation to Actual Tax Expense
in € millions | 2017 | 2016 | 2015 | |||||||||
Earnings before income taxes | 376 | 400 | 372 | |||||||||
|
|
|
|
|
| |||||||
Income tax rate applicable to Penguin Random House (UK corporate income tax rate) | 19.25 | % | 20.00 | % | 20.25 | % | ||||||
|
|
|
|
|
| |||||||
Expected tax expense | (72 | ) | (80 | ) | (75 | ) | ||||||
|
|
|
|
|
| |||||||
The tax effects of the following items led to differences between the expected and actual tax expense: | ||||||||||||
Adjustment to different national tax rates | (59 | ) | (58 | ) | (55 | ) | ||||||
Effect of changes in tax rate and tax law | 3 | (1 | ) | 1 | ||||||||
Tax effects in respect of results from disposals of investments | — | — | (8 | ) | ||||||||
Current income taxes for previous years | (2 | ) | — | 1 | ||||||||
Deferred income taxes for previous years | 3 | 1 | 1 | |||||||||
Effects of measurements of deferred tax assets | 12 | 4 | (11 | ) | ||||||||
Permanent differences | (7 | ) | (5 | ) | (5 | ) | ||||||
Taxes incurred on the level of shareholders in the United States | 114 | 115 | 122 | |||||||||
Other adjustments | (2 | ) | (3 | ) | — | |||||||
Total of adjustments | 62 | 53 | 46 | |||||||||
|
|
|
|
|
| |||||||
Actual tax expense | (10 | ) | (27 | ) | (29 | ) | ||||||
|
|
|
|
|
|
Information as of December 31, 2015, and for the year ended have not been audited.
The actual tax expense differs from the expected tax expense mainly due to differences between the applicable national tax rates to the tax rate applicable to the Combined Financial Statements (UK corporate income tax rate) and due to income taxes related to the tax-transparent entities of the legal group PRH LLC, United States, which are incurred on the level of the shareholders and are therefore not accounted for in the Combined Financial
Penguin Random House Venture Combined Financial Statements
Notes to the Income Statement and the Balance Sheet continued
9 Income Taxes continued
Reconciliation to Actual Tax Expense continued
Statements. Included in the “Adjustment to different national tax rates” is mainly the tax differential to the United States nominal tax rate (2017: 38.10 percent; 2016: 38.80 percent; 2015: 38.50 percent).
Applicable Income Tax Rate
The applicable tax rate corresponds to the applicable tax rate of the Penguin Random House Limited, United Kingdom, as parent company of the legal group PRH Limited, because the main parts of the reported tax relate to this legal group. The applicable tax rate in the financial year 2017 was 19.25 percent (2016: 20.00 percent; 2015: 20.25 percent) and corresponds to the enacted country-specific tax rate in the United Kingdom.
The income tax relating to the legal group PRH LLC, United States, is not material for the Combined Financial Statements as only state income taxes are included in the income tax line in profit or loss. Any other income tax, which derives from the profits of the legal group PRH LLC, is not shown as part of the Combined Financial Statements, as it is accounted for in the partner’s financial statements.
Penguin Random House Venture Combined Financial Statements
Notes to the Income Statement and the Balance Sheet continued
10 Intangible Assets
Goodwill | Other intangible assets | |||||||||||||||||||
in € millions | Other rights and licenses | Internally generated intangible assets | Total | Total | ||||||||||||||||
Cost | ||||||||||||||||||||
Balance as of 1/1/2015 | 813 | 706 | 4 | 710 | 1,523 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Currency translation differences | 70 | 60 | 1 | 61 | 131 | |||||||||||||||
Acquisitions through business combinations | — | — | — | — | — | |||||||||||||||
Other additions | — | 18 | — | 18 | 18 | |||||||||||||||
Reductions through disposal of investments | (4 | ) | (57 | ) | — | (57 | ) | (61 | ) | |||||||||||
Other disposals | — | (3 | ) | (1 | ) | (4 | ) | (4 | ) | |||||||||||
Reclassifications in accordance with IFRS 5 | — | — | — | — | — | |||||||||||||||
Reclassifications and other changes | — | 6 | (1 | ) | 5 | 5 | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Balance as of 12/31/2015 | 879 | 730 | 3 | 733 | 1,612 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Currency translation differences | (14 | ) | (10 | ) | — | (10 | ) | (24 | ) | |||||||||||
Acquisitions through business combinations | — | — | — | — | — | |||||||||||||||
Other additions | — | 15 | — | 15 | 15 | |||||||||||||||
Reductions through disposal of investments | (1 | ) | (1 | ) | — | (1 | ) | (2 | ) | |||||||||||
Other disposals | — | (1 | ) | — | (1 | ) | (1 | ) | ||||||||||||
Reclassifications in accordance with IFRS 5 | (1 | ) | (4 | ) | — | (4 | ) | (5 | ) | |||||||||||
Reclassifications and other changes | — | 2 | — | 2 | 2 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Balance as of 12/31/2016 | 863 | 731 | 3 | 734 | 1,597 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Currency translation differences | (76 | ) | (70 | ) | (1 | ) | (71 | ) | (147 | ) | ||||||||||
Acquisitions through business combinations | 31 | 11 | — | 11 | 42 | |||||||||||||||
Other additions | — | 12 | — | 12 | 12 | |||||||||||||||
Reductions through disposal of investments | — | — | — | — | — | |||||||||||||||
Other disposals | — | — | — | — | — | |||||||||||||||
Reclassifications in accordance with IFRS 5 | — | — | — | — | — | |||||||||||||||
Reclassifications and other changes | — | — | — | — | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Balance as of 12/31/2017 | 818 | 684 | 2 | 686 | 1,504 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Accumulated amortization | ||||||||||||||||||||
Balance as of 1/1/2015 | 4 | 196 | 3 | 199 | 203 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Currency translation differences | — | 17 | 1 | 18 | 18 | |||||||||||||||
Amortization | — | 60 | — | 60 | 60 | |||||||||||||||
Impairment losses | — | — | — | — | — | |||||||||||||||
Reversals of impairment losses | — | — | — | — | — |
Penguin Random House Venture Combined Financial Statements
Notes to the Income Statement and the Balance Sheet continued
10 Intangible Assets continued
Goodwill | Other intangible assets | |||||||||||||||||||
in € millions | Other rights and licenses | Internally generated intangible assets | Total | Total | ||||||||||||||||
Reductions through disposal of investments | — | (27 | ) | — | (27 | ) | (27 | ) | ||||||||||||
Other disposals | — | (3 | ) | (1 | ) | (4 | ) | (4 | ) | |||||||||||
Reclassifications in accordance with IFRS 5 | — | — | — | — | — | |||||||||||||||
Reclassifications and other changes | — | (1 | ) | — | (1 | ) | (1 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Balance as of 12/31/2015 | 4 | 242 | 3 | 245 | 249 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Currency translation differences | — | (3 | ) | — | (3 | ) | (3 | ) | ||||||||||||
Amortization | — | 48 | — | 48 | 48 | |||||||||||||||
Impairment losses | — | — | — | — | — | |||||||||||||||
Reversals of impairment losses | — | — | — | — | — | |||||||||||||||
Reductions through disposal of investments | — | — | — | — | — | |||||||||||||||
Other disposals | — | (1 | ) | — | (1 | ) | (1 | ) | ||||||||||||
Reclassifications in accordance with IFRS 5 | — | (1 | ) | — | (1 | ) | (1 | ) | ||||||||||||
Reclassifications and other changes | — | — | — | — | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Balance as of 12/31/2016 | 4 | 285 | 3 | 288 | 292 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Currency translation differences | — | (28 | ) | (1 | ) | (29 | ) | (29 | ) | |||||||||||
Amortization | — | 46 | — | 46 | 46 | |||||||||||||||
Impairment losses | — | — | — | — | — | |||||||||||||||
Reversals of impairment losses | — | — | — | — | — | |||||||||||||||
Reductions through disposal of investments | — | — | — | — | — | |||||||||||||||
Other disposals | — | — | — | — | — | |||||||||||||||
Reclassifications in accordance with IFRS 5 | — | — | — | — | — | |||||||||||||||
Reclassifications and other changes | (1 | ) | 1 | — | 1 | — | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Balance as of 12/31/2017 | 3 | 304 | 2 | 306 | 309 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Carrying amount as of 12/31/2017 | 815 | 380 | — | 380 | 1,195 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Carrying amount as of 12/31/2016 | 859 | 446 | — | 446 | 1,305 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Carrying amount as of 12/31/2015 | 875 | 488 | — | 488 | 1,363 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
Information as of December 31, 2015, and for the year ended have not been audited.
The carrying amount of the ”Other rights and licenses” includes backlists and frontlists in the amount of €270 million (2016: €326 million; 2015: €361 million) and imprints in the amount of €79 million (2016: €92 million; 2015: €99 million).
As in the previous years, no intangible assets have been provided as collateral for liabilities as of the end of the reporting period 2017.
Penguin Random House Venture Combined Financial Statements
Notes to the Income Statement and the Balance Sheet continued
10 Intangible Assets continued
Goodwill is attributable to the following cash-generating units:
Goodwill by Cash-Generating Units
in € millions | 12/31/2017 | 12/31/2016 | 12/31/2015 | |||||||||
Penguin Random House North America | 494 | 559 | 542 | |||||||||
Penguin Random House United Kingdom | 170 | 176 | 205 | |||||||||
Dorling Kindersley | 14 | 14 | 17 | |||||||||
Spanish Speaking | 115 | 87 | 87 | |||||||||
Rest of the World | 22 | 23 | 24 | |||||||||
|
|
|
|
|
| |||||||
815 | 859 | 875 | ||||||||||
|
|
|
|
|
|
Information as of December 31, 2015, and for the year ended have not been audited.
For the purpose of impairment testing (IAS 36), goodwill from a business combination is allocated to the cash-generating units that are expected to benefit from the synergies of the business reducecombination. Goodwill is tested for impairment at least annually and whenever there is an indication that it may be impaired, as outlined in the “Accounting and Measurement Policies” section and under the following assumptions. The recoverable amount is the higher of fair value less costs of disposal and value in use. For the cash-generating units, the recoverable amount equals the fair value, which is derived from discounted cash flows less costs of disposal, and which is based on level 3 of the fair value hierarchy. Projected cash flows were based on internal estimates for three detailed planning periods and, as a rule, two further detailed planning periods were applied. For periods after this detailed horizon, a perpetual annuity was applied, taking into account individual business-specific growth rates.
Management estimates of cash flow are based on factors including assumptions of economic trends and the associated risks, the regulatory environment, the competitive environment, market share, investments, EBITDA margins and growth rates. With regard to the individual cash-generating units bearing material goodwill, relating to the market development for the beginning of the detailed planning period, a mostly stable development for the physical book markets was assumed for financial year 2018. The physical book markets in the United States and the United Kingdom are expected to stabilize on the level of 2017, whereas a slight growth is expected for these markets in Spain and Germany. Regardinge-book sales, it is expected for the financial year 2018 that publishers’e-book sales in the United States and the United Kingdom will stabilize on the level of 2017. For audio download sales, a strong growth is expected for the financial year 2018 in the United States and the United Kingdom. The five-year sales forecasts use average nominal growth rates for Dorling Kindersley of 2.2 percent and for Spanish Speaking (including Latin American countries) of 4.5 percent.
Penguin Random House Venture Combined Financial Statements
Notes to the Income Statement and the Balance Sheet continued
10 Intangible Assets continued
In addition, fair values, based on discounted cash flows, were measured using the following individual business-specific discount rates and growth rates for periods after the detailed planning period:
Overview of Growth and Discount Rates
Growth rate in % for the year 12/31/2017 | Discount rate in % for the year 12/31/2017 | Growth rate in % for the year 12/31/2016 | Discount rate in % for the year 12/31/2016 | Growth rate in % for the year 12/31/2015 | Discount rate in % for the year 12/31/2015 | |||||||||||||||||||
Penguin Random House North America | 0.5 | 8.5 | 0.5 | 8.3 | 0.5 | 8.2 | ||||||||||||||||||
Penguin Random House United Kingdom | 0.5 | 7.6 | 0.5 | 7.6 | 0.5 | 8.0 | ||||||||||||||||||
Dorling Kindersley | 0.6 | 8.4 | 0.6 | 8.2 | 0.5 | 8.1 | ||||||||||||||||||
Spanish Speaking | 4.6 | 13.0 | 5.0 | 12.8 | 10.0 | 17.4 | ||||||||||||||||||
Rest of the World | 2.6 | 10.1 | 2.5 | 9.3 | 3.5 | 10.5 |
Information as of December 31, 2015, and for the year ended have not been audited.
In the financial years 2017, 2016 and 2015, no impairment losses were recognized for goodwill.
As of December 31, 2017, the recoverable amount for the cash-generating unit Spanish Speaking exceeded the carrying amount by €3 million (2016: €4 million; 2015: €1 million). In the event of an increase in the discount rate by 0.2 percentage points, a reduction in the long-term growth rate by 0.3 percentage points or a reduction in the average nominal sales growth rate for the five-year detailed planning period by 0.3 percentage points, the recoverable amount is lower than the carrying amount for the first time.
As of December 31, 2017, the recoverable amount for the cash-generating unit Dorling Kindersley exceeded the carrying amount by €4 million (2016: €3 million; 2015: €116 million). In the event of an increase in the discount rate by 0.4 percentage points, a reduction in the long-term growth rate by 0.7 percentage points or a reduction in the average nominal sales growth rate for the five-year detailed planning period by 2.1 percentage points, the recoverable amount is lower than the carrying amount for the first time.
As of December 31, 2017, the goodwill of the cash-generating units Penguin Random House North America, Penguin Random House United Kingdom and Rest of the World was not subject to impairment even given a change by one of the two most important factors: discount rate (increase of 1.0 percentage point) and long-term growth rate (reduction of 1.0 percentage point).
Penguin Random House Venture Combined Financial Statements
Notes to the Income Statement and the Balance Sheet continued
11 Property, Plant and Equipment
in € millions | Land, rights equivalent to land and buildings | Technical equipment and machinery | Other equipment, fixtures, furniture and office equipment | Advance payments and construction in progress | Total | |||||||||||||||
Cost | ||||||||||||||||||||
Balance as of 1/1/2015 | 120 | 100 | 189 | 22 | 431 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Currency translation differences | 11 | 8 | 16 | 2 | 37 | |||||||||||||||
Acquisitions through business combinations | — | — | — | — | — | |||||||||||||||
Other additions | 1 | 3 | 12 | 8 | 24 | |||||||||||||||
Reductions through disposal of investments | — | — | (5 | ) | — | (5 | ) | |||||||||||||
Other disposals | (25 | ) | (28 | ) | (6 | ) | (1 | ) | (60 | ) | ||||||||||
Reclassifications in accordance with IFRS 5 | — | — | — | — | — | |||||||||||||||
Reclassifications and other changes | 4 | 11 | 7 | (27 | ) | (5 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Balance as of 12/31/2015 | 111 | 94 | 213 | 4 | 422 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Currency translation differences | (5 | ) | (6 | ) | 1 | — | (10 | ) | ||||||||||||
Acquisitions through business combinations | — | — | — | — | — | |||||||||||||||
Other additions | 4 | 2 | 5 | 4 | 15 | |||||||||||||||
Reductions through disposal of investments | — | — | — | — | — | |||||||||||||||
Other disposals | (1 | ) | (1 | ) | (7 | ) | — | (9 | ) | |||||||||||
Reclassifications in accordance with IFRS 5 | — | — | — | — | — | |||||||||||||||
Reclassifications and other changes | — | (1 | ) | 5 | (6 | ) | (2 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Balance as of 12/31/2016 | 109 | 88 | 217 | 2 | 416 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Currency translation differences | (9 | ) | (7 | ) | (22 | ) | (1 | ) | (39 | ) | ||||||||||
Acquisitions through business combinations | — | — | — | — | — | |||||||||||||||
Other additions | 1 | 1 | 8 | 11 | 21 | |||||||||||||||
Reductions through disposal of investments | — | — | — | — | — | |||||||||||||||
Other disposals | — | — | (5 | ) | — | (5 | ) | |||||||||||||
Reclassifications in accordance with IFRS 5 | — | — | — | — | — | |||||||||||||||
Reclassifications and other changes | — | 4 | 1 | (3 | ) | 2 | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Balance as of 12/31/2017 | 101 | 86 | 199 | 9 | 395 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Accumulated depreciation | ||||||||||||||||||||
Balance as of 1/1/2015 | 49 | 68 | 112 | — | 229 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Currency translation differences | 4 | 6 | 10 | — | 20 | |||||||||||||||
Depreciation | 3 | 8 | 18 | — | 29 | |||||||||||||||
Impairment losses | — | — | — | — | — | |||||||||||||||
Reversals of impairment losses | — | — | — | — | — |
Penguin Random House Venture Combined Financial Statements
Notes to the Income Statement and the Balance Sheet continued
11 Property, Plant and Equipment continued
in € millions | Land, rights equivalent to land and buildings | Technical equipment and machinery | Other equipment, fixtures, furniture and office equipment | Advance payments and construction in progress | Total | |||||||||||||||
Reductions through disposal of investments | — | — | (3 | ) | — | (3 | ) | |||||||||||||
Other disposals | (13 | ) | (25 | ) | (6 | ) | — | (44 | ) | |||||||||||
Reclassifications in accordance with IFRS 5 | — | — | — | — | — | |||||||||||||||
Reclassifications and other changes | — | — | 1 | — | 1 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Balance as of 12/31/2015 | 43 | 57 | 132 | — | 232 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Currency translation differences | (1 | ) | (5 | ) | 2 | — | (4 | ) | ||||||||||||
Depreciation | 3 | 7 | 18 | — | 28 | |||||||||||||||
Impairment losses | — | — | — | — | — | |||||||||||||||
Reversals of impairment losses | — | — | — | — | — | |||||||||||||||
Reductions through disposal of investments | — | — | — | — | — | |||||||||||||||
Other disposals | (1 | ) | (1 | ) | (7 | ) | — | (9 | ) | |||||||||||
Reclassifications in accordance with IFRS 5 | — | — | — | — | — | |||||||||||||||
Reclassifications and other changes | — | (1 | ) | 1 | — | — | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Balance as of 12/31/2016 | 44 | 57 | 146 | — | 247 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Currency translation differences | (4 | ) | (4 | ) | (16 | ) | — | (24 | ) | |||||||||||
Depreciation | 3 | 6 | 19 | — | 28 | |||||||||||||||
Impairment losses | — | — | — | — | — | |||||||||||||||
Reversals of impairment losses | — | — | — | — | — | |||||||||||||||
Reductions through disposal of investments | — | — | — | — | — | |||||||||||||||
Other disposals | — | — | (6 | ) | — | (6 | ) | |||||||||||||
Reclassifications in accordance with IFRS 5 | — | — | — | — | — | |||||||||||||||
Reclassifications and other changes | — | — | — | — | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Balance as of 12/31/2017 | 43 | 59 | 143 | — | 245 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Carrying amount as of 12/31/2017 | 58 | 27 | 56 | 9 | 150 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Carrying amount as of 12/31/2016 | 65 | 31 | 71 | 2 | 169 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Carrying amount as of 12/31/2015 | 68 | 37 | 81 | 4 | 190 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
Information as of December 31, 2015, and for the year ended have not been audited.
At the end of the financial years 2017, 2016 and 2015, no property, plant and equipment was pledged as collateral for liabilities. No impairment losses were recognized for property, plant and equipment in the financial years 2017, 2016 and 2015.
Penguin Random House Venture Combined Financial Statements
Notes to the Income Statement and the Balance Sheet continued
12 Interests in Associates
At the end of the financial years 2017, 2016 and 2015, Penguin Random House holds an investment in one associate.
The following table shows summarized financial information on this associate. which management considers immaterial. The information given represents Penguin Random House’s interest.
Summarized Financial Information on the Immaterial Associate
in € millions | 2017 | 2016 | 2015 | |||||||||
Earnings after taxes from continuing operations | — | — | (1 | ) | ||||||||
Other comprehensive income | (2 | ) | 5 | (8 | ) | |||||||
Total comprehensive income | (2 | ) | 5 | (9 | ) |
Information as of December 31, 2015, and for the year ended have not been audited.
Due to the ongoing difficult economic situation in Brazil, an impairment loss of €10 million was recognized during the financial year 2017 for the associate. The recoverable amount was determined using the fair value less costs of disposal on the basis of the discounted cash flow method with a long-term growth rate of 6.0 percent and a discount rate of 13.8 percent due to the business activities in the Brazilian market.
13 Other Financial Assets
in € millions | 12/31/2017 | 12/31/2016 | 12/31/2015 | |||||||||
Current | ||||||||||||
Derivative financial instruments | 1 | 3 | 5 | |||||||||
|
|
|
|
|
| |||||||
1 | 3 | 5 | ||||||||||
|
|
|
|
|
| |||||||
Non-current | ||||||||||||
Investments in affiliates | — | — | 1 | |||||||||
Other investments | 2 | 2 | 2 | |||||||||
Securities and financial assets | 7 | 5 | 4 | |||||||||
|
|
|
|
|
| |||||||
9 | 7 | 7 | ||||||||||
|
|
|
|
|
|
Information as of December 31, 2015, and for the year ended have not been audited.
Information on impairment is presented in note 24 “Additional Disclosures on Financial Instruments.”
At the end of the financial years 2017, 2016 and 2015, no financial assets have been provided as collateral for liabilities, no material financial assets were pledged with restrictions on disposal and no financial assets were provided as security for contingent liabilities to third parties.
Penguin Random House Venture Combined Financial Statements
Notes to the Income Statement and the Balance Sheet continued
14 Inventories
in € millions | 12/31/2017 | 12/31/2016 | 12/31/2016 | |||||||||
Raw materials and supplies | 13 | 15 | 18 | |||||||||
Work in progress | 55 | 52 | 63 | |||||||||
Finished goods and merchandise | 184 | 195 | 220 | |||||||||
Advance payments | 1 | 1 | — | |||||||||
|
|
|
|
|
| |||||||
253 | 263 | 301 | ||||||||||
|
|
|
|
|
|
Information as of December 31, 2015, and for the year ended have not been audited.
In the financial year 2017, write-downs on inventories were recognized in the amount of€-15 million(2016: €-13 million; 2015:€-18 million). At the end of the financial years 2017, 2016 and 2015, no inventories have been pledged as collateral for liabilities.
15 Trade Receivables and Other Receivables
in € millions | 12/31/2017 | 12/31/2016 | 12/31/2015 | |||||||||
Non-current | ||||||||||||
Trade receivables | — | — | 1 | |||||||||
Other receivables | 4 | 5 | 5 | |||||||||
Current | ||||||||||||
Trade receivables | 752 | 718 | 691 | |||||||||
Other receivables | 25 | 16 | 39 |
Information as of December 31, 2015, and for the year ended have not been audited.
Information on impairment and the analysis of maturities is presented in note 24 “Additional Disclosures on Financial Instruments.”
16 OtherNon-financial Assets
in € millions | 12/31/2017 | 12/31/2016 | 12/31/2015 | |||||||||
Non-current | ||||||||||||
Othernon-financial assets | 282 | 295 | 315 | |||||||||
Current | ||||||||||||
Othernon-financial assets | 430 | 452 | 412 | |||||||||
Advance payments | 387 | 412 | 373 | |||||||||
Other tax receivables | 12 | 10 | 9 | |||||||||
Deferred items | 30 | 29 | 29 | |||||||||
Sundrynon-financial assets | 1 | 1 | 1 |
Information as of December 31, 2015, and for the year ended have not been audited.
Thenon-current othernon-financial assets in the amount of €259 million (2016: €283 million; 2015: €303 million) relate to advance payments for published or unpublished book titles. If a book title is expected to be published within the next 12 months, advance payments on it are considered current. Advances on
Penguin Random House Venture Combined Financial Statements
Notes to the Income Statement and the Balance Sheet continued
16 OtherNon-financial Assets continued
book titles are initially capitalized within othernon-financial assets when the advance is paid and subsequently expensed in the income statement position “Royalties” as related revenues are earned or when future recovery is not probable to adjust the advance to its net realizable value. The realizable value of royalty advances relies on a degree of management judgement in determining the profitability of individual author contracts. If the carrying amount is higher than the estimated realizable value of author contracts, these excess amounts will bewritten-off in the income statement position “Allowances on receivables andnon-financial assets.” The recoverability of royalty advances is based upon a detailed management review of the age of the advance, the future sales projections for new authors and prior sales history of repeat authors.
17 Cash and Cash Equivalents
in € millions | 12/31/2017 | 12/31/2016 | 12/31/2015 | |||||||||
Cash | 375 | 310 | 292 | |||||||||
Other securities < 3 months | 1 | 2 | 2 | |||||||||
|
|
|
|
|
| |||||||
376 | 312 | 294 | ||||||||||
|
|
|
|
|
|
Information as of December 31, 2015, and for the year ended have not been audited.
At the end of the financial years 2017, 2016 and 2015, no cash and cash equivalents were used as collateral for liabilities and no cash and cash equivalents existed with restrictions on disposal.
18 Equity
The equity includes the combined equity, membership capital and combined retained earnings including share capital and share premiums attributable to the Penguin Random House Limited, in London, United Kingdom, LLC membership capital attributable to Penguin Random House LLC in the United States and the undistributed prior year net profits of those companies included in the Combined Financial Statements. Accumulated other comprehensive income includes remeasurement effects of defined benefit pension plans (actuarial gains and losses on the defined benefit obligation, differences between actual investment returns and the return implied by the net interest cost on the plan assets, and effects of the asset ceiling) and accumulated other comprehensive income.
Penguin Random House Venture Combined Financial Statements
Notes to the Income Statement and the Balance Sheet continued
18 Equity continued
The change in other comprehensive income after taxes is derived as follows:
Changes to Components of Other Comprehensive Income after Taxes
in € millions | 2017 | |||||||||||||||||||
Before-tax amount | Taxes | Net-of-tax amount | thereof of Penguin Random House shareholders | thereof of non- controlling interests | ||||||||||||||||
Items that will not be reclassified subsequently to profit or loss | ||||||||||||||||||||
Remeasurement effects on defined benefit plans | 25 | (5 | ) | 20 | 20 | — | ||||||||||||||
Share of other comprehensive income of investments accounted for using the equity method | — | — | — | — | — | |||||||||||||||
Items that will be reclassified subsequently to profit or loss when specific conditions are met | ||||||||||||||||||||
Currency translation differences | (161 | ) | — | (161 | ) | (161 | ) | — | ||||||||||||
Cash flow hedges | (1 | ) | — | (1 | ) | (1 | ) | — | ||||||||||||
Share of other comprehensive income of investments accounted for using the equity method | (2 | ) | — | (2 | ) | (2 | ) | — | ||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Other comprehensive income net of tax | (139 | ) | (5 | ) | (144 | ) | (144 | ) | — | |||||||||||
|
|
|
|
|
|
|
|
|
|
in € millions | 2016 | |||||||||||||||||||
Before-tax amount | Taxes | Net-of-tax amount | thereof of Penguin Random House shareholders | thereof of non- controlling interests | ||||||||||||||||
Items that will not be reclassified subsequently to profit or loss | ||||||||||||||||||||
Remeasurement effects on defined benefit plans | (26 | ) | 5 | (21 | ) | (21 | ) | — | ||||||||||||
Share of other comprehensive income of investments accounted for using the equity method | — | — | — | — | — | |||||||||||||||
Items that will be reclassified subsequently to profit or loss when specific conditions are met | ||||||||||||||||||||
Currency translation differences | (19 | ) | — | (19 | ) | (18 | ) | (1 | ) | |||||||||||
Cash flow hedges | (1 | ) | — | (1 | ) | (1 | ) | — | ||||||||||||
Share of other comprehensive income of investments accounted for using the equity method | 11 | — | 11 | 11 | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Other comprehensive income net of tax | (35 | ) | 5 | (30 | ) | (29 | ) | (1 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
Penguin Random House Venture Combined Financial Statements
Notes to the Income Statement and the Balance Sheet continued
18 Equity continued
Changes to Components of Other Comprehensive Income after Taxes continued
in € millions | 2015 | |||||||||||||||||||
Before-tax amount | Taxes | Net-of-tax amount | thereof of Penguin Random House shareholders | thereof of non- controlling interests | ||||||||||||||||
Items that will not be reclassified subsequently to profit or loss | ||||||||||||||||||||
Remeasurement effects on defined benefit plans | 30 | (7 | ) | 23 | 23 | — | ||||||||||||||
Share of other comprehensive income of investments accounted for using the equity method | — | — | — | — | — | |||||||||||||||
Items that will be reclassified subsequently to profit or loss when specific conditions are met | ||||||||||||||||||||
Currency translation differences | 161 | — | 161 | 161 | — | |||||||||||||||
Cash flow hedges | 2 | — | 2 | 2 | — | |||||||||||||||
Share of other comprehensive income of investments accounted for using the equity method | (6 | ) | — | (6 | ) | (6 | ) | — | ||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Other comprehensive income net of tax | 187 | (7 | ) | 180 | 180 | — | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
Information as of December 31, 2015, and for the year ended have not been audited.
As in the financial years 2016 and 2015, in the financial year 2017, an immaterial amount relating to cash flow hedge effects recognized in other comprehensive income was reclassified to the income statement. These are amounts before tax.
19 Provisions for Pensions and Similar Obligations
in € millions | 12/31/2017 | 12/31/2016 | 12/31/2015 | |||||||||
Defined benefit obligation | 23 | 46 | 25 | |||||||||
Obligations similar to pensions | 1 | 1 | 1 | |||||||||
|
|
|
|
|
| |||||||
24 | 47 | 26 | ||||||||||
|
|
|
|
|
|
Information as of December 31, 2015, and for the year ended have not been audited.
Penguin Random House operates various pension plans for current and former employees and their surviving dependents mainly in the United Kingdom, the United States and Canada. The model of such plans varies according to the legal, fiscal and economic environment of the country concerned. These company pension plans include both defined contribution and defined benefit plans.
In the case of defined contribution plans, the company makes payments into an external pension fund or another welfare fund through a statutory, contractual or voluntary model. The company has no obligation to provide further benefits once it has made these payments, so no provisions are recognized. Expenses for defined contribution plans in the amount of €21 million were recognized in the financial year 2017 (2016: €26 million; 2015: €24 million). The contributions paid by employer to state pension plans amount to €36 million (2016: €36 million; 2015: €37 million) in the financial year 2017.
Penguin Random House Venture Combined Financial Statements
Notes to the Income Statement and the Balance Sheet continued
19 Provisions for Pensions and Similar Obligations continued
All other pension plans are defined benefit plans. The US and Canadian companies’ obligations for healthcare costs for employees after they retire (medical care plans) are also defined benefit obligations and are included in the provisions on the balance sheet. For all of the retirement benefit plans, a distinction must be made as to whether or not these are financed through an external investment fund.
Net Defined Benefit Liability Recognized in the Balance Sheet
in € millions | 12/31/2017 | 12/31/2016 | 12/31/2015 | |||||||||
Present value of defined benefit obligation of unfunded plans | 21 | 21 | 21 | |||||||||
Present value of defined benefit obligation of funded plans | 434 | 440 | 404 | |||||||||
|
|
|
|
|
| |||||||
Total present value of defined benefit obligation | 455 | 461 | 425 | |||||||||
|
|
|
|
|
| |||||||
Fair value of plan assets | (455 | ) | (426 | ) | (411 | ) | ||||||
|
|
|
|
|
| |||||||
Net defined benefit liability recognized in the balance sheet | — | 35 | 14 | |||||||||
|
|
|
|
|
| |||||||
thereof provisions for pensions | 23 | 46 | 25 | |||||||||
thereof other assets | 23 | 11 | 11 |
Information as of December 31, 2015, and for the year ended have not been audited.
As in the previous years, in the financial year 2017, the asset ceiling prescribed by IAS 19.64 did not impact other comprehensive income. The other assets are disclosed undernon-currentnon-financial assets.
Provisions are recognized for these defined benefit plans. These are mostly final salary plans.
Defined Benefit Plans
in € millions | 12/31/2017 | 12/31/2016 | 12/31/2015 | |||||||||
Final salary plans | 366 | 378 | 348 | |||||||||
Career average plans | 15 | 15 | 13 | |||||||||
Other commitments given | 56 | 50 | 45 | |||||||||
Medical care plans United States | 7 | 8 | 9 | |||||||||
Medical care plans Canada | 11 | 10 | 10 | |||||||||
|
|
|
|
|
| |||||||
Present value of defined benefit obligation | 455 | 461 | 425 | |||||||||
|
|
|
|
|
| |||||||
thereof capital commitments | — | — | — |
Information as of December 31, 2015, and for the year ended have not been audited.
The obligations and plan assets available for the existing pension plans are, in some cases, exposed to demographic, economic and legal risks. The demographic risks are primarily the longevity risk for pensioners. Economic risks include, in this respect, mostly unforeseeable developments on the capital markets and the associated impacts on plan assets and pension obligations. Legal risks can result from restrictions to investments and minimum funding requirements.
The plans in the United Kingdom are subject to the “Pensions Act 2004,” which includes reviewing the full financing of the pension plan from an actuarial perspective every three years with annual monitoring and, if
Penguin Random House Venture Combined Financial Statements
Notes to the Income Statement and the Balance Sheet continued
19 Provisions for Pensions and Similar Obligations continued
Defined Benefit Plans continued
necessary, eliminating any deficits that may have arisen by means of further additions to plan assets. There are no other material regulatory conditions over and above the minimum funding regulations in the United States and United Kingdom.
The provisions are determined using actuarial formulas in accordance with IAS 19. The amount of provisions depends on employees’ length of service with the company and their pensionable salary. Provisions are computed using the projected unit credit method, in which the benefit entitlement earned is allocated to each year of service, thus assuming an increasing cost of service in comparison to the entry age normal method. When identifying the present value of the pension obligation, the underlying interest rate is of material importance. For Penguin Random House, this is based on the “Mercer Yield Curve Approach.” With this approach, separate spot rate yield curves are created for the United Kingdom, the United States and Canada on the basis of high-quality corporate bonds. To appropriately present the time value of money in accordance with IAS 19.84, the basis does not consider either spikes for which the risk estimate may be substantially higher or lower or bonds with embedded options that distort interest rates.
Further significant actuarial assumptions are assumed as follows:
Actuarial Assumptions
12/31/2017 | ||||||||||||
United States | United Kingdom | Other | ||||||||||
Discount rate | 3.90 | % | 2.50 | % | 3.50 | % | ||||||
Rate of salary increase | n/a | 2.86 | % | 3.00 | % | |||||||
Rate of pension increase | n/a | 2.94 | % | n/a | ||||||||
12/31/2016 | ||||||||||||
United States | United Kingdom | Other | ||||||||||
Discount rate | 4.51 | % | 2.60 | % | 4.01 | % | ||||||
Rate of salary increase | n/a | 2.97 | % | 3.02 | % | |||||||
Rate of pension increase | n/a | 3.12 | % | n/a | ||||||||
12/31/2015 | ||||||||||||
United States | United Kingdom | Other | ||||||||||
Discount rate | 4.52 | % | 3.90 | % | 4.12 | % | ||||||
Rate of salary increase | n/a | 3.15 | % | 3.02 | % | |||||||
Rate of pension increase | n/a | 2.10 | % | n/a |
Information as of December 31, 2015, and for the year ended have not been audited.
Penguin Random House Venture Combined Financial Statements
Notes to the Income Statement and the Balance Sheet continued
19 Provisions for Pensions and Similar Obligations continued
Actuarial Assumptions continued
An increase or decrease in the assumptions set out above compared to the assumptions actually applied would have had the following effects on the defined benefit obligation as of December 31, 2017:
Effect of Actuarial Assumptions
in € millions | Increase | Decrease | ||||||
Effect of 0.5 percentage point change in discount rate | (39 | ) | 46 | |||||
Effect of 0.5 percentage point change in rate of salary increase | 8 | (7 | ) | |||||
Effect of 0.5 percentage point change in rate of pension increase | 17 | (15 | ) | |||||
Effect of change in average life expectancy by one year | 16 | (16 | ) |
To determine the sensitivity of the longevity, the mortality rates for all beneficiaries were reduced or increased evenly, so that the life expectancy of a person of a country-specific retirement age increases or decreases by one year.
Penguin Random House Venture Combined Financial Statements
Notes to the Income Statement and the Balance Sheet continued
19 Provisions for Pensions and Similar Obligations continued
Effect of Actuarial Assumptions continued
Changes in the present value of defined benefit obligations and plan assets in the reporting period were as follows:
Development of the Defined Benefit Plans
Defined benefit obligation (I) | Fair value of plan assets (II) | Net defined benefit balance (I)-(II) | ||||||||||||||||||||||||||||||||||
in € millions | 2017 | 2016 | 2015 | 2017 | 2016 | 2015 | 2017 | 2016 | 2015 | |||||||||||||||||||||||||||
Balance as of 1/1 | 461 | 425 | 417 | 426 | 411 | 371 | 35 | 14 | 46 | |||||||||||||||||||||||||||
Current service cost | 11 | 10 | 15 | — | — | — | 11 | 10 | 15 | |||||||||||||||||||||||||||
Interest expenses | 12 | 15 | 16 | — | — | — | 12 | 15 | 16 | |||||||||||||||||||||||||||
Interest income | — | — | — | 11 | 15 | 14 | (11 | ) | (15 | ) | (14 | ) | ||||||||||||||||||||||||
Past service cost | (3 | ) | — | — | — | — | — | (3 | ) | — | — | |||||||||||||||||||||||||
Income and expenses for defined benefit plans recognized in the combined income statement | 20 | 25 | 31 | 11 | 15 | 14 | 9 | 10 | 17 | |||||||||||||||||||||||||||
Income/expense on plan assets excluding amounts included in net interest income and net interest expenses | — | — | — | 26 | 54 | (7 | ) | (26 | ) | (54 | ) | 7 | ||||||||||||||||||||||||
Actuarial gains (-) and losses (+) | ||||||||||||||||||||||||||||||||||||
– changes in financial assumptions | 5 | 98 | (33 | ) | — | — | — | 5 | 98 | (33 | ) | |||||||||||||||||||||||||
– changes in demographic assumptions | (11 | ) | (11 | ) | (8 | ) | — | — | — | (11 | ) | (11 | ) | (8 | ) | |||||||||||||||||||||
– experience adjustments | 7 | (6 | ) | 4 | — | — | — | 7 | (6 | ) | 4 | |||||||||||||||||||||||||
Remeasurements for defined benefit plans recognized in the combined statement of comprehensive income | 1 | 81 | (37 | ) | 26 | 54 | (7 | ) | (25 | ) | 27 | (30 | ) | |||||||||||||||||||||||
Contributions to plan assets by employer | — | — | — | 16 | 17 | 21 | (16 | ) | (17 | ) | (21 | ) | ||||||||||||||||||||||||
Contributions to plan assets by employees | 2 | 2 | 3 | 3 | 3 | 3 | (1 | ) | (1 | ) | — | |||||||||||||||||||||||||
Pension payments | (11 | ) | (14 | ) | (12 | ) | (11 | ) | (14 | ) | (12 | ) | — | — | — | |||||||||||||||||||||
Currency translation differences | (18 | ) | (58 | ) | 23 | (16 | ) | (60 | ) | 21 | (2 | ) | 2 | 2 | ||||||||||||||||||||||
Other changes | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
Other reconciling items | (27 | ) | (70 | ) | 14 | (8 | ) | (54 | ) | 33 | (19 | ) | (16 | ) | (19 | ) | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
Balance as of 12/31 | 455 | 461 | 425 | 455 | 426 | 411 | — | 35 | 14 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
thereof | ||||||||||||||||||||||||||||||||||||
United Kingdom | 420 | 427 | 392 | 443 | 414 | 401 | (23 | ) | 13 | (9 | ) | |||||||||||||||||||||||||
United States | 7 | 8 | 10 | — | — | — | 7 | 8 | 10 | |||||||||||||||||||||||||||
Canada | 28 | 26 | 23 | 12 | 12 | 10 | 16 | 14 | 13 |
Information as of December 31, 2015, and for the year ended have not been audited.
Penguin Random House Venture Combined Financial Statements
Notes to the Income Statement and the Balance Sheet continued
19 Provisions for Pensions and Similar Obligations continued
Development of the Defined Benefit Plans continued
Employer contributions to plan assets are expected to amount to €17 million in the next financial year. Of the expenses for defined benefit plans in the amount of €9 million (2016: €10 million; 2015: €17 million), €8 million (2016: €10 million; 2015: €15 million) was recognized under the item “Personnel costs” and €1 million under “Other financial expenses” and “Other financial income” (2016: €0 million; 2015: €2 million). The past service cost and losses from settlements recognized under “Personnel costs” totaled€-3 million (2016: €0 million; 2015: €0 million).
The expenses are broken down as follows:
Expenses for Defined Benefit Plans
in € millions | 2017 | 2016 | 2015 | |||||||||
Current service cost | 11 | 10 | 15 | |||||||||
Past service cost and impact from settlement | (3 | ) | — | — | ||||||||
Net interest expenses | 1 | — | 2 | |||||||||
|
|
|
|
|
| |||||||
Net pension expenses | 9 | 10 | 17 | |||||||||
|
|
|
|
|
|
Information as of December 31, 2015, and for the year ended have not been audited.
The portfolio structure of plan assets is composed as follows:
Portfolio Structure of Plan Assets
in € millions | 12/31/2017 | 12/31/2016 | 12/31/2015 | |||||||||
Equity instruments1) | 154 | 181 | 212 | |||||||||
Debt instruments1) | 210 | 161 | 111 | |||||||||
Other funds | 68 | 67 | 64 | |||||||||
Qualifying insurance policies | 3 | 4 | 3 | |||||||||
Cash and cash equivalents | 12 | 7 | 11 | |||||||||
Real estate | 8 | 6 | 6 | |||||||||
Derivatives | — | — | 3 | |||||||||
Other | — | — | 1 | |||||||||
|
|
|
|
|
| |||||||
Fair value of plan assets | 455 | 426 | 411 | |||||||||
|
|
|
|
|
|
Information as of December 31, 2015, and for the year ended have not been audited.
1) For almost all equity and debt instruments, market prices are listed on an active market.
All plan assets are used exclusively for the fulfillment of benefit obligations. In order to avoid a concentration of risk, plan assets are invested in various classes of investments.
Penguin Random House Venture Combined Financial Statements
Notes to the Income Statement and the Balance Sheet continued
19 Provisions for Pensions and Similar Obligations continued
Portfolio Structure of Plan Assets continued
The weighted average duration of the pension obligations as of December 31, 2017, was 19 years (2016: 20 years; 2015: €21 years). The maturity profile of the anticipatednon-discounted pension payments is presented in the following table:
Maturity Profile of Pension Payments
in € millions | Expected pension payments | |||
2018 | 13 | |||
2019 | 10 | |||
2020 | 10 | |||
2021 | 10 | |||
2022 | 13 | |||
2023-2027 | 67 |
Obligations similar to pensions relate to severance payments at retirement in the amount of €1 million (2016: €1 million; 2015: €1 million). Provisions for severance payments at retirement are recognized in the same way as defined benefit plans, but with actuarial gains and losses recognized in profit or loss.
20 Other Provisions
1/1/2017 | Additions | Reversal | Usage | Other effects | Change of consolidation scope | Accrued interest | 12/31/2017 | |||||||||||||||||||||||||||||||||
in € millions | of which > 1 year | of which > 1 year | ||||||||||||||||||||||||||||||||||||||
Restructuring | — | — | 3 | — | (2 | ) | — | — | — | 1 | — | |||||||||||||||||||||||||||||
Onerous contracts | 28 | 26 | 9 | (1 | ) | — | (4 | ) | — | 1 | 33 | 27 | ||||||||||||||||||||||||||||
Litigation | 3 | — | 1 | (1 | ) | — | — | — | — | 3 | — | |||||||||||||||||||||||||||||
Sales and distribution | 4 | — | 1 | (3 | ) | (1 | ) | — | — | — | 1 | — | ||||||||||||||||||||||||||||
Other employee benefits | 7 | — | 2 | (1 | ) | (2 | ) | (1 | ) | — | — | 5 | — | |||||||||||||||||||||||||||
Other | 2 | 1 | 3 | (1 | ) | — | 1 | 1 | — | 6 | 2 | |||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
44 | 27 | 19 | (7 | ) | (5 | ) | (4 | ) | 1 | 1 | 49 | 29 | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1/1/2016 | Additions | Reversal | Usage | Other effects | Change of consolidation scope | Accrued interest | 12/31/2016 | |||||||||||||||||||||||||||||||||
in € millions | of which > 1 year | of which > 1 year | ||||||||||||||||||||||||||||||||||||||
Restructuring | 4 | 2 | 1 | — | (5 | ) | — | — | — | — | — | |||||||||||||||||||||||||||||
Onerous contracts | 2 | — | 25 | — | — | 1 | — | — | 28 | 26 | ||||||||||||||||||||||||||||||
Litigation | 3 | — | 1 | (1 | ) | — | — | — | — | 3 | — | |||||||||||||||||||||||||||||
Sales and distribution | 4 | — | 1 | — | (1 | ) | — | — | — | 4 | — | |||||||||||||||||||||||||||||
Other employee benefits | 6 | — | 2 | — | (1 | ) | — | — | — | 7 | — | |||||||||||||||||||||||||||||
Other | 4 | 1 | 1 | (1 | ) | — | (2 | ) | — | — | 2 | 1 | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
23 | 3 | 31 | (2 | ) | (7 | ) | (1 | ) | — | — | 44 | 27 | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Penguin Random House Venture Combined Financial Statements
Notes to the Income Statement and the Balance Sheet continued
20 Other Provisions continued
1/1/2015 | Additions | Reversal | Usage | Other effects | Change of consolidation scope | Accrued interest | 12/31/2015 | |||||||||||||||||||||||||||||||||
in € millions | of which > 1 year | of which > 1 year | ||||||||||||||||||||||||||||||||||||||
Restructuring | 21 | 4 | 2 | — | (21 | ) | 2 | — | — | 4 | 2 | |||||||||||||||||||||||||||||
Onerous contracts | 2 | — | 1 | — | (1 | ) | — | — | — | 2 | — | |||||||||||||||||||||||||||||
Litigation | 4 | 1 | 1 | (1 | ) | — | (1 | ) | — | — | 3 | — | ||||||||||||||||||||||||||||
Sales and distribution | 3 | — | 1 | (1 | ) | — | 1 | — | — | 4 | — | |||||||||||||||||||||||||||||
Other employee benefits | 6 | — | 3 | (2 | ) | (1 | ) | — | — | — | 6 | — | ||||||||||||||||||||||||||||
Other | 5 | 2 | 2 | (4 | ) | — | 1 | — | — | 4 | 1 | |||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
41 | 7 | 10 | (8 | ) | (23 | ) | 3 | — | — | 23 | 3 | |||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Information as of December 31, 2015, and for the year ended have not been audited.
In August 2016, Penguin Random House signed a new lease contract for its offices at 1745 Broadway, New York/United States. The new contracts comprise additional floors and therefore give the opportunity to consolidate from three locations into one. The new lease starts on July 1, 2018, with an eight-month rent-free period, and the lease term lasts until June 2033. The leases for the abandoned two locations both expire in March 2025. Under consideration of possible subleases, the consolidation of the three locations to one gives rise to an onerous lease provision of €25 million (2016: €26 million) at the end of the reporting period. Of the additions to onerous contracts, €4 million are recognized for the office lease in London, United Kingdom, and €3 million for a warehouse lease in Rugby, United Kingdom.
21 Financial Debt
Carrying amounts of financial debt are calculated as follows:
Current andNon-current Financial Debt
Current | Non-current | |||||||||||||||||||||||||||||||
12/31/2017 | 12/31/2016 | 12/31/2015 | Remaining term in years | 12/31/2017 | 12/31/2016 | 12/31/2015 | ||||||||||||||||||||||||||
in € millions | 1 to 5 years | > 5 years | ||||||||||||||||||||||||||||||
Liabilities to banks | 21 | 21 | 12 | — | — | — | — | 1 | ||||||||||||||||||||||||
Lease liabilities | — | — | 1 | 3 | — | 3 | 1 | 2 | ||||||||||||||||||||||||
Other financial debt | 417 | 82 | 135 | 663 | — | 663 | — | — | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
438 | 103 | 148 | 666 | — | 666 | 1 | 3 | |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Information as of December 31, 2015, and for the year ended have not been audited.
At initial recognition within the scope of IAS 39, thenon-current financial debt is recognized at fair value including transaction costs, and the subsequent measurement is based on amortized cost using the effective interest method. Foreign currency liabilities are translated using the exchange rate at the end of the reporting period. In the financial year 2013, Penguin Random House entered into a Revolving Credit Agreement with Bertelsmann SE & Co. KGaA and Pearson plc. Under this shareholder loan agreement, the Group has access to a revolving facility of up to US$250 million. This facility was amended in October 2017 and is valid until October 5, 2022. The interest rates for loans under the revolving facility are applicable LIBOR plus a margin of
Penguin Random House Venture Combined Financial Statements
Notes to the Income Statement and the Balance Sheet continued
21 Financial Debt continued
Current andNon-current Financial Debt continued
2.00 percent per year. The loan drawdown is in either US dollar or British pound. As of December 31, 2017, the loan amounted to €208 million (2016: €82 million; 2015: €135 million), which is included in position “Other financial debt.”
In October 2017, Penguin Random House entered with Bertelsmann PRH Finance, Inc., a subsidiary of Bertelsmann SE & Co. KGaA, into a Term Loan Agreement of US$795 million, valid until October 2022. The term loan bears interest at 4.25 percent per year. As of December 31, 2017, the companyterm loan balance amounts to €663 million, which is included in position “Other financial debt.”
In addition, in December 2017, Penguin Random House entered with Bertelsmann PRH Finance, Inc. into a Term Loan Agreement of US$250 million, valid until March 30, 2018. The interest rates for loans are applicable LIBOR plus a margin of 2.00 percent per year. As of December 31, 2017, the term loan balance amounts to €208 million, which is also included in position “Other financial debt.”
In the position “Liabilities to banks,” the amount of €2 million (2016: €2 million; 2015: €2 million) relates to the supply-chain financing arrangements (reverse factoring). The substance and nature of such arrangements, involving the provision of finance linked to the supply of goods or services, lead to the reclassification of the original liability presented as a trade payable to the debt liability.
Financial debt is generally unsecured.
22 Liabilities
in € millions | 12/31/2017 | 12/31/2016 | 12/31/2015 | |||||||||
Non-current | ||||||||||||
Payables from royalties | 88 | 114 | 126 | |||||||||
Other financial payables | 2 | — | 1 | |||||||||
Othernon-financial liabilities | 32 | 32 | 38 | |||||||||
Current | ||||||||||||
Trade payables | 364 | 378 | 424 | |||||||||
Payables from royalties | 433 | 458 | 482 | |||||||||
Other financial payables | 310 | 80 | 77 | |||||||||
Tax liabilities | 2 | 2 | 3 | |||||||||
Social security liabilities | 6 | 6 | 6 | |||||||||
Personnel-related liabilities | 93 | 111 | 113 | |||||||||
Received advance payments | — | — | — | |||||||||
Deferred items | 17 | 21 | 14 | |||||||||
Sundrynon-financial liabilities | 6 | 5 | 5 | |||||||||
Othernon-financial liabilities | 124 | 145 | 141 |
Information as of December 31, 2015, and for the year ended have not been audited.
As of December 31, 2017, the current other financial payables includes a dividend liability to the Penguin Random House shareholders of €226 million, which is payable in the financial year 2018. Further details are presented in the section “Background.”
Penguin Random House Venture Combined Financial Statements
Notes to the Income Statement and the Balance Sheet continued
23Off-Balance-Sheet Liabilities
Contingent Liabilities and Other Commitments
in € millions | 12/31/2017 | 12/31/2016 | 12/31/2015 | |||||||||
Rental and lease commitments for already used real estate and movables | 565 | 685 | 466 | |||||||||
Commitments from assets under construction | 39 | — | — | |||||||||
Other commitments | 702 | 738 | 733 | |||||||||
|
|
|
|
|
| |||||||
1,306 | 1,423 | 1,199 | ||||||||||
|
|
|
|
|
|
Commitments from assets under construction result from lease contracts for assets, which were not completed at the end of the reporting period. The right of use will begin in future periods. The full amount relates to one contract entered into during the financial year 2017. It solely consists of obligations to lease a building in London, United Kingdom, which is expected to be completed in the second half of 2019. The commitments relate in the amount of €8 million to periods between one and five years and in the amount of €31 million to periods of more than five years. There were no such commitments in the previous years.
The total amount of other commitments represents the portion of obligations to authors for which no payments have yet been made, where future payments are contingent upon other events (such as delivery and acceptance of manuscripts). At the end of the financial years 2017, 2016 and 2015, Penguin Random House had no commitments for the acquisition of property, plant and equipment.
The following minimum lease payments exist from all long-term rental commitments classified as operating leases:
Minimum Lease Payments for Operating Leases
in € millions | 12/31/2017 | 12/31/2016 | 12/31/2015 | |||||||||
Nominal amount | ||||||||||||
Up to 1 year | 59 | 65 | 70 | |||||||||
1 to 5 years | 200 | 228 | 251 | |||||||||
Over 5 years | 306 | 392 | 145 | |||||||||
565 | 685 | 466 | ||||||||||
|
|
|
|
|
| |||||||
Present value | 447 | 548 | 412 | |||||||||
|
|
|
|
|
|
Information as of December 31, 2015, and for the year ended have not been audited.
These commitments largely concern tenancy. They are partially offset by expected minimum lease payments from subleases with a nominal value of €5 million (2016: €18 million; 2015: €29 million). The net present values calculated considering country-specific interest rates show all of the net payments required to settle the obligation.
In August 2016, Penguin Random House has signed a new lease contract for its offices at 1745 Broadway, New York/United States. The new contracts comprise additional floors and therefore give the opportunity to consolidate from three locations into one. The new lease starts July 1, 2018, with an eight-month rent-free period, and the lease term lasts until June 2033.
Penguin Random House Venture Combined Financial Statements
Notes to the Income Statement and the Balance Sheet continued
24 Additional Disclosures on Financial Instruments
Maturity Analysis of Selected Financial Assets
in € millions | Neither impaired nor past due on the reporting date | Not individually impaired as of the reporting date and past due by: | Gross value of accounts receivable individually impaired | |||||||||||||||||||||||||
< 1 month | 1 to 3 months | 3 to 6 months | 6 to 12 months | > 12 months | ||||||||||||||||||||||||
Trade receivables 12/31/2017 | 669 | 34 | 15 | 6 | 1 | 4 | 59 | |||||||||||||||||||||
Trade receivables 12/31/2016 | 681 | 24 | 7 | 4 | 1 | 2 | 70 | |||||||||||||||||||||
Trade receivables 12/31/2015 | 518 | 176 | 6 | 6 | 1 | 2 | 92 |
Information as of December 31, 2015, and for the year ended have not been audited.
Reconciliation of Changes in Impairment in accordance with IFRS 7
in € millions | Balance as of 1/1 | Additions | Usage | Reversal | Change of consolidation scope | Exchange rate effect | Balance as of 12/31 | |||||||||||||||||||||
Trade receivables 12/31/2017 | (71 | ) | (8 | ) | 6 | 36 | (4 | ) | 5 | (36 | ) | |||||||||||||||||
Trade receivables 12/31/2016 | (109 | ) | (17 | ) | 6 | 47 | — | 2 | (71 | ) | ||||||||||||||||||
Trade receivables 12/31/2015 | (107 | ) | (26 | ) | 4 | 35 | (7 | ) | (8 | ) | (109 | ) |
Information as of December 31, 2015, and for the year ended have not been audited.
Default risks arising from trade receivables from major customers are partially mitigated through credit collateralization. Penguin Random House has obtained credit collateralization in the amount of €484 million (2016: €441 million; 2015: €402 million) for these receivables. The carrying amount of all receivables, loans and securities constitutes Penguin Random House’s maximum default risk.
Penguin Random House Venture Combined Financial Statements
Notes to the Income Statement and the Balance Sheet continued
24 Additional Disclosures on Financial Instruments continued
Reconciliation of Changes in Impairment in accordance with IFRS 7 continued
The following table presents the remaining contractual maturity of the financial liabilities. The figures are based on undiscounted cash flows at the earliest date at which Penguin Random House can be held liable for payment.
Contractual Maturity Analysis of Financial Liabilities
Carrying amount | Undiscounted cash flows | |||||||||||||||||||
in € millions | Up to 1 year | 1 to 5 years | Over 5 years | Total | ||||||||||||||||
Liabilities to banks | 21 | 21 | — | — | 21 | |||||||||||||||
Lease liabilities | 3 | — | 3 | — | 3 | |||||||||||||||
Other financial debt | 1,080 | 417 | 663 | — | 1,080 | |||||||||||||||
Trade payables | 364 | 364 | — | — | 364 | |||||||||||||||
Payables from royalties | 521 | 433 | 82 | 6 | 521 | |||||||||||||||
Derivative financial instruments | 5 | 5 | — | — | 5 | |||||||||||||||
Other financial payables | 307 | 305 | 2 | — | 307 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Balance as of 12/31/2017 | 2,301 | 1,545 | 750 | 6 | 2,301 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Liabilities to banks | 21 | 21 | — | — | 21 | |||||||||||||||
Lease liabilities | 1 | — | 1 | — | 1 | |||||||||||||||
Other financial debt | 82 | 82 | — | — | 82 | |||||||||||||||
Trade payables | 378 | 378 | — | — | 378 | |||||||||||||||
Payables from royalties | 572 | 458 | 106 | 8 | 572 | |||||||||||||||
Derivative financial instruments | 3 | 3 | — | — | 3 | |||||||||||||||
Other financial payables | 77 | 77 | — | — | 77 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Balance as of 12/31/2016 | 1,134 | 1,019 | 107 | 8 | 1,134 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Liabilities to banks | 13 | 12 | 1 | — | 13 | |||||||||||||||
Lease liabilities | 3 | 1 | 2 | — | 3 | |||||||||||||||
Other financial debt | 135 | 135 | — | — | 135 | |||||||||||||||
Trade payables | 424 | 424 | — | — | 424 | |||||||||||||||
Payables from royalties | 608 | 482 | 123 | 3 | 608 | |||||||||||||||
Derivative financial instruments | 3 | 3 | — | — | 3 | |||||||||||||||
Other financial payables | 75 | 74 | 1 | — | 75 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Balance as of 12/31/2015 | 1,261 | 1,131 | 127 | 3 | 1,261 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
Information as of December 31, 2015, and for the year ended have not been audited.
Cash outflows from financial obligations include payments of principal and interest. Current cash outflows from financial obligations are offset by planned cash inflows from receivables and other financial assets. To cover current cash outflows, Penguin Random House also has adequate financial reserves in the amount of the cash and cash equivalents in place at the end of the reporting period.
Penguin Random House Venture Combined Financial Statements
Notes to the Income Statement and the Balance Sheet continued
24 Additional Disclosures on Financial Instruments continued
The following table presents the remaining terms of the contractual amounts to be exchanged in a derivative financial instrument for which gross cash flows are exchanged:
Liabilities from Derivatives with Gross Settlement
Remaining term of liabilities | ||||||||||||
in € millions | Up to 1 year | 1 to 5 years | Over 5 years | |||||||||
Cash outflow | (309 | ) | (22 | ) | — | |||||||
Cash inflow | 304 | 22 | — | |||||||||
|
|
|
|
|
| |||||||
Balance as of 12/31/2017 | (5 | ) | — | — | ||||||||
|
|
|
|
|
| |||||||
Cash outflow | (69 | ) | — | — | ||||||||
Cash inflow | 66 | — | — | |||||||||
|
|
|
|
|
| |||||||
Balance as of 12/31/2016 | (3 | ) | — | — | ||||||||
|
|
|
|
|
| |||||||
Cash outflow | (114 | ) | — | — | ||||||||
Cash inflow | 111 | — | — | |||||||||
|
|
|
|
|
| |||||||
Balance as of 12/31/2015 | (3 | ) | — | — | ||||||||
|
|
|
|
|
|
Information as of December 31, 2015, and for the year ended have not been audited.
Carrying Amounts and Measurement Methods by Measurement Category
Assets
in € millions | Category according to IAS 39 and measurement | 12/31/2017 | 12/31/2016 | 12/31/2015 | ||||||||||
Investments in affiliates | Available-for-sale; at cost | — | — | 1 | ||||||||||
Other investments | Available-for-sale; at cost | 2 | 2 | 2 | ||||||||||
Securities and financial assets | Available-for-sale; at cost | — | — | — | ||||||||||
Securities and financial assets | Financial assets initially recognized at fair value through profit or loss | 7 | 5 | 4 | ||||||||||
Derivative financial instruments | Financial assets held for trading; fair value recognized in profit or loss | 1 | 2 | 3 | ||||||||||
Derivative financial instruments | Derivatives with hedge relation | — | 1 | 2 | ||||||||||
Trade receivables | Loans and receivables; at amortized cost | 752 | 718 | 692 | ||||||||||
Other receivables | Loans and receivables; at amortized cost | 29 | 21 | 44 | ||||||||||
Cash | Loans and receivables; at amortized cost | 375 | 310 | 292 | ||||||||||
|
|
|
|
|
| |||||||||
Other securities < 3 months | Loans and receivables; at amortized cost | 1 | 2 | 2 | ||||||||||
|
|
|
|
|
| |||||||||
1,167 | 1,061 | 1,042 | ||||||||||||
|
|
|
|
|
|
Information as of December 31, 2015, and for the year ended have not been audited.
Investments in affiliates and other investments that are classified asavailable-for-sale within financial assets are measured at cost as they do not have a quoted price on an active market and a reliable estimate of the fair value is not possible. No plan has been made to sell holdings of the otheravailable-for-sale investments in the near future.
Penguin Random House Venture Combined Financial Statements
Notes to the Income Statement and the Balance Sheet continued
24 Additional Disclosures on Financial Instruments continued
Carrying Amounts and Measurement Methods by Measurement Category continued
For all other financial assets and financial liabilities, their carrying amount represents a reasonable approximation of fair value.
The fair value measurements of the Group’s financial assets are categorized within level 2 of the fair value hierarchy. The different levels have been defined as follows:
Level 1: quoted prices (unadjusted) in active markets for identical assets
Level 2: inputs other than quoted prices included within level 1 that are observable for the asset, either directly (i.e., prices) or indirectly (i.e., derived from prices)
Level 3: inputs for the asset that are not based on observable market dates (unobservable inputs.)
Equity and Liabilities
in € millions | Category according to IAS 39 and measurement | 12/31/2017 | 12/31/2016 | 12/31/2015 | ||||||||||
Liabilities to banks | Financial liabilities; at amortized cost | 21 | 21 | 13 | ||||||||||
Lease liabilities | Payables out of scope of IAS 39 | 3 | 1 | 3 | ||||||||||
Other financial debt | Financial liabilities; at amortized cost | 1,080 | 82 | 135 | ||||||||||
Trade payables | Financial liabilities; at amortized cost | 364 | 378 | 424 | ||||||||||
Payables from royalties | Financial liabilities; at amortized cost | 521 | 572 | 608 | ||||||||||
Derivative financial instruments | Financial liabilities held for trading; fair value recognized in profit or loss | 5 | 3 | 3 | ||||||||||
Other financial payables | Financial liabilities; at amortized cost | 303 | 77 | 73 | ||||||||||
Other financial payables | Financial liabilities initially recognized at fair value through profit or loss | 4 | — | 2 | ||||||||||
|
|
|
|
|
| |||||||||
2,301 | 1,134 | 1,261 | ||||||||||||
|
|
|
|
|
|
Information as of December 31, 2015, and for the year ended have not been audited.
Currently, Penguin Random House measures derivative financial instruments and obligations to pay contingent consideration at fair value. For measuring the fair value of unlisted derivatives, Penguin Random House uses various financial methods reflecting the prevailing market conditions and risks at the respective balance sheet dates. These valuation techniques maximize the use of observable market data where it is available and rely as little as possible on entity-specific estimates. As all significant inputs required to estimate fair value of derivatives are observable, the instruments are included in level 2 of the fair value hierarchy. Irrespective of the type of financial instrument, future cash flows are discounted at the end of the reporting period based on the respective market interest rates and yield curves at the end of the reporting period. The fair value of forward exchange transactions is calculated using the average spot prices at the end of the reporting period and taking into account forward markdowns and markups for the remaining term of the transactions.
For contingent consideration financial liabilities presented in the item “Other financial payables”, no observable market data is available, therefore measuring fair values is based primarily on cash flow-based valuation techniques and on the significant unobservable inputs (e.g., forecast revenue growth rates or market multiples). Due to the significant unobservable inputs, these financial liabilities are classified within level 3 of the fair value hierarchy.
Penguin Random House Venture Combined Financial Statements
Notes to the Income Statement and the Balance Sheet continued
24 Additional Disclosures on Financial Instruments continued
Equity and Liabilities continued
The valuation of financial assets and financial liabilities according to level 2 and level 3 requires management to make certain assumptions about the model inputs including cash flows, discount rate and credit risk. In the financial year 2017, no reclassifications were performed between levels 2 and 3.
The net result from financial instruments includes mainly the following items all recognized in profit and loss: interest expenses for the financial debt in the amount of€-11 million (2016:€-2 million; 2015:€-2 million), impairment losses on trade receivables in the amount of €27 million (2016: €30 million; 2015: €9 million), net losses on financial instruments categorized as held for trading in the amount of€-5 million (2016:€-12 million; 2015: €5 million) and immaterial exchange rate effects on loans and receivables as well as financial liabilities at amortized cost (2016: €16 million; 2015:€-11 million).
The requirements for offsetting the financial instruments reported on the balance sheet are not met so that no material offsetting was carried out as of December 31, 2017, 2016 and 2015.
Accounting of Derivative Financial Instruments and Hedges
All derivatives are recognized at their fair value. When a contract involving a derivative is entered into, it is determined whether that contract is intended to serve as a fair value hedge or as a cash flow hedge. Some derivatives, however, do not meet the requirements for recognition as hedges, even though they function as such in financial terms.
Penguin Random House documents all relationships between hedging instruments and hedged items and its major markets. risk management objectives and strategies in connection with the various hedges. This method includes linking all derivatives used for hedging purposes to the underlying assets, liabilities, firm commitments and forecasted transactions. Furthermore, Penguin Random House assesses and documents the degree to which changes in the fair values or cash flows of hedged items are effectively offset by changes in the corresponding hedging instruments, both when the hedges are initiated and on an ongoing basis.
Financial Derivatives
Penguin Random House uses standard market financial derivatives, unlisted (OTC) instruments. These include, in particular, forward agreements and currency swaps. Transactions are entered into solely with Bertelsmann Group Treasury or banks with a high credit rating. In general, the transactions with banks are only performed with banks approved by the Chief Financial Officer. The nominal volume is the total of all underlying buying and selling amounts of the respective transactions.
The majority of the programmefinancial derivatives at the end of the reporting period are used to hedge currency risks from intercompany financing activities (2017: 62 percent; 2016: 33 percent; 2015: 44 percent). A total of €129 million (2016: €133 million; 2015: €117 million) (2017: 38 percent; 2016: 67 percent; 2015: 56 percent) is expecteddue to financial derivatives used to hedge against exchange rate risks from operating business as of the end of the reporting period. No financial derivatives were purchased for speculative purposes.
The maturity bands correspond to the remaining maturities of the financial derivatives.
Penguin Random House Venture Combined Financial Statements
Notes to the Income Statement and the Balance Sheet continued
24 Additional Disclosures on Financial Instruments continued
Nominal Amounts of Financial Derivatives
Nominal volume as of 12/31/2017 | Nominal volume as of 12/31/2016 | Nominal volume as of 12/31/2015 | ||||||||||||||||||||||||||||||||||||||||||||||
in € millions | < 1 year | 1 to 5 years | > 5 years | Total | < 1 year | 1 to 5 years | > 5 years | Total | < 1 year | 1 to 5 years | > 5 years | Total | ||||||||||||||||||||||||||||||||||||
Currency derivatives | ||||||||||||||||||||||||||||||||||||||||||||||||
Forward contracts and currency swaps | 319 | 21 | — | 340 | 176 | 23 | — | 199 | 180 | 29 | — | 209 | ||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
319 | 21 | — | 340 | 176 | 23 | — | 199 | 180 | 29 | — | 209 | |||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Information as of December 31, 2015, and for the year ended have not been audited.
Fair Values of Financial Derivatives
Nominal volume | Fair value | |||||||||||||||||||||||
in € millions | 12/31/2017 | 12/31/2016 | 12/31/2015 | 12/31/2017 | 12/31/2016 | 12/31/2015 | ||||||||||||||||||
Currency derivatives | ||||||||||||||||||||||||
Forward contracts and currency swaps | 340 | 199 | 209 | (4 | ) | — | 2 | |||||||||||||||||
340 | 199 | 209 | (4 | ) | — | 2 |
Information as of December 31, 2015, and for the year ended have not been audited.
Fair values are netted. Further details are presented in the following table ”Derivative Financial Instruments.”
Some of the derivatives are recognized as hedging instruments in connection with cash flow hedges. The effective portion of changes in the fair value of cash flow hedges is recognized in other comprehensive income until the effects of the hedged underlying transaction affect profit or loss. The portion remaining in other comprehensive income at December 31, 2017, will thus mainly impact the income statement in the financial years 2018 through 2019. There is no ineffective portion of the cash flow hedges in the financial year 2017, an immaterial ineffective portion of the cash flow hedges in the financial year 2016 and no ineffective portion of the cash flow hedges in the financial year 2015.
The following table provides an overview of carrying amounts of the Penguin Random House’s derivative financial instruments, which correspond to their fair values. A distinction is made between derivatives that are included in an effective hedging relationship in accordance with IAS 39 and those that are not.
Derivative Financial Instruments
in € millions | Carrying amount as of 12/31/2017 | Carrying amount as of 12/31/2016 | Carrying amount as of 12/31/2015 | |||||||||
Assets | ||||||||||||
Forward contracts and currency swaps | 1 | 3 | 5 | |||||||||
Without hedge relation | 1 | 2 | 3 | |||||||||
In connection with cash flow hedges | — | 1 | 2 | |||||||||
Equity and liabilities | ||||||||||||
Forward contracts and currency swaps | 5 | 3 | 3 | |||||||||
Without hedge relation | 5 | 3 | 3 | |||||||||
In connection with cash flow hedges | — | — | — |
Information as of December 31, 2015, and for the year ended have not been audited.
Penguin Random House Venture Combined Financial Statements
Notes to the Income Statement and the Balance Sheet continued
24 Additional Disclosures on Financial Instruments continued
Financial Instruments
Penguin Random House is part of the Bertelsmann Group. Therefore, Penguin Random House is generally included in the financial risk policy and procedures of Bertelsmann. The principles of these financial risk policy are described below.
Financial Risk Management
Penguin Random House is exposed to various forms of financial risk through its international business operations. Above all, this includes the effects of exchange and interest rate movements. Penguin Random House’s risk management activities are designed to effectively mitigate these risks. The Executive Board of Penguin Random House establishes basic risk management policy, outlining general procedures for hedging currency and interest rate risk and the utilization of derivative financial instruments. The Bertelsmann Group Treasury advises subsidiaries on operating risk and hedges risks using derivative financial instruments as necessary. However, subsidiaries are not obliged to use the services provided by this department for their operating risks.
Exchange Rate Risk
Penguin Random House is exposed to an exchange rate risk in various currencies. Its subsidiaries are advised, but not obliged, to hedge themselves against exchange rate risks in the local reporting currency by signing forward agreements with banks that have a high credit rating. Loans within Penguin Random House that are subject to exchange rate risk are hedged using derivatives.
Interest Rate Risk
Penguin Random House’s interest rate risk arises primarily from loans payable, financing agreements with Bertelsmann SE & Co. KGaA, Pearson plc and Bertelsmann PRH Finance, Inc., a subsidiary of Bertelsmann SE & Co. KGaA. and from cash and cash equivalents. In the financial year 2013, Penguin Random House entered into a Revolving Credit Agreement with Bertelsmann SE & Co. KGaA and Pearson plc. Under this shareholder loan agreement, the Group has access to a revolving facility of up to US$250 million. This facility was amended in October 2017 and is valid until October 5, 2022. The interest rates for loans under the revolving facility are applicable LIBOR plus a margin of 2.00 percent per year. In addition, in December 2017, Penguin Random House entered with Bertelsmann PRH Finance, Inc. into a Term Loan Agreement of US$250 million, valid until March 30, 2018. The interest rates for loans are applicable LIBOR plus a margin of 2.00 percent per year.
Liquidity Risk
Liquidity risks may arise through a lack of rollover financing (liquidity risk in a narrower sense), delayed receipt of payment and unforeseen expenditure (budgeting risk). Budgeting risk is determined by comparing deviations in actual spending with budget and reserve amounts. In a narrower sense, liquidity risk depends on the volume of debt due within a given period.
Counterparty Risk
Penguin Random House is exposed to default risks in the amount of the invested cash and cash equivalents and the positive fair value of the derivatives in its portfolio. Transactions involving money market securities and
Penguin Random House Venture Combined Financial Statements
Notes to the Income Statement and the Balance Sheet continued
24 Additional Disclosures on Financial Instruments continued
Counterparty Risk continued
other financial instruments are exclusively conducted with Bertelsmann Group Treasury or a defined group of banks with a high credit rating. Penguin Random House has obtained credit collateralization in the amount of €484 million (2016: €441 million; 2015: €402 million) for trade receivables from major customers.
Capital Management
The capital management of Penguin Random House is embedded in the financial management of the Bertelsmann Group, considering the shareholder agreements between Bertelsmann SE & Co. KGaA and Pearson plc. Within this framework Penguin Random House considers the legal requirements regarding equity and liquidity needs.
Interest Rate and Exchange Rate Sensitivity
For the analysis of interest rate risk, a distinction is made between cash flow and present value risks. Financial debt, cash and cash equivalents are subject to a greater degree of cash flow risk, as changes in market interest rates impact the Group’s interest result almost immediately. In contrast, medium- and long-term interest rate agreements are subject to a greater degree of present value risk. The accounting treatment of present value risks depends on the respective financial instrument or a hedging relationship documented in conjunction with a derivative (micro-hedge).
Upon initial recognition, originated financial debt is measured at fair value less transaction costs. Subsequent measurement is based on amortized cost. Changes in fair value are limited to opportunity effects, as changes in interest rates have no effect on the balance sheet or the income statement. The recognition of originated financial debt at fair value is only permitted for transactions for which a micro-hedge is documented in accordance with IAS 39 in conjunction with the conclusion of an interest rate or exchange rate hedge transaction involving derivatives. In this case, changes in the fair value of the respective items are recognized in the income statement in order to substantially balance out the offsetting effects of the fair value measurement of the related derivatives.
For derivative financial instruments, the effects of changes in interest rates are recognized in the income statement. In the case of documented hedging relationships (cash flow hedges), however, these effects are taken directly to equity.
The cash flow or present value risks existing at the end of the reporting periods are analyzed using a sensitivity calculation as anafter-tax observation. A parallel shift in the interest rate curve of+/-1 percent is assumed for all major currencies. The analysis is performed on the basis of financial debt, cash and cash equivalents and derivatives at the end of the reporting period. The results are shown in the following table:
Sensitivity Analysis of Cash Flow and Present Value Risks
12/31/2017 | 12/31/2016 | 12/31/2015 | ||||||||||||||||||||||
in € millions | Shift +1% | Shift -1% | Shift +1% | Shift -1% | Shift +1% | Shift -1% | ||||||||||||||||||
Cash flow risks (income statement) | — | — | 1 | (1 | ) | 1 | (1 | ) | ||||||||||||||||
Present value risks (income statement) | — | — | — | — | — | — | ||||||||||||||||||
Present value risks (equity) | — | — | — | — | — | — |
Information as of December 31, 2015, and for the year ended have not been audited.
Penguin Random House Venture Combined Financial Statements
Notes to the Income Statement and the Balance Sheet continued
24 Additional Disclosures on Financial Instruments continued
Sensitivity Analysis of Cash Flow and Present Value Risks continued
The analysis of exchange rate sensitivity includes the Group’s financial debt and operating transactions at the end of the reporting period and the hedging relationships entered into. The calculation is performed for the unsecured net exposure on the basis of an assumed 10 percent appreciation of the euro versus all foreign currencies and is presented after tax. A uniform devaluation of foreign currencies would have resulted in a change in the carrying amount recognized in profit or loss of €2 million (2016: €2 million; 2015:€-2 million). Thereof, less than €1 million (2016: less than €1 million; 2015:€-1 million) relates to fluctuations in the US dollar exchange rate with a net exposure of US$4 million (2016:US$-2 million; 2015: US$20 million). Shareholders’equity would have declined by��-5 million (2016:€-6 million; 2015:€-5 million) as a result of fluctuations in the fair values of documented cash flow hedges. Thereof,€-4 million (2016:€-4 million; 2015:€-4 million) relates to fluctuations in the US dollar exchange rate on the basis of a documented cash flow hedge volume of US$64 million (2016: US$65 million; 2015: US$69 million). If there had been a uniform increase in the value of foreign currencies, this would have led to opposite changes in these amounts for Penguin Random House.
25 Statement of Cash Flows
Penguin Random House’s combined statement of cash flows has been prepared in accordance with IAS 7 and is used to evaluate its ability to generate cash and cash equivalents. Cash flows are divided into those relating to operating activities, investing activities and financing activities. Cash flows from operating activities are presented using the indirect method, whereby EBIT is adjusted for the effects of anon-cash nature, any deferrals or accruals of past or future operating receipts or payments as well as items of income or expenses associated with investing cash flows. In addition, cash flows arising from income taxes are classified as cash flows from operating activities as well as other cash flows that are neither investing nor financing. Contributions to pension plans are a cash outflow reported as a separate item in the cash flow from operating activities. The change in provisions for pensions and similar obligations represents the balance of personal expenses for pensions and similar obligations and company payments for these obligations (further explanations are presented in note 19 “Provisions for Pensions and Similar Obligations”). The management of Penguin Random House utilizes indicators that include operating EBITDA and is thus before interest and taxes as well as depreciation, amortization and impairment and special items. Operating results and the resulting cash flow from operating activities should therefore be consistent and comparable. Accordingly, the net balance of interest paid and interest received in the financial year is shown in the cash flow statement as part of financing activities.
Cash flows from investing activities are determined directly in accordance with IAS 7. Investing activities include payments for fixed assets and purchase price payments for consolidated investments acquired as well as proceeds from the disposal ofnon-current assets and participations. Further explanations concerning acquisitions made in the financial year are presented in the “Acquisitions and Disposals” section. Disposals in the financial year are also presented separately in that section. No financial debt was assumed in the financial years 2017, 2016 and 2015.
Cash flow from financing activities includes changes in equity, financial debt and dividend payments affecting cash, as well as interest paid and interest received. In the financial year 2017, the item “Proceeds from other financial debt” relates to receipts in the amount of €1,266 million from the shareholder Bertelsmann and its related subsidiary as well as from the shareholder Pearson. During the financial year shareholders’ loans of €199 million were paid back. The repayments are included in the item “Redemption of other financial debt.” The item “Dividends to Penguin Random House shareholders” includes cash outflows of €792 million form special dividend distributions in connection with the acquisition of another 22 percent interest in Penguin Random House by Bertelsmann from Pearson. Further details are presented in the section “Background.” In the financial year
Penguin Random House Venture Combined Financial Statements
Notes to the Income Statement and the Balance Sheet continued
25 Statement of Cash Flows continued
2017, the item “Change in equity” mainly includes capital contributions to Penguin Random House as presented in note 26 “Related Party Disclosures.”
The combined statement of cash flows includes the effects of changes in foreign currencies and changes in the scope of consolidation. Items in the combined statement of cash flows thus cannot be compared to changes in items disclosed on the combined balance sheet.
The following table shows the cash changes andnon-cash changes of financial debt.
Changes in Financial Debt
in € millions | 12/31/2015 | 12/31/2016 | Cash changes | Non-cash changes | 12/31/2017 | |||||||||||||||||||
Acquisitions through business combinations | Exchange rate effect | |||||||||||||||||||||||
Liabilities to banks | 13 | 21 | 3 | — | (3 | ) | 21 | |||||||||||||||||
Lease liabilities | 3 | 1 | 2 | — | — | 3 | ||||||||||||||||||
Other financial debt | 135 | 82 | 1,065 | 1 | (68 | ) | 1,080 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total financial debt | 151 | 104 | 1,070 | 1 | (71 | ) | 1,104 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Information as of December 31, 2015, and for the year ended have not been audited.
26 Related Party Disclosures
For Penguin Random House, related parties as defined in IAS 24 are those persons and entities that control or exercise a significant influence over Penguin Random House, as well as those persons and entities controlled or jointly controlled by Penguin Random House, or over which it exercises a significant influence. Accordingly, all legal entities controlled or jointly controlled by the ultimate parent company of Penguin Random House preparing consolidated financial statements for public use Bertelsmann SE & Co. KGaA, or over which it exercises a significant influence, all legal entities controlled or jointly controlled by Pearson plc and key management personnel of Penguin Random House and all its parents including close members of their families and the companies that are controlled or jointly managed by them, are defined as related parties.
The ultimate parent company of Penguin Random House preparing consolidated financial statements, Bertelsmann SE & Co. KGaA, includes in its consolidated financial statements those of Penguin Random House. Bertelsmann SE & Co. KGaA is a company incorporated under German law whose registered office is established at Carl-Bertelsmann-Strasse 270,D-33311 Gütersloh, Germany. Consolidated financial statements for Bertelsmann SE & Co. KGaA can be obtained at its registered office.
Remuneration for key management personnel includes:
Remuneration for Key Management Personnel
in € millions | 2017 | 2016 | 2015 | |||||||||
Short-term employee benefits | 6 | 7 | 6 | |||||||||
Termination benefits | 1 | — | — | |||||||||
Post-employment benefits | — | — | — | |||||||||
Other long-term benefits | 2 | 2 | — |
Information as of December 31, 2015, and for the year ended have not been audited.
Penguin Random House Venture Combined Financial Statements
Notes to the Income Statement and the Balance Sheet continued
26 Related Party Disclosures continued
Remuneration for Key Management Personnel continued
The remuneration shown includes remuneration for activities by the members of the management who have responsibility for planning, directing and controlling and by the members of the Board of Directors of both PRH LLC and PRH Limited. Companies of the Bertelsmann Group and the Pearson Group have grantedpost-employment benefits to the key management personnel of Penguin Random House. There were no associated expenses in the financial year 2017 (2016: €4 million; 2015: €0 million). At the end of the reporting period, the related defined benefit obligation amounts to €7 million (2016: €7 million; 2015: €2 million).
Transactions with subsidiaries included in the scope of consolidation are eliminated and are not further disclosed. In addition to transactions with consolidated subsidiaries, the following transactions with related parties and entities were conducted in the reporting period:
Transactions with Related Parties
in € millions | Parents | Entities with significant influence | Key members of management | Joint ventures | Associates | Other related parties | ||||||||||||||||||
2017 | ||||||||||||||||||||||||
Goods delivered and services provided | — | — | — | — | — | 15 | ||||||||||||||||||
Goods and services received | — | — | — | — | — | (119 | ) | |||||||||||||||||
Receivables against | — | — | — | — | — | 7 | ||||||||||||||||||
Amounts owed to | 173 | — | 7 | — | — | 1,125 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
2016 | ||||||||||||||||||||||||
Goods delivered and services provided | — | — | — | — | — | 17 | ||||||||||||||||||
Goods and services received | — | — | — | — | — | (121 | ) | |||||||||||||||||
Receivables against | — | — | — | — | — | 6 | ||||||||||||||||||
Amounts owed to | 3 | — | 6 | — | — | 124 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
2015 | ||||||||||||||||||||||||
Goods delivered and services provided | — | — | — | — | — | 18 | ||||||||||||||||||
Goods and services received | — | — | — | — | — | (148 | ) | |||||||||||||||||
Receivables against | 1 | — | — | — | — | 5 | ||||||||||||||||||
Amounts owed to | 9 | — | 6 | — | — | 190 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Information as of December 31, 2015, and for the year ended have not been audited.
Transactions with parent companies contain transactions with PRH Holdings, Inc. as well as Bertelsmann UK Limited as these entities are the direct parent companies of Penguin Random House. PRH Publication, Inc. and Pearson PRH Holdings Limited are entities that have significant influence over Penguin Random House. In the financial years 2017, 2016 and 2015, no transactions with the latter two companies have occurred. Transactions with all other entities of the Bertelsmann Group including its subsidiaries, joint ventures and associates as well as transactions with all other entities of the Pearson Group including its subsidiaries and joint ventures have been presented as transactions with other related parties.
Goods delivered and services provided to related parties mainly include income from rental services and revenues from selling goods and providing diverse services. Received goods and services from related parties
Penguin Random House Venture Combined Financial Statements
Notes to the Income Statement and the Balance Sheet continued
26 Related Party Disclosures continued
Transactions with Related Parties continued
primarily contain expenses for print services, rental and lease expenses and expenses for acquiring goods and receiving sundry services. The outstanding receivables against related parties mainly obtain trade accounts receivable. Trade accounts payable and loans payable from a revolving credit agreement and from a term loan agreement are the main content of the amounts owed as well as dividends payable due in 2018 to related parties at each balance sheet date.
In 2013 Penguin Random House entered into a revolving credit agreement with Bertelsmann SE & Co. KGaA and Pearson plc. The credit facility was amended in October 2017 and limits amounts to a dollar equivalent of US$250 million. Committed borrowings may be denominated in US dollars, British pounds or euros. This facility is valid until October 5, 2022. The interest rate is defined depending on the used currency. In case of US dollar or British pound denominated loans made or outstanding during any interest period will have applied the LIBOR per annum equal to the applicable Screen Rate for three months on the date of this agreement and each interest payment date thereafter. In case of Euro denominated loans made or outstanding during any interest period will have applied the EURIBOR per annum equal to the applicable Screen Rate for three months on the date of this agreement and each interest payment date thereafter. All loans subject to the above respective interest rate for the interest period in effect plus 2.00 percent to be completecalculated on the basis of a year of 360 days and actual days elapsed. Within this revolving credit agreement Penguin Random House received loans payable in the amount of €383 million (2016: €179 million; 2015: €253 million) from Bertelsmann SE & Co. KGaA and Pearson plc during the financial year 2017. As of December 31, 2017, the total of revolving loans amounted to €208 million (2016: €82 million; 2015: €135 million). The outstanding liability is part of the table concerning the transactions with related parties.
In October 2017 Penguin Random House entered with Bertelsmann PRH Finance, Inc., a subsidiary of Bertelsmann SE & Co. KGaA, into a Term Loan Agreement of US$795 million, valid until October 2022. The term loan bears interest at 4.25 percent per year. As of December 31, 2017, the term loan balance amounts to €663 million. The outstanding liability is part of the table concerning the transactions with related parties.
In addition, in December 2017, Penguin Random House entered with Bertelsmann PRH Finance, Inc. into a Term Loan Agreement of US$250 million, valid until March 30, 2018. The interest rates for loans are applicable LIBOR plus a margin of 2.00 percent per year, to be calculated on the basis of a year of 360 days and actual days elapsed. At December 31, 2017, the term loan balance amounts to €208 million. The outstanding liability is also part of the table concerning the transactions with related parties.
The shareholders made capital contributions for reimbursement of payments made by mid-yearPenguin Random House for liabilities relating to periods before Penguin Random House’s formation. In the financial year 2017, Bertelsmann UK Limited made a capital contribution in the amount of €9 million (2016: €12 million; 2015: €37 million) and Pearson PRH Holdings Limited paid less than €1 million (2016: less than €1 million; 2015: €1 million). The amount of the capital contribution in 2017 includes the reimbursement for deficit pension contributions of €11 million (2016: €6 million; 2015: €11 million). In the financial year 2015, Pearson plc contributed an additional €3 million on behalf of PRH Publication, Inc.
Bertelsmann SE & Co. KGaA and Pearson plc entered into a revolving deposit agreement with Penguin Random House in 2014, valid until July 1, 2018. The currency of the deposit is in US dollars from Penguin Random House LLC and British pounds from Penguin Random House Ltd. and shall be in a principal amount of 10,000,000 units of the relevant currency or multiples thereof. US dollar denominated deposits shall bear interest
Penguin Random House Venture Combined Financial Statements
Notes to the Income Statement and the Balance Sheet continued
26 Related Party Disclosures continued
at aper-annum rate equal to the Fed Funds Rate (Federal Reserve Bank of New York) in effect for the interest period of the deposit plus 0.10 percent on a basis year of 360 days. British pound denominated deposits shall bear interest at a per annum rate equal to the Base Rate as administered by the Bank of England for the interest period in effect for the deposit minus 0.10 percent on a basis year of 365 days. Within this revolving deposit agreement. Penguin Random House granted loans receivable amounting to €106 million to Bertelsmann SE & Co. KGaA and Pearson plc (2016: €81 million; 2015: €0 million), which were completely settled during the financial year 2017.
In the financial years 2017, 2016 and will involve implementation costs2015, no expenses were recognized for bad or doubtful debts due from related parties. Dividends amounting to €822 million were distributed to Bertelsmann parent companies (2016: €168 million; 2015: €218 million). Pearson entities that have significant influence over Penguin Random House received dividends in the amount of €613 million (2016: €149 million; 2015: €192 million). Penguin Random House has obligations to other related parties from operating leases in the amount of €24 million (2016: €37 million; 2015: €52 million). These commitments toward Pearson are related to the lease of a building of Penguin Random House in London. They are partially offset by expected minimum lease payments from sublease with other Bertelsmann companies with a nominal value of €1 million (2016: €3 million; 2015: €5 million).
In the financial year 2016 Bertelsmann SE & Co. KGaA issued an additional lease guarantee for Penguin Random House, as Penguin Random House entered into a new lease for its offices in 1745 Broadway, New York, United States. The new contracts comprise an extension of approximately £320m.
As of the end of the financial years 2017, 2016 and 2015, provisions for onerous contracts for other related parties amounted to less than €1 million.
27 Events after the Reporting Period
The Term Loan Agreement of US$250 million from December 2017 was repaid prematurely on March 5, 2018.
SIGNATURES
The registrant hereby certifies that it meets the requirements for filing a Form20-F and that it has caused and authorized the undersigned for sign this annual report on its behalf.
Pearson plc |
/s/ Coram Williams |
Coram Williams |
Chief Financial Officer |
Date: March 23, 2016April 4, 2018