20-F 1 d140177d20f.htm 20-F 20-F
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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 1, 2021

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 20-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, 2020

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 number 1-16055

 

 

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)

Graeme Baldwin

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

 

Trading Symbol

 

Name of Each Exchange on Which Registered

*Ordinary Shares, 25p par value   PSO   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

     753,257,638  

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ☒    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  ☒

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  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or an emerging growth company. See definition of “accelerated file”, “large accelerated filer” and “emerging growth company”, in Rule 12b-2 of the Exchange Act.

☒  Large accelerated filer                 ☐  Accelerated filer                ☐  Non-accelerated filer                  ☐  Emerging growth company

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 whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.  ☒

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing

 

☐  US GAAP

  

☒  International financial Reporting Standards as Issued

by the International Accounting Standards Board

   ☐  Other

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 in Rule 12b-2 of the Exchange Act):    Yes  ☐    No  ☒

 

 

 


Table of Contents

TABLE OF CONTENTS

 

          Page  
  

Introduction

     3  
   Forward-Looking Statements      4  
   PART I   

Item 1.

   Identity of Directors, Senior Management and Advisers      5  

Item 2.

   Offer Statistics and Expected Timetable      5  

Item 3.

   Key Information      5  
   Selected Consolidated Financial Data      5  
   Dividend Information      6  
   Risk Factors      7  

Item 4.

   Information on the Company      15  
   Pearson plc      15  
   Overview      15  
   Recent Developments      16  
   The Group’s Strategy      16  
   Operating Divisions      17  
   Operating Cycles      20  
   Competition      21  
   Intellectual Property      22  
   Raw Materials      22  
   Government Regulation      22  
   Licenses, Patents and Contracts      22  
   Legal Proceedings      22  
   Organizational Structure      23  
   Property, Plant and Equipment      23  
   Capital Expenditures      24  

Item 4A.

   Unresolved Staff Comments      24  

Item 5.

   Operating and Financial Review and Prospects      24  
   General Overview      25  
   Results of Operations      30  
   Liquidity and Capital Resources      45  
   Accounting Policies      48  

Item 6.

   Directors, Senior Management and Employees      48  
   Directors and Senior Management      48  
   Compensation of Senior Management      53  
   Share Options of Senior Management      65  
   Share Ownership of Senior Management      65  
   Employee Share Ownership Plans      66  
   Board Practices      66  
   Employees      67  

Item 7.

   Major Shareholders and Related Party Transactions      68  

Item 8.

   Financial Information      68  

Item 9.

   The Offer and Listing      69  

Item 10.

   Additional Information      69  
   Articles of Association      69  
   Material Contracts      75  
   Exchange Controls      75  
   Tax Considerations      75  
   Documents on Display      78  

 

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          Page  

Item 11.

   Quantitative and Qualitative Disclosures about Market Risk      79  
   Introduction      79  
   Capital Risk      79  
   Interest and Foreign Exchange Rate Management      79  
   Liquidity and Re-financing Risk Management      80  
   Financial Counterparty Risk Management      80  

Item 12.

   Description of Securities Other Than Equity Securities      80  
   American Depositary Shares      80  
   Fees paid by ADR holders      80  
   Fees incurred in past annual period and fees to be paid in the future      81  
   PART II   

Item 13.

   Defaults, Dividend Arrearages and Delinquencies      82  

Item 14.

   Material Modifications to the Rights of Security Holders and Use of Proceeds      82  

Item 15.

   Controls and Procedures      82  
   Disclosure Controls and Procedures      82  
   Management’s Annual Report on Internal Control over Financial Reporting      82  
   Change in Internal Control over Financial Reporting      82  

Item 16A.

   Audit Committee Financial Expert      83  

Item 16B.

   Code of Ethics      83  

Item 16C.

   Principal Accountant Fees and Services      83  

Item 16D.

   Exemptions from the Listing Standards for Audit Committees      83  

Item 16E.

   Purchases of Equity Securities by the Issuer and Affiliated Purchases      84  

Item 16F.

   Change in Registrant’s Certifying Auditor      84  

Item 16G.

   Corporate Governance      84  

Item 16H.

   Mine Safety Disclosure      84  
   PART III   

Item 17.

   Financial Statements      85  

Item 18.

   Financial Statements      85  

Item 19.

   Exhibits      85  

 

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INTRODUCTION

In this Annual Report on Form 20-F (the “Annual Report”) references to “Pearson”, the “Company” or the “Group” are references to Pearson plc 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.

The Group has prepared the financial information contained in this Annual Report in accordance with International Financial Reporting Standards (“IFRS”) and IFRS Interpretations Committee (“IFRS IC”) interpretations as issued by the International Accounting Standards Board (“IASB”) and in conformity with the requirements of the Companies Act 2006 and in accordance with International Financial Reporting Standards adopted pursuant to Regulation (EC) No 1606/2002 as it applied to the European Union (“EU-adopted IFRS”). Unless otherwise indicated, any reference in this Annual Report to consolidated financial statements is to the consolidated financial statements and the related notes, included elsewhere in this Annual Report.

The Group publishes its consolidated financial statements in sterling. The 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 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

 

   

references to “brl”, “R$” are to the lawful currency of Brazil.

For convenience and except where specified otherwise, the Group has translated some sterling figures into US dollars at the rate of £1.00 = $1.37, 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, 2020. 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 28, 2021 the noon buying rate for sterling was £1.00 = $1.39.

The Group currently consists of its education business only. In April 2020, the Group completed the sale of the remaining 25% equity interest in the consumer publishing business Penguin Random House to Bertelsmann, the owner of the 75% interest. See “Item 4. Information on the Company — Overview of operating divisions”. The Pearson plc Consolidated Financial Statements are included in this report on pages F1-F93.

 

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FORWARD-LOOKING STATEMENTS

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 the 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 the Group’s or its 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 industry results to differ materially from those expressed or implied by any forward-looking statement. Although the Group believes that the expectations reflected in the forward-looking statements are reasonable, it cannot guarantee future results, levels of activity, performance or achievements.

 

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PART I

 

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 and in conformity with the requirements of the Companies Act 2006 and in accordance with EU-adopted IFRS. The selected consolidated income statement data for the years ended December 31, 2020, 2019 and 2018 and the selected consolidated balance sheet data as at December 31, 2020 and 2019 have been derived from the Group’s audited consolidated financial statements included in “Item 18. Financial Statements” in this Annual Report.

On May 5, 2017, the Group announced that it was undertaking a strategic review of its US K12 courseware business. The US K12 business was classified as held for sale on the Group’s balance sheet as at December 31, 2017 and December 31, 2018. On March 29, 2019 the Group completed the sale of its US K12 courseware business to Nexus Capital Management LP resulting in a pre-tax profit on sale of $13m.

On October 5, 2017 the Group completed the sale of a 22% share in Penguin Random House to Bertelsmann, retaining a 25% share. Following the announcement of planned sale of the remaining 25% share in December 2019, the business was classified as held for sale on the Group’s balance sheet as at December 31, 2019. On April 1, 2020, the Group completed the sale of the remaining 25% share in Penguin Random House to Bertelsmann resulting in a pre-tax profit on sale of £180m

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 disposal completed on March 15, 2018.

In November 2020, the Group announced the sale of its interests in Pearson Institute of Higher Education (PIHE) in South Africa. The business was classified as held for sale on the Group’s balance sheet as at December 31, 2020. The sale completed on February 5, 2021 for nominal consideration.

There were no significant acquisitions made in 2020.

The selected consolidated financial information should be read in conjunction with “Item 5. Operating and Financial Review and Prospects” and the 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.

 

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For convenience, the Group has translated the 2020 amounts into US dollars at the rate of £1.00 = $1.37, 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, 2020.

 

     Year Ended December 31  
     2020     2020     2019     2018     2017     2016  
     $     £     £     £     £     £  
     (In millions, except for per share amounts)  

Consolidated Income Statement data

            

Sales

     4,654       3,397       3,869       4,129       4,513       4,552  

Operating profit/(loss)

     563       411       275       553       451       (2,497

Profit/(loss) after taxation from continuing operations

     425       310       266       590       408       (2,335

Profit/(loss) for the financial year

     425       310       266       590       408       (2,335

Consolidated Earnings data per share

            

Basic earnings/(loss) per equity share(1)

     56.2¢       41p       34.0p       75.6p       49.9p       (286.8)p  

Diluted earnings/(loss) per equity share(2)

     56.2¢       41p       34.0p       75.5p       49.9p       (286.8)p  

Basic earnings/(loss) from continuing operations per equity share(1)

     56.2¢       41p       34.0p       75.6p       49.9p       (286.8)p  

Diluted earnings/(loss) from continuing operations per equity share(2)

     56.2¢       41p       34.0p       75.5p       49.9p       (286.8)p  

Dividends per ordinary share

     18.5¢       13.5p       19.5p       18.5p       17.0p       52.0p  

Consolidated Balance Sheet data at period end

            

Total assets (non-current assets plus current assets)

     10,213       7,455       7,650       7,905       7,888       10,066  

Net assets

     5,664       4,134       4,323       4,525       4,021       4,348  

Long-term obligations(3)

     (2,297     (1,677     (1,835     (1,246     (1,662     (3,794

Capital stock

     258       188       195       195       200       205  

Number of equity shares outstanding (millions of ordinary shares)

     753       753       782       781       802       822  

 

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 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, deferred income and tax liabilities.

Dividend information

The Group pays dividends to holders of ordinary shares on dates that are fixed in accordance with the guidelines of the London Stock Exchange. The board of directors normally declares an interim dividend in July or August of each year to be paid in September or October. The 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 the annual general meeting. At the Group’s annual general meeting on April 30, 2021 shareholders will be asked to approve a final dividend of 13.5p per ordinary share for the year ended December 31, 2020.

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

 

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each of the respective payment dates for interim and final dividends. The final dividend for the 2020 fiscal year will be paid on May 7, 2021 (subject to shareholder approval).

 

Fiscal year

   Interim      Final      Total      Interim      Final     Total  
     (Pence per ordinary share)      (Cents per ordinary share)  

2020

     6.0        13.5        19.5        7.7        18.5     26.2  

2019

     6.0        13.5        19.5        8.0        16.7       24.7  

2018

     5.5        13.0        18.5        7.2        16.9       24.1  

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  

 

*

As the 2020 final dividend had not been paid by the filing date, the dividend has been translated into cents using the noon buying rate for sterling as at December 31, 2020.

Future dividends will be dependent on the 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.

Risk Factors

You should carefully consider the risk factors described below, as well as the other information included in the rest of this document. The 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 it presently cannot identify.

Our business, results of operations and financial condition have been and could further be adversely affected by the effects of the global COVID-19 pandemic.

In March 2020 a global pandemic was declared by the World Health Organization (WHO). Since then, COVID-19 has spread globally, to include the United Kingdom, United States and other countries where we operate. The spread of COVID-19 resulted in the worldwide spread of a new and at the time, untreatable disease. Many countries around the world subsequently imposed quarantines and restrictions on travel and large gatherings to slow the spread of the virus, that included the closures of non-essential businesses. We activated our crisis plan and in line with scientific advice and government requirements, the majority of staff continues to work from their homes, whilst we also closely monitor developments on a day-by-day basis, adjusting and protecting our front-line operations. Our primary focus is on ensuring the safety and well-being of our employees, customers and learners. We continue to manage the incident via our incident management framework across eight regional teams, commanded by a central team in London. In addition, we invoked our business resilience plans to help support our customers and maintain our business operations.

As local jurisdictions put restrictions in place, our ability to continue to operate our business was and remains in part disrupted for an indefinite period of time. As the COVID-19 outbreak continued to spread, we maintained operations globally, in line with local shutdowns as mandated by respective governmental authorities.

In addition, the spread of COVID-19, which has caused a broad impact globally, materially affected us economically. While the potential economic impact brought by, and the duration of, COVID-19 may be difficult to assess or predict, the pandemic could result in significant disruption of global financial markets, reducing our ability to access capital, which could in the future negatively affect our liquidity. In addition, a recession or market correction resulting from the spread of COVID-19 could materially affect our business and the value of our ordinary shares.

The COVID-19 pandemic has impacted our colleagues, customers and business in terms of revenue and profits. In 2020 we saw a significant trading impact as a result of COVID-19. The challenging nature of COVID-19 has impacted all our businesses but has been felt most acutely across our International and Global Assessment

 

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businesses due to test center and school closures, exam cancelations, reduced global mobility and international economic pressure on spending. The ongoing uncertainty in 2021 gives rise to potential commercial risks that are actively being monitored by our business and finance teams. The impact from tougher lockdowns, increased infection rates and further operating constraints could restrict access to test centers and affect parts of our International and other businesses. The global outbreak of COVID-19 continues to trend and evolve. The extent to which COVID-19 may continue to impact our business and operations will depend on future developments, including the success of current vaccination programs, the continued duration of the outbreak, travel restrictions and social distancing in the United Kingdom, the United States and other countries where we operate. We are also reliant on the effectiveness of actions taken by governmental authorities to contain and treat the disease and whether additional countries where we operate are required to move to additional and deeper lock-down status. There is a risk that certain countries or regions where we operate may experience difficulties in containing COVID-19, or it may be more difficult to contain if the outbreak reaches a larger population or broader geography, in which case the risks described herein could be elevated significantly. The ultimate long-term impact of COVID-19 is highly uncertain and cannot be predicted with confidence. COVID-19 is expected to remain a primary global health and safety concern throughout 2021 and beyond.

The accelerated pace and scope of our business transformation initiatives increase our risk to execution timelines and to business adoption of change. The risk is that benefits may not be fully realized, costs may increase, or that the Group’s business as usual activities are adversely impacted.

Business transformation and change initiatives in support of the Group’s strategic goals to accelerate its digital transition and to simplify its business continued throughout 2019 and 2020. A range of transformation initiatives were successfully completed during 2020. In 2021, the Group announced a new strategy which has the potential for increased risk as the organisational structure and financial reporting processes are realigned in order to pursue the new strategy. The pace and scope of change potentially increases the risk that not all these changes will deliver within anticipated timeframes, and that the costs of these changes may increase. In addition, as a result of the increased pressure of transformational change, business as usual activities may not perform in line with plans, or the level of customer service may not meet expectations. In parallel with the business transformation, as the Group responds to the transition to digital and virtual learning, it will continue to look at opportunities to develop business models and further refine organization structures. Resistance to change could restrict the organization from making the necessary changes to the business model.

Failure to prevent or detect a malicious attack on the Group’s systems has in the past and could in future 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 its businesses, the Group holds large volumes of personally identifiable information including that of employees, customers, students and citizens, and other highly sensitive business critical data such as financial data, internal sensitive information, and intellectual property. Despite its implementation of security measures, threat actors of all types, including individuals, criminal organizations and state sponsored operatives, have from time to time gained access and may in the future gain access to the Group’s data through unauthorized means in order to misappropriate such information for fraudulent or other purposes. A significant breach can result in a devastating impact on the Group’s reputation, customer loyalty, and student experience. Inability to prove due diligence can result in severe penalties and a loss of business (existing and future).

From time to time, the Group’s business has experienced, and may continue to experience in the future, an unauthorized disclosure of personal information despite best efforts to prevent it. Such an incident, together with a failure to comply with data privacy regulations, could result in damage to the customer experience and the Group’s reputation and in financial loss.

Across its businesses, the Group holds large volumes of personally identifiable information (PII), including that of employees, customers, students and citizens. Any perceived or actual unauthorized disclosure of PII,

 

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whether through breach of the Group’s network by an unauthorized party, employee theft, misuse or error or otherwise, could harm the Group’s reputation, impair its ability to attract and retain its customers, or subject the Group to regulatory investigations and/or to claims or litigation arising from damages suffered by individuals, and thereby harm its business and operational results. Failure to adequately protect PII could potentially lead to regulatory penalties, litigation damages, significant remediation costs, reputational damage, cancelation of some existing contracts and difficulty in competing for future business, among other things. In addition, the Group could incur significant costs in complying with the relevant laws and regulations regarding the unauthorized disclosure of personal information, payments due to cyber extortion or to responding to regulatory investigations into such matters. Changes to data privacy legislation must also be monitored and acted upon to ensure the Group remains in compliance across different markets.

Failure to use the Group’s data effectively to enhance the quality and scope of current products and services in order to improve learning outcomes could adversely affect the Group’s business.

The Group seeks to maximize data to enhance the quality and scope of current products and services in order to improve learning outcomes while managing associated risks. The Group’s ability to continue to do so may be subject to factors beyond the Group’s control. In addition, the unavailability of timely, complete and accurate data limits informed decision-making and increases the risk of non-compliance with legal, regulatory and reporting requirements. Business change and transformation success is dependent on migration of a significant number of datasets and our inability to effectively accomplish this could adversely affect the Group’s results.

If the Group fails to attract, retain and develop appropriately skilled employees, it may limit its ability to achieve its strategic and operational goals and its business may be harmed.

The Group’s success depends on the skill, experience and engagement of its employees. If it is unable to attract, retain and develop sufficiently experienced and capable staff, especially in technology, product development, sales and leadership, its business and financial results may suffer. When talented employees leave, the Group may have difficulty replacing those skills, and its business may suffer. There can be no assurance that the Group will be able to successfully attract and retain the skills that it needs.

The Group’s business depends on a strong brand, and any failure to maintain, protect and enhance its brand would hurt its ability to retain or expand its business.

Protecting the Pearson brand is critical to expanding the Group’s business and will depend largely on its ability to maintain its customers’ trust in its solutions and in the quality and integrity of its products and services. If the Group does not successfully maintain a strong brand, its business could be harmed. Beyond protection, strengthening the Pearson brand will enable the Group to more effectively engage with governments, administrators, teachers, learners and influencers.

Failure to successfully invest in and deliver the right products and services and respond to competitive threats could result in lower-than-expected sales and profits.

A common trend facing all the 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. The 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. Alternative 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 traditional publishing business models, potentially impacting both sales volumes and pricing.

 

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Students are seeking cheaper sources of content, e.g. second hand and rental copies, online discounters, file sharing and use of pirated copies. This change in behavior puts downward pressure on textbook prices in major markets, and this could adversely impact the Group’s results.

If the Group does not adapt rapidly to these changes, it may lose business to ‘faster’ and more ‘agile’ competitors, who increasingly are non-traditional competitors, making their identification all the more difficult. The Group may be required to invest significant resources to further adapt to the changing competitive environment.

There are multiple competing demands for educational funds and there is no guarantee that new courseware or testing or training programs will be funded, or that the Group will win or retain this business.

A control breakdown or service failure in the Group’s school assessment and qualification businesses could result in financial loss and reputational damage.

The Group’s professional services and assessment businesses involve complex contractual relationships with both government agencies and commercial customers for the provision of various testing services. The 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 the Group’s assessment and qualification businesses, both in the US and the UK. A service failure caused by a breakdown in testing and assessment processes could lead to a mis-grading of student tests and/or late delivery of test results to students and their schools. In either event the Group may be subject to legal claims, penalty charges under contracts, non-renewal of contracts and/or the suspension or withdrawal of its 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 the Group’s ability to retain existing contracts and/or obtain new customers.

The Group’s investment in inherently riskier emerging markets may deliver returns that are lower than anticipated.

The Group has invested in a number of emerging markets, some of which are inherently riskier than its 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, sanctions, bribery and corruption) as well as unmanaged expansion are all factors which could limit returns on investments made in these markets.

Changes in government policy and/or regulations have the potential to affect the Group’s business model and/ or decisions across all markets.

The Group’s educational services and assessment businesses may be adversely affected by changes in government funding resulting from either trends that are beyond the 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 the Group’s failure to successfully deliver previous contracts.

The results and growth of the 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. 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 customers. The current challenging environment could impact the Group’s ability to collect education-related debt.

 

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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 the 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 the market in any given year. Uncertainty remains over the longer term impact of international trading arrangements and general economic conditions in the UK as a result of Brexit, and globally as a result of the COVID-19 pandemic, among other examples of wider uncertainty and instability in the rest of the world, any of, which can affect governments education policy and decisions.

Global economy and cyclical market factors may adversely impact the Group’s financial performance.

With the continued pressure and uncertainty in the worldwide economies, particularly in light of the continuing COVID-19 pandemic, there remains a risk of a weakening in trading conditions, which could adversely impact future financial performance. The effect of continued deterioration or lack of recovery in the global economy will vary across 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, although they can have a positive impact for many of the Group’s businesses, could for others lead to a reduction in demand for the Group’s products and services.

A significant deterioration in the Group’s profitability and/or cash flows caused by prolonged economic instability could reduce its liquidity and/or impair its financial ratios and trigger a need to raise additional funds from the capital markets and/or renegotiate its banking covenants.

To the extent that worldwide economic conditions materially deteriorate, as a result of the COVID-19 pandemic or otherwise the Group’s sales, profitability and cash flows could be significantly reduced as customers could be unable to purchase products and services in the expected quantities and/or pay for them within normal agreed terms.

Disruption in capital markets or potential concerns about the Group’s credit rating, for instance manifested in downgrades or negative outlooks by the credit rating agencies, may mean that this capital may not be available on favorable terms or may not be available at all.

All the Group’s businesses depend 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 the Group’s sales and reputation.

All the Group’s businesses, to a greater or lesser extent, are dependent on information technology. It either provides software and/or internet services to its customers or uses complex IT systems and products to support its business activities, including customer-facing systems, back-office processing and infrastructure. The Group faces several technological risks associated with software product development and service delivery, information technology security (including viruses 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 the Group has experienced verifiable attacks on its systems by unauthorized parties. To date, such attacks have not resulted in any material damage, but the Group’s businesses could be adversely affected if its systems and infrastructure experience a significant failure or interruption.

Operational disruption to its business, including those caused by third party providers, a major disaster and/or external threats, could restrict the Group’s ability to supply products and services to its customers.

Across all its businesses, the Group manages complex operational and logistical arrangements including distribution centers, data centers, and educational and office facilities, as well as relationships with third party

 

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print sites. It has also outsourced some support functions, including information technology, warehousing and logistics to third party providers. The failure of third parties to whom it has outsourced business functions could adversely affect its 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 the Group’s ability to service its customers and meet the terms of its 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 future revenues.

Environmental, social and governance risks may also adversely impact the Group’s business.

The Group considers environmental, social and governance (ESG) risks no differently to the way it manages any other business risk. These include ethical business behavior, compliance with UN Global Compact standards, environmental impact, people and editorial standards. A failure to comply with such standards could adversely affect the Group’s reputation and have a negative impact on its relations with employees, vendors and customers.

Failure to adequately protect the health, safety and well-being of the Group’s employees, learners and other stakeholders could adversely impact the Group’s reputation, profitability and future growth.

Although the Group has invested in global health and safety procedures and controls to safeguard the health, safety and wellbeing of its employees and other stakeholders, accidents or incidents could still occur due to unforeseen risks, causing injury or harm to individuals and impacting the Group’s business operations. The effects of the COVID-19 pandemic may exacerbate the risk. 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 reputation.

Failure to adequately protect learners could result in significant harm to one or more learners.

Incidents may occur where learners are abused or harassed. For example, where the Group has direct learner contact via online learning, or in its direct delivery businesses where it is operating, either directly or in a third-party partnership. These incidents can cause harm to learners, which is something the Group takes extremely seriously, and could also have a negative financial, legal and reputational impact to the business.

Failure to ensure security for the Group’s staff, learners, assets and reputation, 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 localized incidents, terrorist attacks, strikes or extreme weather. Future occurrences could cause harm to individuals and/or disrupt business operations. These have the potential to lead to operational loss, a reduction in profitability and impact on the Group’s global reputation.

The Group generates a substantial proportion of its revenue in foreign currencies, particularly the US dollar, and foreign exchange rate fluctuations could adversely affect the Group’s earnings and the strength of its balance sheet.

As with any international business, the Group’s earnings can be materially affected by exchange rate movements. The main exposure is to movements in the US dollar to sterling exchange rate as approximately 69% of the Group’s total revenue is generated in US dollars. The Group also has exposure to a range of other international currencies including emerging market currencies. Operating profit for 2020, translated at 2019 average rates, would have been £1m lower.

 

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A lack of sufficient capital resources could adversely impact the Group’s ability to operate.

If the global economy weakens further and/or the global financial markets collapse, as a result of the COVID-19 pandemic or otherwise, the Group may not have access to or could lose its bank deposits or suffer a significant increase in customer bad debts. Lack of sufficient capital resources could significantly limit the Group’s ability to take advantage of business and strategic opportunities. If replacement funds are not available, the Group may be required to delay, reduce the scope of, or eliminate material parts of its business strategy, including potential additional acquisitions or development of new products, services and technologies.

Changes in tax law or perceptions on tax planning strategies may lead to a 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 the Group’s future reported tax rate and/or its future tax payments. The application of tax legislation can be complex and tax authorities may take a different view to management. The Group has been subject to audit by tax authorities. In particular, the Group is under assessment from the tax authorities in Brazil challenging the deduction for tax purposes of goodwill amortisation for the years 2012 to 2017 (similar assessments may be raised for other years). In addition, the Group has lodged an appeal against the European Commission’s decision that the United Kingdom controlled foreign company group financing partial exemption (FCPE) partially constitutes State Aid. Although the Group believes its tax provision is reasonable, the final determination of its tax liability could be materially different from its historical income tax provisions, which could have a material effect on the Group’s financial position, results of operations or cash flows.

The Group’s tax strategy reflects its business strategy and the locations and financing needs of its operations. In common with many companies, the Group seeks to manage its tax affairs to protect value for its shareholders, in line with its broader fiduciary duties. The 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.

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 the Group’s reputation.

Although the Group is committed to conducting business in a legal and ethical manner in compliance with local and international statutory requirements and standards applicable to its business, there is a risk that the 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 the Group’s reputation, or lead to litigation and financial impacts.

Failure to comply with antitrust and competition legislation and/or legal or regulatory proceedings could result in substantial financial cost and/or adversely impact the Group’s reputation.

The Group is subject to global and local antitrust and competition law and although it is committed to conducting business in compliance with local and international laws, there is a risk that management, employees or representatives may act in a way that violates applicable antitrust or competition laws. Further, the Group and its subsidiaries are and may be in the future subject to legal and regulatory proceedings in the countries in which the Group operates. These proceedings could result in greater scrutiny of the 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 the Group’s reputation.

If the Group does not adequately protect its intellectual property and proprietary rights, its competitive position and results may be adversely affected and its ability to grow restricted.

The Group’s products and services largely comprise intellectual property delivered through a variety of print and digital media, online software applications and platforms. The Group relies on trademark, patent, copyright and other intellectual property laws to establish and protect its proprietary rights in these products and services.

 

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Failure to adequately manage, procure, register or protect intellectual property rights (including trademarks, patents, trade secrets and copyright) in the Group’s brands, content and technology, may (1) prevent the Group from enforcing its rights, and (2) enable bad actors to illegally access and duplicate the Group’s content (print and digital counterfeit, digital piracy), which will reduce sales and/or erode sales.

The Group’s intellectual property rights (IPR) in brands and content — historically its core assets — are generally well established in key markets. As technology has become an increasingly critical component of the Group’s business strategy, it has also been steadily increasing investment in its patent program to expand its protection of high value inventions in the US and key international markets.

Online copying and security circumvention have become increasingly sophisticated and resistant to available countermeasures. Notably, in recent years “digital counterfeit” web sites have sold or attempted to sell unprotected PDF files of many of Pearson’s titles, at scale, using modern and sophisticated ecommerce methods, with a professional and polished look and feel. From an IP perspective, increasing the Group’s digital business exposes it to more trademark, copyright and patent infringement risks.

The Group’s forward-looking IP strategy includes maintaining a global patent footprint in key markets outside the US. However, the Group also conducts business in other countries where its 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 future growth. Where the Group has registered or otherwise established its IPR, it cannot guarantee that such rights will provide competitive advantages 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 it in many countries; the potential that its IPR may lapse, be invalidated, circumvented, challenged, or abandoned, or that it may otherwise lose the ability to assert its intellectual property rights against others. The loss or diminution in value of these proprietary rights or the Group’s intellectual property could have a material adverse effect on the Group’s business and financial performance.

Failure to generate anticipated sales growth, synergies and/or cost savings from acquisitions, mergers and other business combinations, could lead to goodwill and intangible asset impairments.

The Group periodically acquires and disposes of businesses to achieve its strategic objectives and will continue to consider both as means to pursue its strategic priorities.

Acquisitions may involve significant risks and uncertainties, including difficulties in integrating acquired businesses in order to realize anticipated sales growth, synergies and/or cost savings; diversion of management attention from other business concerns or resources; use of resources that are needed in other parts of our business. Acquisitions could lead to goodwill and intangible asset impairments. In addition, divestitures involve risks and uncertainties that could adversely affect our business, results of operations and financial condition. These include, among others, the inability to find potential buyers on favorable terms, disruption to our business and/or diversion of management attention from other business concerns, loss of key employees and possible retention of certain liabilities related to the divested business.

The Group’s reported earnings and cash flows may be adversely affected by changes in its pension costs and funding requirements.

The 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’ valuations can fluctuate, the plans may require additional funding from the Group, which could have an adverse impact on its results.

 

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It is the Group’s policy to ensure that each pension plan is adequately funded, over time, to meet its ongoing and future liabilities. The UK Group 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 the Group. The Group’s earnings and cash flows may be adversely affected by the need to provide additional funding to eliminate pension fund deficits in its defined benefit plans. The Group’s greatest exposure relates to the 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.

Although the UK defined benefit plan is significantly de-risked (given, in addition to a de-risked investment policy, it was also in significant surplus as at 1 January 2018, being the date of the last valuation) the ability to achieve and maintain this standard remains subject to market conditions, meaning that additional funding could still be required from the Group in the future. The next valuation of the UK defined benefit plan as at 1 January 2021 is currently underway and is expected to be completed during the course of 2021.

 

ITEM 4.

INFORMATION ON THE COMPANY

Pearson plc, (Pearson or the Group) is a worldwide learning company with its principal operations in the education, assessments and certifications markets. The Group delivers content, assessment and services, powered by technology, in order to drive personalized learning at scale. The Group creates and manages intellectual property, which it promotes and sells to its customers under well-known brand names. The Group delivers its content in a variety of forms and through a variety of channels, with emphasis on digital services. Though it operates in more than 70 countries around the world, today its largest markets are North America (69% of 2020 sales) and Europe (16% of 2020 sales).

Pearson was incorporated and registered in 1897 under the laws of England and Wales as a limited company and re-registered under the UK Companies Act as a public limited company in 1981. The Group conducts its operations primarily through its subsidiaries and other affiliates. Its principal executive offices are located at 80 Strand, London WC2R 0RL, United Kingdom (telephone: +44 20 7010 2000) and its website address is https://plc.pearson.com/

Overview

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 provides content across the curriculum and a range of education services including teacher development, educational software and system-wide solutions, it owns and operates colleges and schools (including virtual schools).

The Group is run as one global learning company, operating around six geographical areas (UK, Europe, US, Canada, Asia Pacific, Other countries) organized in four reporting segments (Global Online Learning, Global Assessment, North America Courseware, International). Within each geographical area, the Group provides content, assessment and digital services to schools, colleges and universities, as well as professional and vocational education to learners. The costs of Enabling Functions are reported separately.

Until April 2020, the Group owned a 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% to Bertelsmann on October 5, 2017. In December 2019, the Group announced the sale of its remaining 25% interest to Bertelsmann. The sale completed on April 1, 2020.

 

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Recent developments

On March 8, 2021, the Group announced a new strategy including a new divisional structure. Going forward the new structure will impact segmental reporting and may impact the Group’s cash generating units.

On March 5, 2021, the Group announced the disposal of its Brazilian K-12 Sistemas, COC and Dom Bosco — in Brazil, subject to securing regulatory approval and closing.

On February 26, 2021, the Group acquired Spotlight Education, a company that utilizes technology to convert education data into personalized video reports in 30 languages. Consideration payable is c$6m.

On February 5, 2021, the Group completed the sale of its interests in Pearson Institute of Higher Education (PIHE) in South Africa to a consortium of Stellenbosch Graduate Institute (SGI) and EXEO Capital for nominal consideration.

The Group’s strategy

The Group’s mission is to help people achieve their potential through learning and its vision is to be the world’s preeminent learning company, delivering the world’s most valuable learning products to more people than ever before. This is simultaneously good for our business, and good for the world, because when we demonstrate the power of learning, we grow our business and transform lives.

Following the appointment of a new CEO in October 2020, the Group announced a new strategy on March 8, 2021. The new strategy reflects evolving consumer habits, in particular the way that COVID-19 has accelerated the trend to digital-first and virtual learning. The new strategy will enhance the existing priorities and capitalize on the opportunities presented by evolving trends in our market, which the Group is well positioned to seize through its experience and expertise across the entire lifelong learning spectrum.

The strategy, based on a simpler, more agile operating model, is focused on three global market opportunities - the rise in online and digital learning tools, the workforce skills gap and the growing demand for accreditation and certification. These represent a balance between profitable markets where Pearson has a leading position, and new high growth markets where we believe we have the capabilities to grow market share rapidly.

Our strategy focuses on three priorities to unlock growth and to ensure we can quickly and effectively respond to change globally:

 

   

Consumer focused & data-led approach

 

   

Portfolio & Organizational structure

 

   

Talent & culture

We are reorganizing Pearson to focus on five new business divisions, all supported by our Direct to Consumer group. Each division will have full responsibility for its overheads, product development, and operations to enable a more agile and transparent operating model, and each will be linked to the others through our shared IP and capabilities.

Reorganizing our business and operations to focus on five business divisions to release untapped value and potential within the company.

Our five new business divisions are Virtual Learning, Higher Education, English Language Learning, Workforce Skills, and Assessment & Qualifications – all of which will be supported by our new Direct to Consumer group. These five divisions will form the foundation of the company. They are great businesses with excellent growth potential. They reinforce each other and will be the platform on which we build our direct to consumer vision. We want everyone in the world to realize the value and joy of learning, and we will help the world’s learners at every stage of life to unlock their potential in a rapidly changing world.

 

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Streamlining our portfolio to become a truly digital company

Pearson has made good progress in rationalizing its portfolio over recent years but there is still further potential. We will therefore streamline our portfolio to focus on the priorities of our five new businesses, and on our mission to become a globally scalable digital company. We will ensure that any disposals or new acquisitions support the strategic focus of the company, maintain the health of our balance sheet and deliver the best return for our shareholders. We are currently undertaking a strategic review of our international courseware local publishing businesses.

Strengthening our culture

In any organization, the internal always determines the external. At Pearson we have committed employees who really care about education and learners, who understand every dimension of learning and who understand how learning improves people’s lives. We see exciting opportunities to evolve our culture to capture the full potential of the talented people who work at Pearson, based around the four key themes of: putting the consumer at the center of everything we do; embracing diversity, equity & inclusion; collaborating across businesses and territories as one global company; and increasing our speed, agility and focus on quality.

Increasing our societal impact

Pearson has an important role to play when it comes to helping address the inequality of opportunity in learning around the world. Our recent work to promote access and inclusion in learning includes the launch of our social bond earlier this year, tied to improving learning outcomes for people across the world who need it most. We are continuing our efforts to achieve diversity across both our employee base and within our content through representation. We have developed a roadmap to become net carbon zero; and we are also enhancing our reporting structures and are reporting according to Sustainability Accounting Standards Board (SASB) for the first time this year. Being a sustainable business will contribute to Pearson’s future growth and we are committed to making a positive impact.

Our strategy reflects a new vision for Pearson and incorporates a simpler, more agile operating model focused on three global market opportunities where we can leverage our existing expertise, build on our investments in technology, and strengthen our areas of competitive advantage to reposition Pearson towards sectors and opportunities that offer strong inherent growth characteristics. All of this will be achieved with our new guiding principles:

 

   

We will put the consumer at the center of everything we do and provide them with the highest quality and best value products

 

   

We will only be in businesses that will drive growth, scale, profitability and shareholder value;

 

   

We will have the capabilities to deliver, including an entrepreneurial culture, diverse talent and effective technology;

 

   

We will move with speed and agility.

Operating divisions

Pearson is one of the leading providers of educational courseware, assessment and digital services. The Group provides test development, processing and scoring services to governments, educational institutions, corporations and professional bodies around the world. The Group publishes across the curriculum and provides a range of education services including teacher development, educational software and system-wide solutions.

In 2020, the reporting segments have been reorganized to reflect the management structure and operating model in place during the year. The primary segments for management and reporting purposes are Global Online

 

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Learning (consisting of Virtual Schools and Online Program Management), Global Assessment (consisting of Pearson VUE, US Student Assessment and Clinical Assessment), North American Courseware (consisting of courseware and services businesses in the US and Canada) and International (consisting of the courseware and other businesses outside North America and including UK Qualifications and English). The Group separately reports the costs of Enabling Functions such as enterprise technology, finance, human resources and other corporate functions. In addition, the Group has separately disclosed the results from the Penguin Random House associate (PRH) to the point of disposal in April 2020.

Operating divisions have been affected by the COVID-19 pandemic. Sales declined in the Global Assessment, North American Courseware and International divisions due to school and test center closures, the cancelation of Spring testing and budgetary pressures which impacted courseware purchasing. The pandemic accelerated the shift to digital learning which had a positive effect on Global Online Learning due to enrolment growth in Virtual Schools and growth in OPM. For details on the impact of COVID-19 on the Group’s financial results see Item 5 —“Operating and Financial Review and Prospects”

Global Online Learning

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 schools and higher education.

Pearson’s Online Learning Services (POLS) business provides higher education institutions with course design, marketing and enrolment, and course administration services for their online degree programs. These services are often referred to as Online Program Management (OPM). Pearson is a leader in the OPM market, running more than 470 programs across 34 partners globally, delivering more than 350,000 course enrolments per year across graduate and undergraduate degree programs. Demand for high quality online degree programs is increasing, and provides institutions with the valuable tools, services and guidance required to meet this demand.

Pearson’s Online and Virtual Schools consist of K12 virtual public schools across 37 states through Connections Academy, virtual private schools through Pearson Online Academy, and access to K12 online curriculum and tools directly to school districts through District Partnerships. The Pearson virtual schools system equips schools with teaching, access to proprietary curriculum and technology, and other academic and non-academic services. The business has experienced significant enrolment growth in the 2020/21 school year as a result of the COVID-19 pandemic which has accelerated the already strong growth in demand for high quality, personalized online learning. Virtual Schools now serve more than 100,000 students.

See “Item 5. Operating and Financial Review and Prospects — Results of Operations — Year Ended December 31, 2020 compared to year ended December 31, 2019 — Sales and operating profit by division — Global Online Learning” for a discussion of developments during 2020 with respect to this segment.

Global Assessment

School testing plays an integral role in understanding what students know and can do. The business is one of the largest providers of educational assessment services in the US; providing services for the U.S. Department of Education; 20 US states; Puerto Rico; large school districts, including New York City; non-profit organizations; and strategic industry partners. The business operates at scale, developing, delivering, scoring, and reporting on millions of online and paper tests each year. Working with educators and education advocates, School’s experts help develop next-generation assessments that feature technology-enhanced items, performance-based assessments, and adaptive testing to understand where students are and help them on their journey as critical thinkers ready to compete in the global economy. With a strong emphasis on equity and access for all students, especially those most at risk, Pearson experts have provided states with a roadmap to assess students fairly and validly, regardless of their instructional circumstances.

 

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The clinical assessment businesses’ solutions include learning assessments to help  gage how students learn, talent assessments to help companies develop their workforce, and clinical assessments to help psychologists and speech/ language/ hearing/ occupational and physical therapists diagnose and monitor patients.

The professional certification business, Pearson VUE (VUE), is a leading provider  of 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 20,000 test centers across the globe as well as delivering remotely proctored exams online via its OnVUE offering. The business delivers 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, Microsoft, Amazon and CompTIA.

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.

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, 2020 compared to year ended December 31, 2019 — Sales and operating profit by division — Global Assessment” for a discussion of developments during 2020 with respect to this segment.

North America Courseware

The 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 and beyond 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. The Group has a leading position in each of these areas and a distinctive strategy of connecting each element to support institutions and personalize learning. Across the US the business works with states, schools and colleges to help make education more effective, accessible and affordable for a diverse community of learners.

US Higher Education Courseware digital registrations including eBooks are more than 12 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.

See “Item 5. Operating and Financial Review and Prospects — Results of Operations — Year Ended December 31, 2020 compared to year ended December 31, 2019 — Sales and operating profit by division — North America Courseware” for a discussion of developments during 2020 with respect to this segment.

International

The International business operates in many markets outside North America. These are markets where the business works closely with educators and policy makers to improve learning through creating curriculum, designing assessments and developing digital learning systems.

Pearson is the UK’s largest awarding organization, offering academic and vocational qualifications that are globally recognized and benchmarked, with educational excellence rooted in names like Edexcel and BTEC. Learners take the business’s qualifications in many countries worldwide. Online marking technology is used to

 

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mark most 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 ActiveLearn, and through supporting skills for employability for progression in study, work and life.

In English, the Pearson Test of English supports visa applications to the Australian Department of Immigration and Border Protection and is also sold in markets such as India and China for study and immigration purposes to Australia and other countries. Pearson ELT courseware (institutional English language courses) is a significant player in the global English market, with products such as MyEnglish Lab. Our business in Brazil includes English language school franchises as well as serving primary and secondary education with its ‘sistemas’ or learning systems which include COC, Dom Bosco and NAME.

Following our announcement in March 2021, the Group is in the process of selling its Brazilian Sistemas business.

In South Africa, Italy and Hong Kong the business is one of the largest players in the school textbook market. We are currently launching a strategic review of our international courseware local publishing businesses.

See “Item 5. Operating and Financial Review and Prospects — Results of Operations — Year Ended December 31, 2020 compared to year ended December 31, 2019 — Sales and operating profit by division — International” for a discussion of developments during 2020 with respect to this segment.

Penguin Random House

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. The Group completed the sale of 22% of Penguin Random House to Bertelsmann on October 5, 2017. The Group announced the sale of its remaining 25% stake in Penguin Random House to Bertelsmann in December 2019, accounting for the investment as held for sale as at December 31, 2019. The transaction was completed on April 1, 2020.

See “Item 5. Operating and Financial Review and Prospects — Results of Operations — Year ended December 31, 2020 compared to year ended December 31, 2019 — Sales and operating profit by division — Penguin Random House” for a discussion of developments during 2020 with respect to Penguin Random House.

Operating cycles

The Group determines a normal operating cycle separately for each entity/cash generating unit 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

 

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years. The Company renews its pre-publication assets to meet the market adoption cycles. Therefore, the operating cycle naturally follows the market cycle. Since the sale of the Group’s US K12 business, which completed in March 2019, the school operating cycle in North America has become less important than in previous years.

 

   

The Higher Education courseware market has historically had 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 its pre-publication assets to meet the typical demand for new editions of, or revisions to, educational programs. Analysis of historical data shows that the typical life cycle of Higher Education content is up to 5 years but increasingly the Group’s strategy of increasing the focus on digital product is likely to mean shorter cycles with content being refreshed more regularly with smaller updates than would be the case for physical product. In addition to content the Group also develops technology platforms for products and the life cycle for these platforms can be in excess of the 5 years cycle for content. Again, the operating cycle for content and platforms mirrors the market cycle.

Historically 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 International courseware markets operate in a similar way although often with less formal ‘adoption’ processes.

The operating cycles in respect of the Group’s professional and clinical content are more specialized in nature as they relate to educational or heavy reference products released into smaller markets (e.g. the financial training and IT 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 and 7 years for Clinical content. Elsewhere in the Group, operating cycles are typically less than one year.

Competition

The Group’s businesses operate in highly competitive environments.

The 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.

In services, the Group competes with companies such as Stride in virtual schools and 2U Inc. in Online Program Management, alongside smaller niche players that specialize in a particular academic discipline or focus on a learning technology.

In Global 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 International 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 Academic competes with alternative tests including iELTS and TOEFL.

 

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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.

Intellectual property

The Group’s principal intellectual property assets consist of its:

 

   

trademarks and other rights via its brands (including corporate and business unit brands, imprints, as well as product and service brands);

 

   

copyrights for its textbook and related educational content and software code; and

 

   

patents and trade secrets related to the innovative methods deployed in its key technologies.

The Group believes it has taken all reasonable legal steps to protect its key brands in its major markets and copyright in its content and has taken appropriate steps to develop a comprehensive patent program to ensure appropriate protection of emerging inventions that are critical to its new business strategies.

Raw materials

Paper remains the principal raw material used by the Group. The Group purchases most of its paper through its global outsourcing partner LSC Communications located in the United States. The Group has not experienced and does not anticipate difficulty in obtaining adequate supplies of paper for its operations, with sourcing available from numerous suppliers. While local prices fluctuate depending upon local market conditions, the Group has not experienced extensive volatility in fulfilling paper requirements. In the event of a sharp increase in paper prices, the Group has a number of alternatives to minimize the impact on its operating margins, including modifying the grades of paper used in production.

Government regulation

The manufacture of certain products in various markets is subject to governmental regulation relating to the discharge of materials into the environment. Operations are also subject to the risks and uncertainties attendant to doing business in numerous countries. Some of the countries in which the Group conducts these operations maintain controls on the repatriation of earnings and capital and restrict the means available for hedging potential currency fluctuation risks. The operations that are affected by these controls, however, are not material. Accordingly, these controls have not significantly affected the Group’s international operations. Regulatory authorities may have enforcement powers that could have an impact. The Group believes, however, that in light of the nature of its business the risk of these sanctions does not represent a material threat.

Licenses, patents and contracts

The Group is not dependent upon any particular licenses, patents or new manufacturing processes that are material to its business or profitability. Likewise, it is not materially dependent upon any particular contracts with suppliers or customers, including contracts of an industrial, commercial or financial nature. Notwithstanding the foregoing, the Group’s education business is dependent upon licensed rights since most textbooks and digital learning tools include content and/or software that is licensed to it by third parties (or assigned subject to royalty arrangements). In addition, some software products in various business lines, particularly those of its Clinical business, rely upon patents licensed from third parties.

Legal proceedings

The Group and its subsidiaries are from time to time the subject of legal proceedings incidental to the nature of its and their operations. These may include private litigation or arbitrations, governmental proceedings and

 

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investigations by regulatory bodies. Pearson is one of several defendants named in 14 US lawsuits and one Canadian antitrust lawsuit related to the Group’s Inclusive Access programmes. These lawsuits, purporting to be class actions, have been brought on behalf of students and off campus retailers alleging, among other things, that Pearson’s Inclusive Access programmes violate US and Canadian antitrust laws and state or provincial laws by reducing competition from the secondary market and off campus retailers. Motions to dismiss have been filed by all defendants in the US lawsuits and a ruling is expected later in 2021. The Group does not currently expect that the outcome of pending proceedings or investigations, either individually or in aggregate, will have a significant effect on its financial position or profitability nor have any such proceedings had such effect in the recent past. The Group is not aware of material proceedings in which any member of senior management or any of its affiliates is a party adverse to it or any of its subsidiaries or in respect of which any of those persons has a material interest adverse to it or any of its subsidiaries.

Organizational structure

Pearson plc is a holding company which conducts its business primarily through subsidiaries and other affiliates throughout the world. Below is a list of its significant subsidiaries as at December 31, 2020, including name, country of incorporation or residence, proportion of ownership interest and, if different, proportion of voting power held.

 

Name power

  

Country of incorporation/residence

  

Percentage
interest/voting

Pearson Education Inc.

   United States (Delaware)    100%

Pearson Education Ltd.

   England and Wales    100%

NCS Pearson Inc.

   United States (Minnesota)    100%

In October 2017, the Group disposed of 22% of Penguin Random House to Bertelsmann, and in December 2019 it announced the sale of its remaining 25% interest to Bertelsmann. The disposal completed on April 1, 2020.

On May 5, 2017, the Group announced that it was undertaking a strategic review of its US K12 courseware business. The US K12 business was classified as held for sale on the Group’s balance sheet as at December 31, 2017 and December 31, 2018. On March 29, 2019 the Group completed the sale of its US K12 courseware business to Nexus Capital Management LP resulting in a pre-tax profit on sale of $13m.

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 disposal completed on March 15, 2018.

In November 2020, the Group announced the sale of its interests in Pearson Institute of Higher Education (PIHE) in South Africa. The business was classified as held for sale on the Group’s balance sheet as at December 31, 2020. The sale completed on February  5, 2021.

Property, plant and equipment

The Group’s headquarters are located at leasehold premises in London, England. As at December 31, 2020 it owned or leased approximately 740 properties, including approximately 594 testing/teaching centers in over 58 countries worldwide, the majority of which are located in the United Kingdom and the United States. 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 the 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.

 

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The vast majority of printing is carried out by third party suppliers. The Group operates a small digital print operation as part of its Pearson Assessment & Testing businesses which provides short-run and print-on-demand products, typically custom client applications.

The Group owns the following principal properties at December 31, 2020:

 

General use of property

  

Location

   Area in square feet  

Office

   Iowa City, Iowa, USA      312,760  

Warehouse/Office

   Cedar Rapids, Iowa, USA      205,000  

Printing

   Owatonna, Minnesota, USA      128,000  

The Group leased the following principal properties at December 31, 2020:

 

General use of property

  

Location

   Area in square feet  

Teaching center

   Midrand, South Africa      273,274  

Office

   Westminster, London, UK      300,503  

Office

   Hoboken, New Jersey, USA      216,273  

Office

   Bloomington, Minnesota, USA      147,159  

Teaching center

   Pretoria, South Africa      134,553  

Office

   Boston, Massachusetts, USA      122,548  

Warehouse/Office

   Cedar Rapids, Iowa, USA      119,682  

Office

   San Antonio, Texas, USA      117,063  

Warehouse

   Naucalpan de Juarez, Mexico      113,638  

Capital Expenditures

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 2020 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 international accounting standards in conformity with the requirements of the Companies Act 2006. In addition, the consolidated financial statements have been prepared in accordance with international financial reporting standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union (‘EU-adopted IFRS’). The consolidated financial statements have also been prepared in accordance with the International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). At the balance sheet date there is no difference between IFRS in conformity with the Companies Act 2006, the EU-adopted IFRS and IASB issued IFRS.

Where this discussion refers to constant currency comparisons, these are estimated by re-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. The Group believes this presentation provides a more useful period to period comparison as changes due solely to movements in exchange rates are eliminated.

 

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From January 1, 2020, the Group has reorganized and is reporting for the first time new segmental analysis to reflect the management structure and operating model in place during the year. The primary segments for management and reporting purposes are Global Online Learning (consisting of Virtual Schools and Online Program Management), Global Assessment (consisting of Pearson VUE, US Student Assessment and Clinical Assessment), North American Courseware (consisting of courseware and services businesses in the US and Canada) and International (consisting of the courseware and other businesses outside North America and including UK Qualifications and English). The Group separately reports the costs of Enabling Functions such as enterprise technology, finance, human resources and other corporate functions. In addition, the Group has separately disclosed the results from the Penguin Random House associate (PRH) to the point of disposal in April 2020.

All figures for 2019 and 2018 have been restated to reflect 2020 segments.

General overview

Introduction

The Group’s primary segments for management and reporting are as follows:

 

   

Global Online Learning — Virtual Schools and Online Program Management.

 

   

Global Assessment — Pearson VUE, US Student Assessment and Clinical Assessment.

 

   

North American Courseware — Courseware and services businesses in the US and Canada.

 

   

International — Courseware and other businesses outside North America and including UK Qualifications and English.

The Group separately reports the costs of Enabling Functions such as enterprise technology, finance, human resources and other corporate functions. In addition, the Group has separately disclosed the results from the Penguin Random House associate to the point of disposal in April 2020.

On March 15, 2018, the Group completed the sale of Wall Street English (WSE) to a consortium of funds affiliated with Baring Private Equity Asia and CITIC Capital realizing a profit before tax of £207m. The business had been classified as held for sale at December 31, 2017.

On March 29, 2019, the Group completed the sale of the US K12 courseware business (K12) to Nexus Capital Management LP for headline consideration of $250m comprising an initial cash payment of $25m and an unconditional vendor note for $225m expected to be repaid in three to seven years. The K12 business had been held for sale on the balance sheet following a strategic review and discussion with potential buyers since the end of 2017 until the disposal in 2019.

In December 2019, the Group announced the sale of its remaining 25% interest in Penguin Random House. At the end of December 2019, the Group’s share of the assets of PRH was classified as held for sale on the balance sheet. In April 2020, the Group completed the sale of the remaining 25% interest in Penguin Random House to Bertelsmann, generating net proceeds of £531m and resulting in a pre-tax profit of £180m.

In November 2020, the Group announced the sale of its interests in Pearson Institute of Higher Education (PIHE) in South Africa. At the end of December 2020, the assets and liabilities of PIHE have been classified as held for sale on the balance sheet. The sale completed on February 5, 2021 for nominal consideration.

None of the disposals referred to above were significant enough to meet the definition of a discontinued business and their results to the date of disposal are included in continuing operations.

The Group’s total sales decreased from £3,869m in 2019 to £3,397m in 2020, a decrease of £472m or 12%. This year on year decrease was impacted by currency movements, primarily the comparative weakness of the US

 

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dollar relative to sterling during the year. In 2020 currency movements decreased sales by £31m when compared to the equivalent figures at constant 2019 rates. When measured at 2019 constant exchange rates, the Group’s sales declined by 11%. Part of the decrease is due to the absence of sales from businesses sold during 2019 and 2020. The Group estimates that after excluding the impact of disposals sales in 2020 declined by 10% compared to 2019 at constant exchange rates. Sales decline was seen across all business segments except for Global Online Learning which saw strong growth year on year.

In 2020, the Group reported an operating profit of £411m compared to an operating profit of £275m in 2019. The increase in profit of £136m is mainly due to the gain on sale of PRH, the reduction in restructuring costs and the reduction in intangible charges, which were more than enough to offset the impact of COVID-19 on trading profits. After stripping out the effect of the sale of businesses, intangible charges, restructuring costs and the impact of currency movements, profits from trading decreased by around £210m. This underlying trading decrease was primarily due to the impact of COVID-19 on trading in the Global Assessment and International segments, continued pressure in the US Higher Education Courseware market, partly offset by growth in the Global Online Learning segment and cost savings in the Enabling Functions.

In May 2017, we announced a restructuring program, to run between 2017 and 2019, to drive significant cost savings. This program began in the second half of 2017 and costs incurred relate to delivery of cost efficiencies in our enabling functions and US higher education courseware business together with further rationalization of the property and supplier portfolio. The restructuring costs in 2019 relate predominantly to staff redundancies. The restructuring program was largely completed at the end of 2019.

Operating profit in 2020 includes a gain of £178m which largely relates to the sale of the remaining interest in PRH (£180m gain) and impairments of assets and other costs relating to the disposal of Pearson Institute of Higher Education (£8m loss). In 2019, gains of £16m largely relate to the sale of the US K12 business.

Currency movements increased 2020 operating profit by £1m when compared to the equivalent figures translated at constant 2019 exchange rates.

The profit before taxation in 2020 of £354m compares to a profit before taxation of £232m in 2019. The increase in profit of £122m reflects the £136m increase in the reported operating profit identified above offset by an increase in net finance costs of £14m, from £43m in 2019 to £57m in 2020.

The Group’s net interest payable increased from £41m in 2019 to £61m in 2020. The increase is mainly due to interest on tax with credits recorded in 2019 not being repeated in 2020, and interest charges on the bond raised in June 2020. Also included in net finance costs are net finance costs relating to employee benefit plans, foreign exchange and other gains and losses. In 2020 the total of these items was a gain of £4m compared to a loss of £2m 2019. Net finance income relating to retirement benefits decreased from £13m in 2019 to £6m in 2020 reflecting the comparative funding position of the plans at the beginning of each year and lower prevailing discount rates. In 2020, finance income of £26m relating to the revaluation of the US K12 disposal proceeds was recorded and there were increases in losses on long-term interest rate hedges and increases in foreign exchange losses on unhedged inter-company loans and cash and cash equivalents in 2020 compared to 2019.

The reported tax charge in 2020 was £44m (12.5%) compared to a credit of £34m (14.7%) in 2019. The statutory tax credit in 2019 was primarily due to US tax losses generated on the disposal of the US K12 business.

Net cash generated from operations decreased to £450m in 2020 from £480m in 2019. The decrease in cash generated from operations is largely explained by the drop-through of reduced profit due to COVID-19, offset by improved working capital.

Net interest paid at £50m in 2020 compares to £64m in 2019 and reflects a reduction in interest on lease liabilities and a reduction in payments relating to FX contracts. Tax received in 2020 was £2m compared to tax paid of £30m in 2019 with the decrease mainly explained by refunds received in the US and UK relating to historical periods, the settlement of a historical tax audit and the impact of the disposal of our US K12 business.

 

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Capital expenditure on property, plant and equipment was £53m in 2020 compared to £55m in 2019. There were no material property sales in 2019 or 2020. Capital expenditure on software intangibles decreased from £138m in 2019 to £81m in 2020. The reduction in expenditure on intangible capital reflects the reduction in investment in enabling function technology as the digital transformation program comes to an end.

Cash outflow from acquisitions in 2020 was £12m compared to £97m in 2019. There were no significant acquisitions in 2020, the net cash outflow on acquisition of subsidiaries in 2020 relates to deferred payments for prior year acquisitions and investment purchases. There were two small acquisitions in 2019, Lumerit and Smart Sparrow which together accounted for £40m of cash consideration, £40m of additional capital was invested in PRH, with the balance of the cash outflow on acquisitions in 2019 being in relation to investments and prior year items. The net cash inflow in respect of businesses and investments disposed was £631m in 2020 compared to a net outflow of £96m in 2019. In 2020 the cash received largely related to the disposal of PRH and the partial repayment of the receivable held in relation to the disposal of the US K12 business. In 2019 the cash outflow mainly relates to the US K12 Courseware business and reflects the deferral of proceeds and the level of working capital in the business at the disposal date.

Dividends from joint ventures and associates decreased from £64m in 2019 to £4m in 2020. The reduction is primarily due to the fact that the PRH disposal completed in April 2020. Dividends paid to company shareholders in 2020 of £146m compares to £147m in 2019. Cash returned to shareholders via the share buyback program in H1 2020 amounted to £176m in 2020. Treasury share purchases in 2020 in respect of employee share plans were £6m compared to £52m in 2019.

Overall the Group’s net borrowings decreased from £1,016m at the end of 2019 to £463m at the end of 2020. In addition to the cash flows referred to above, the adoption of IFRS 16 added £666m of net debt on transition after taking account of both lease liabilities and the investment in finance lease receivable brought on balance sheet at January 1, 2019.

Outlook

On March 8, 2021 the Group announced its expectations for revenue and adjusted operating profit growth in 2021. Adjusted operating profit is the key financial measure used by management to evaluate the performance of the Group and allocate resources to business segments over time by separating out those items of income and expenditure relating to acquisitions and disposals, major restructuring programs and certain other items that are not representative of underlying performance. Reconciliations of adjusted operating profit to statutory operating profit are included below under ‘Sales and operating profit by segment’ and in note 2 within Item 18 — Financial Statements. Due to the difficulty in making accurate forecasts of some of the information excluded from adjusted operating profit, the Group is unable to quantify expected 2021 statutory operating profit without unreasonable efforts, and consequently, no statement thereof, and no reconciliation of the Group’s expected 2021 adjusted operating profit thereto, is included.

The 2021 outlook is based on the following:

 

   

Good growth in Virtual Learning, driven by the Virtual Schools 20/21 academic year enrolment growth. Enrolments for the 21/22 academic year expected to be broadly flat, with the ‘covid cohort’ partially returning to bricks and mortar schools, offset by underlying growth, and waiting lists. Online Program Management (OPM) is also expected to grow.

 

   

Assessment & Qualifications revenue growth as lockdowns and social distancing ease. Expect impacted test centers to start reopening — with social distancing — in April, and normal operations to resume progressively in H2 2021. US school assessments expected to resume, and clinical tests to be taken as schools reopen. UK exams canceled with modest profit impact as teacher assessment to replace exams.

 

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English Language Learning revenue expected to improve as mobility, migration and school purchasing recover slowly amidst continuing COVID-19 restrictions.

 

   

Higher Education revenue to decline, but by less than seen in recent years, as the print base becomes smaller, and as the pricing pressure from the change in mix from print and bundles, to platform and eTexts, is offset by recapture of the secondary market driven by eText growth and the digital first strategy, and enrolment recovery.

 

   

Workforce Skills revenue expected to grow, given the strong business fundamentals and investments made into digital and direct to consumer opportunities.

 

   

Revenue phasing will be impacted by current conditions, with Q1 sales behind a challenging 2020 comparative, with growth expected in Q2 and Q3 assuming further pandemic recovery, with the delivery of pent up testing demand in H2 2020 providing a tougher comparative.

The Group sets out in note 11 within Item 18 — Financial Statements, as part of its assessment of goodwill for impairment, the sensitivity to impairment resulting from reasonably possible changes in key assumptions. It is highlighted that a relatively small reduction in contribution, that could arise from longer-term disruption caused by the COVID-19, may result in impairment charges.

In assessing the Group’s liquidity, the impact of the COVID-19 pandemic has been modeled under several scenarios to ensure that the likelihood of a prolonged period of disruption has been appropriately considered in assessing the availability of funding to the Group and the ability of the Group to comply with its banking covenants. The modeling includes a severe reduction in revenue, profit and operating cash flow that extends through the full three-year period to ensure that the Group has adequate resources to manage for a prolonged period of disruption.

In assessing the Group’s ability to continue as a going concern for the period to June 30, 2022, the board analyzed a variety of downside scenarios including a severe but plausible scenario where the Group is impacted by all principal risks from 2021 (weighted for probability of occurrence) as well as reverse stress testing to identify what would be required to either breach covenants or run out of liquidity. The severe but plausible scenario modeled an impact from COVID-19 and other risks which in aggregate were significantly greater than seen in 2020 continuing throughout 2021 to 2022.

At December 31, 2020, the Group had available liquidity of c£1.9bn, comprising central cash balances and its undrawn $1.19bn Revolving Credit Facility (RCF) maturing February 2024. Even under a severe downside case where further declines in profitability compared to 2020 are modeled in 2021 and 2022, the Group would maintain liquidity headroom in excess of £800m and sufficient headroom against covenant requirements during the period under assessment even before modeling the mitigating effect of actions that management would take in the event that these downside risks were to crystallize.

 

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Sales information by segment

The following table shows sales information for each of the past three years by segment:

 

     Year ended December 31  
     2020      2019      2018  
   £m      £m      £m  

Global Online Learning

     697        586        521  

Global Assessment

     892        1,031        955  

North American Courseware

     894        1,091        1,461  

International

     914        1,161        1,192  
  

 

 

    

 

 

    

 

 

 

Total continuing operations

     3,397        3,869        4,129  
  

 

 

    

 

 

    

 

 

 

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  
     2020      2019      2018  
     £m      £m      £m  

Europe

     535        629        623  

North America

     2,426        2,522        2,7536  

Asia Pacific

     251        441        455  

Other countries

     185        277        298  
  

 

 

    

 

 

    

 

 

 

Total continuing operations

     3,397        3,869        4,129  
  

 

 

    

 

 

    

 

 

 

In the table above sales are allocated based on the country in which the customer is located.

Exchange rate fluctuations

The Group earns a significant proportion of its 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:$1.28 in 2020, £1:$1.28 in 2019 and £1:$1.34 in 2018. Fluctuations in exchange rates can have a significant impact on the Group’s reported sales and profits. In 2020, the Group generated 69% of its continuing sales in the US (2019: 62%; 2018: 64%). In 2020 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 its reported earnings per share of approximately 5.3p. See “Item 11. Quantitative and Qualitative Disclosures about Market Risk” for more information on how foreign exchange risk is managed. The year-end US dollar rate for 2020 was £1:$1.37 compared to £1:$1.32 for 2019 and £1:$1.27 for 2018. The total impact on shareholders’ funds of foreign exchange translation was a loss of £179m in 2020 compared to a loss of £111m in 2019. 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.

Critical accounting policies

The 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 these 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) in “Item 18. Financial Statements”.

 

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Results of operations

Year ended December 31, 2020 compared to year ended December 31, 2019

Consolidated results of operations

Sales

The Group’s total sales decreased from £3,869m in 2019 to £3,397m in 2020, a decrease of £472m or 12%. This year on year decrease was impacted by currency movements, primarily the comparative weakness of the US dollar relative to sterling during the year. In 2020 currency movements decreased sales by £31m when compared to the equivalent figures at constant 2019 rates. When measured at 2019 constant exchange rates, the Group’s sales declined by 11%. Part of the decrease is due to the absence of sales from businesses sold during 2019 and 2020. The Group estimates that after excluding the impact of disposals sales in 2020 declined by 10% compared to 2019 at constant exchange rates. Sales decline was seen across all business segments except for Global Online Learning which saw strong growth year on year.

Global Online Learning sales increased by £111m or 19% from £586m in 2019 to £697m in 2020. The Group estimates that after excluding the impact of exchange rates, the contribution from businesses disposed in 2019 and 2020, Global Online Learning sales increased by 18% in 2020 compared to 2019. The sales growth reflects strong enrolment growth in Virtual Schools and good growth in OPM.

Global Assessment sales decreased by £139m or 13% from £1,031m in 2019 to £892m in 2020. The Group estimates that after excluding the impact of exchange rates, the contribution from businesses disposed in 2019 and 2020, Global Assessment sales decreased by 14% in 2020 compared to 2019. Sales declined 10% at Pearson VUE reflecting the impact of the test center closures in the first half of the year offset by pent up demand in the second half partially moderated by further lockdowns in Q4. Online Proctoring saw strong growth in the year with volumes up from 0.2m at the end of 2019 to 2.1m at the end of 2020 predominantly driven by demand from the IT sector. Overall testing volumes were down 22% to 12.9m due to test center closures. In School and Clinical Assessment, cancelation of Spring testing and school closures impacted both businesses respectively in H1 with a further modest impact due to COVID-19 in H2.

North America Courseware sales decreased by £197m or 18% from £1,091m in 2019 to £894m in 2020. The Group estimates that after excluding the impact of exchange rates, the contribution from businesses disposed in 2019 and 2020, North America Courseware sales decreased by 13% in 2020 compared to 2019. In US Higher Education Courseware sales declined 12% with total unit sales increasing slightly and digital registrations including eBooks growing 9%. In Canada, courseware sales were down significantly due to school and bookstore closures. The sales decline also reflects the disposal of the US K12 business in 2019.

International sales decreased by £247m or 21% from £1,161m in 2019 to £914m in 2020. The Group estimates that after excluding the impact of exchange rates, the contribution from businesses disposed in 2019 and 2020, International sales decreased by 19% in 2020 compared to 2019. The sales decline reflects the interruption of Australian immigration and test center closures impacting PTE, as well as budgetary pressures caused by the impact of COVID-19 on courseware purchasing.

 

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Cost of goods sold and operating expenses

The following table summarizes the Group’s cost of sales, net operating expense and other net gains and losses:

 

         Year ended December 31      
     2020      2019  
     £m      £m  

Cost of goods sold

     1,767        1,858  

Operating expenses:

     

Distribution costs

     59        73  

Selling, marketing and product development costs

     572        631  

Administrative and other expenses

     816        999  

Restructuring costs

     —          157  

Other income

     (45      (54
  

 

 

    

 

 

 

Total net operating expenses

     1,402        1,806  

Other net gains

     (178      (16
  

 

 

    

 

 

 

Total continuing operations

     2,991        3,648  
  

 

 

    

 

 

 

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. The Group’s cost of sales decreased by £91m, or 5%, from £1,858m in 2019, to £1,767m in 2020. The decrease largely reflects the decrease in sales but also includes some continuing benefit from restructuring. In addition, cost of sales as a percentage of sales increased largely as a result of the mix effect caused by a sales decline in businesses with generally higher gross margins than Pearson as a whole. Cost of sales was 52.0% of sales in 2020 compared to 48.0% in 2019.

Distribution costs. Distribution costs consist primarily of shipping costs, postage and packing. Distribution costs decreased by £14m reflecting the flow through of restructuring savings, the absence of costs from businesses disposed and the decrease in physical print sales.

Selling, marketing and product development costs. The Group’s selling, marketing and product development costs decreased by £59m or 9% from £631m in 2019 to £572m in 2020. The decrease is explained by the absence of costs from businesses disposed, the flow through of restructuring savings and a drive to reduce costs due to the impact of COVID-19. As a percentage of sales, these costs increased slightly in 2020 from 16.3% in 2019 to 16.8% in 2020.

Administrative and other expenses. The Group’s administrative and other expenses decreased by £183m or 18% from £999m in 2019 to £816m in 2020. The decrease is explained by the absence of costs from businesses disposed, the flow through of restructuring savings, a drive to reduce costs due to the impact of COVID-19and the impact of lower intangible charges. In 2019 intangible charges included an additional £65m impairment charge relating to acquired intangibles in the Brazil business following a reassessment of the relative risk in that market.

Restructuring costs. Restructuring costs of £157m in 2019 relate to the 2017-2019 restructuring program announced in May 2017. This program began in the second half of 2017 and costs incurred related to delivery of cost efficiencies in enabling functions and the US higher education courseware business together with further rationalization of the property and supplier portfolio. The restructuring costs in 2019 relate predominantly to staff redundancies. The restructuring program was largely completed at the end of 2019.

 

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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 service fee income from Penguin Random House. Other operating income decreased to £45m in 2020 compared to £54m in 2019 mainly due to reductions in freight charges.

Other net gains and losses. In 2020 other net gains and losses largely relate to the sale of the remaining interest in PRH (£180m gain) and impairments of assets and other costs relating to the disposal of Pearson Institute of Higher Education (£8m loss). In 2019, other net gains largely relate to the sale of the US K12 business.

Share of results of joint ventures and associates

The contribution from the Group’s joint ventures and associates decreased by £49m to £5m in 2020 from £54m in 2019. The decrease is mainly due to the disposal of the 25% interest in Penguin Random House in April 2020.

Operating profit

In 2020, the Group reported an operating profit of £411m compared to an operating profit of £275m in 2019. The increase in profit of £136m is mainly due to the gain on sale of PRH, the reduction in restructuring costs and the reduction in intangible charges, which were more than enough to offset the impact of COVID-19 on trading profits. After stripping out the effect of the sale of businesses, intangible charges, restructuring costs and the impact of currency movements, profits from trading decreased by around £210m. This underlying trading decrease was primarily due to the impact of COVID-19 on trading in the Global Assessment and International segments, continued pressure in the US Higher Education Courseware market, partly offset by growth in the Global Online Learning segment and cost savings in the Enabling Functions.

Net finance costs

Net finance costs increased by £14m from £43m in 2019 to £57m in 2020. The Group’s net interest payable increased from £41m in 2019 to £61m in 2020. The increase is mainly due to interest on tax with credits recorded in 2019 not being repeated in 2020, and interest charges on the bond raised in June 2020. Also included in net finance costs are net finance costs relating to employee benefit plans, foreign exchange and other gains and losses. In 2020 the total of these items was a gain of £4m compared to a loss of £2m 2019. Net finance income relating to retirement benefits decreased from £13m in 2019 to £6m in 2020 reflecting the comparative funding position of the plans at the beginning of each year and lower prevailing discount rates. In 2020, finance income of £26m relating to the revaluation of the US K12 disposal proceeds was recorded and there were increases in losses on long-term interest rate hedges and increases in foreign exchange losses on unhedged inter-company loans and cash and cash equivalents in 2020 compared to 2019.

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 reported tax charge in 2020 was £44m (12.5%) compared to a credit of £34m (14.7%) in 2019. The decrease in the effective tax rate is mainly due to a benefit from the release of tax provisions due to the expiry of the relevant statute of limitation. The statutory tax credit in 2019 was primarily due to US tax losses generated on the disposal of the US K12 business. In February 2021, the Group received charging notices requiring payment of materially all of the alleged State Aid. A payment of £100m was made on 8 March 2021. The Group expects to recover the funds in due course.

Discontinued operations

There were no discontinued operations in either 2019 or 2020.

 

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Profit for the year

The profit for the financial year in 2020 was £310m compared to a profit in 2019 of £266m. The increased profit reflects increased operating profit offset by higher net finance costs and a higher tax charge.

Earnings 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 41.0p in 2020 compared to 34.0p in 2019 based on a weighted average number of shares in issue of 755.4m in 2020 and 777.0m in 2019. The increase in earnings per share was due to the increase in profit for 2020 as described above and was impacted by the decrease in the number of weighted average number of shares in 2020 compared to 2019 which mainly arise as a result of the share buy back in 2020.

The diluted earnings per ordinary share was 41.0p in 2020 and 34.0p in 2019 , with the dilutive effect of options being minimal.

Exchange rate fluctuations

Currency movements decreased sales by £31m and increased operating profit by £1m. 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 the performance of the Group and allocate resources to business segments over time by separating out those items of income and expenditure relating to acquisitions and disposals, major restructuring programs and certain other items that are not representative of underlying performance. Reconciliations of adjusted operating profit to statutory operating profit are included below and in note 2 within Item 18 — Financial Statements.

In the Group’s adjusted operating profit, it has excluded other net gains and losses, acquisition related costs, amortization and impairment of acquired intangibles and the cost of major restructuring programs. 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 are non-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.

 

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A reconciliation of operating profit to adjusted operating profit for continuing operations is included in the tables below:

 

     Year ended December 31, 2020  
     Global
Online
Learning
    Global
Assessment
    North
American
Courseware
    International     Enabling
Functions
    PRH     Total  
     £m     £m     £m     £m     £m     £m     £m  

Sales

     697       892       894       914       —         —         3,397  
     21     26     26     27     —         —         100

Total operating profit / (loss)

     70       209       193       162       (404     181       411  

Add back:

              

Cost of major restructuring

     —         —         —         —         —         —         —    

Intangible charges

     29       36       —         15       —         —         80  

Other net gains and losses

     —         —         (3     5       —         (180     (178
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total adjusted operating profit

     99       245       190       182       (404     1       313  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     Year ended December 31, 2019  
     Global
Online
Learning
    Global
Assessment
    North
American
Courseware
    International     Enabling
Functions
    PRH      Total  
     £m     £m     £m     £m     £m     £m      £m  

Sales

     586       1,031       1,091       1,161       —         —          3,869  
     15     27     28     30     —         —          100

Total operating profit / (loss)

     49       317       193       189       (524     51        275  

Add back:

               

Cost of major restructuring

     —         7       51       24       75       2        159  

Intangible charges

     35       27       —         89       —         12        163  

Other net gains and losses

     —         —         (13     (3     —         —          (16
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total adjusted operating profit

     84       351       231       299       (449     65        581  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Global Online Learning

Global Online Learning sales increased by £111m or 19% from £586m in 2019 to £697m in 2020 and adjusted operating profit increased by £15m or 18% from £84m in 2019 to £99m in 2020. The Group estimates that after excluding the impact of exchange rates, the contribution from businesses disposed in 2019 and 2020, Global Online Learning sales increased by 18% in 2020 compared to 2019 and adjusted operating profit also increased by 23%. The sales growth reflects strong enrolment growth in Virtual Schools and good growth in OPM. Adjusted operating profit growth was due to margin on sales growth more than offsetting the investment in our virtual schools platform and customer care support and margin impact in OPM due to discontinued programs. Headline profit grew 18% with good growth in adjusted operating profit partially offset by FX and portfolio changes.

Virtual Schools performed strongly driven by 43% enrolment growth in new and existing schools for the 2020/2021 academic year. We opened three new full-time, state-wide partner schools, and combined with two contract exits this takes the total partner schools to 43 in 29 states. We are launching two new partner schools in Florida and Oregon for the 2021/2022 academic year.

In OPM, we saw good sales growth with a strong performance in undergraduate and international, partially offset by discontinued programs. We also saw the benefits of the operational changes made earlier this year, with increased efficiencies in our student recruitment process and student acquisition costs. Underlying course

 

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enrolments (excluding discontinued programs) grew 20% and total course enrolments declined 7%. We are delivering 470 programs across 34 partners globally. We launched Pearson Pathways, a digital marketplace that provides learners with tailored recommendations for courses and credentials to help them achieve the skills they require.

The Global Online Learning results also include intangible charges of £29m in 2020 compared to £35m in 2019 reflecting lower acquisition activity in recent years.

Global Assessment

Global Assessment sales decreased by £139m or 13% from £1,031m in 2019 to £892m in 2020 and adjusted operating profit decreased by £106m or 30% from £351m in 2019 to £245m in 2020. The Group estimates that after excluding the impact of exchange rates, the contribution from businesses disposed in 2019 and 2020, Global Assessment sales decreased by 14% in 2020 compared to 2019 and adjusted operating profit also decreased by 30%. Sales declined 10% at Pearson VUE reflecting the impact of the test center closures in the first half of the year offset by pent up demand in the second half partially moderated by further lockdowns in Q4. Online Proctoring saw strong growth in the year with volumes up from 0.2m at the end of 2019 to 2.1m at the end of 2020 predominantly driven by demand from the IT sector. Overall testing volumes were down 22% to 12.9m due to test center closures. In School and Clinical Assessment, cancelation of Spring testing and school closures impacted both businesses respectively in H1 with a further modest impact due to COVID-19 in H2.

Adjusted operating profit declined 30% due to the COVID-19 impact on trading, partially offset by mitigating actions.

The Global Assessment results also include intangible charges of £36m in 2020 compared to £27m in 2019 reflecting impairments of £12m made in 2020. Major restructuring costs were £7m in 2019 and £nil in 2020.

North American Courseware

North America Courseware sales decreased by £197m or 18% from £1,091m in 2019 to £894m in 2020 and adjusted operating profit decreased by £41m or 18% from £231m in 2019 to £190m in 2020. The Group estimates that after excluding the impact of exchange rates, the contribution from businesses disposed in 2019 and 2020, North America Courseware sales decreased by 13% in 2020 compared to 2019 and adjusted operating profit also decreased by 20%. In US Higher Education Courseware sales declined 12% with total unit sales increasing slightly and digital registrations including eBooks growing 9%. In Canada, courseware sales were down significantly due to school and bookstore closures. The sales decline also reflects the disposal of the US K12 business in 2019. Adjusted operating profit declined 18% due to the impact of trading partially offset by restructuring and discretionary savings and the disposal of our US K12 courseware business in 2019.

The Group continued to see unbundling of premium priced print and digital products for digital only formats. In 2020 2.2m textbooks were sold into US Higher Education colleges, compared with 3.7m in 2019. Sales of standalone eBook units into colleges grew 33% to 3.7m units, showing signs of secondary market recapture. There has also been continued momentum in Inclusive Access with sales to not-for-profit institutions up 29% on last year representing 13% of US Higher Education Courseware revenue.

The North American Courseware results also include other net gains and losses of £3m gain in 2020 compared to a £13m gain in 2019. In 2019 these primarily relate to the gain on sale of the US K12 business and in 2020 they relate to favorable adjustments to prior year disposal costs. Major restructuring costs in 2019 were £51m and are £nil in 2020.

 

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International

International sales decreased by £247m or 21% from £1,161m in 2019 to £914m in 2020 and adjusted operating profit decreased by £117m or 39% from £299m in 2019 to £182m in 2020. The Group estimates that after excluding the impact of exchange rates, the contribution from businesses disposed in 2019 and 2020, International sales decreased by 19% in 2020 compared to 2019 and adjusted operating profit also decreased by 39%. The sales decline reflects the interruption of Australian immigration and test center closures impacting PTE, as well as budgetary pressures caused by the impact of COVID-19 on courseware purchasing. Adjusted operating profit declined 39% due to the impact of trading partially offset by mitigating actions.

For School & HE Courseware, budget constraints and school closures have led to fewer purchases. In the UK, qualifications revenue was impacted, as expected, by the cancelation of exams in 2020, as well as the end of the NCT contract. In our franchise business in Brazil and across courseware, we have seen market contraction as a result of the pandemic.

PTE volumes were down 36% with declines in all key markets except China where we saw 17% growth due to an improved competitive performance.

The International results also include intangible charges of £15m in 2020 compared to £89m in 2019 reflecting impairments made in relation to Brazil in 2019 of £65m which have not been repeated in 2020. Major restructuring costs were £24m in 2019 and £nil in 2020. Other net gains and losses in 2020 primarily relate to charges in relation to the disposal of PIHE. In 2019 other net gains and losses relate to small acquisitions and disposals.

On 5 March 2021, the Group agreed the disposal of its K-12 Sistemas – COC and Dom Bosco – in Brazil, subject to securing regulatory approval and closing.

Enabling Functions

Enabling functions adjusted operating loss decreased by £45m or 10% from £449m in 2019 to £404m in 2020. The Group estimates that after excluding the impact of exchange rates and the contribution from businesses disposed in 2019 and 2020, the Enabling Functions adjusted operating loss decreased by 9%. Cost reductions were due to restructuring and discretionary savings.

Penguin Random House

The Group’s share of Penguin Random House adjusted operating profits was £nil in 2020 compared to £65m in 2019. Dividend income of £1m was recognised in 2020. In December 2019, the Group announced the sale of its remaining 25% interest in Penguin Random House. At the end of December 2019 the Group’s share of the assets of Penguin Random House was classified as held for sale on the balance sheet. In April 2020, the Group completed the sale of the remaining 25% interest in Penguin Random House to Bertelsmann, generating net proceeds of £531m and resulting in a pre-tax profit of £180m.

Results of operations

Year ended December 31, 2019 compared to year ended December 31, 2018

Consolidated results of operations

Sales

The Group’s total sales decreased from £4,129m in 2018 to £3,869m in 2019, a decrease of £260m or 6%. The year on year movement was impacted by exchange rates, primarily the comparative strength of the US dollar relative to sterling during the year. In 2019, currency movements increased sales by £97m when compared to the equivalent figures at constant 2018 rates. When measured at 2018 constant exchange rates, the Group’s sales declined by 9%. Part of the decrease is due to the absence of sales from businesses sold during 2018 and 2019. The Group estimates that after excluding the impact of disposals sales were flat in 2019 compared to 2018 at

 

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constant exchange rates. Although sales at constant rates after taking account of disposals were flat there were further significant decreases in North America in higher education courseware, offset by aggregate growth in the rest of the business.

Global Online Learning sales increased by £65m or 12% from £521m in 2018 to £586m in 2019. The Group estimates that after excluding the impact of exchange rates, the contribution from businesses disposed in 2018 and 2019, Global Online Learning sales increased by 8% in 2019 compared to 2018. Revenue at Virtual Schools and OPM grew at 6% and 4% respectively due to increased enrolment and course registrations.

Global Assessment sales increased by £76m or 8% from £955m in 2018 to £1,031m in 2019. The Group estimates that after excluding the impact of exchange rates, the contribution from businesses disposed in 2018 and 2019, Global Assessment sales increased by 4% in 2019 compared to 2018. In US School Assessment, revenue declined slightly with continued contraction in revenue associated with the PARCC and ACT-Aspire multi state contracts and contract losses were partially offset by new contract wins. In Professional Certification (Pearson VUE) revenue grew driven by increases in global test volumes.

North American Courseware sales decreased by £370m or 25% from £1,461m in 2018 to £1,091m in 2019. The Group estimates that after excluding the impact of exchange rates, the contribution from businesses disposed in 2018 and 2019, North American Courseware sales decreased by 11% in 2019 compared to 2018. The sales decline was primarily due to North American Higher Education Courseware which declined 12% with print declining by close to 30%, partially offset by modest growth in digital.

International sales decreased by £31m or 3% from £1,192m in 2018 to £1,161m in 2019. The Group estimates that after excluding the impact of exchange rates and the contribution from businesses disposed in 2018 and 2019, International sales increased by 3% in 2019 compared to 2018. Courseware revenue declined moderately. Declines in School Courseware in the UK and Australia offset growth in Italy. In Higher Education Courseware, revenue declines in the UK and Europe more than offset growth in Australia. There was with growth in English Language Courseware in China and School Courseware in the Middle East and Hispano America, offset by declines in school courseware in India and Higher Education courseware in South Africa following a change in government funding.

 

 

Cost of goods sold and operating expenses

The following table summarizes the Group’s cost of sales, net operating expense and other net gains and losses:

 

       Year ended December 31  
       2019        2018  
       £m        £m  

Cost of goods sold

       1,858          1,943  

Operating expenses:

         

Distribution costs

       73          88  

Selling, marketing and product development costs

    

 

631

 

    

 

759

 

Administrative and other expenses

       999          1,039  

Restructuring costs

       157          90  

Other income

       (54        (69
    

 

 

      

 

 

 

Total net operating expenses

       1,806          1,907  

Other net gains

       (16        (230
    

 

 

      

 

 

 

Total continuing operations

       3,648          3,620  
    

 

 

      

 

 

 

 

 

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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. The Group’s cost of sales decreased by £85m, or 4%, from £1,943m in 2018, to £1,858m in 2019. The decrease largely reflects the decrease in sales but also includes some continuing benefit from restructuring. In addition, cost of sales as a percentage of sales increased largely as a result of the mix effect caused by a sales decline in businesses with generally higher gross margins than Pearson as a whole. Cost of sales was 48.0% of sales in 2019 compared to 47.1% in 2018.

Distribution costs. Distribution costs consist primarily of shipping costs, postage and packing. Distribution costs decreased by £15m reflecting the flow through of restructuring savings, the absence of costs from businesses disposed, the decrease in physical print sales and some one-off costs in the Core business in 2018 relating to a change in distribution arrangements that year.

Selling, marketing and product development costs. The Group’s selling, marketing and product development costs decreased by £128m or 17% from £759m in 2018 to £631m in 2019. The decrease is explained by the absence of costs from businesses disposed and restructuring savings realized in the year. As a percentage of sales, these costs decreased in 2019 from 18.4% in 2018 to 16.3% in 2019.

Administrative and other expenses. The Group’s administrative and other expenses decreased by £40m or 4% from £1,039m in 2018 to £999m in 2019. This decrease is explained by the absence of costs from businesses disposed, the impact of restructuring savings particularly in enabling functions and the benefit from adoption of IFRS 16 partly offset by continuing investment in technology and the impact of higher intangible charges. In 2019 intangible charges increased due to an additional £65m impairment charge relating to acquired intangibles in the Brazil business following a reassessment of the relative risk in that market.

Restructuring costs. Restructuring costs of £157m in 2019 and £90m in 2018 (excluding the share of associate restructuring charges) relate to the 2017-2019 restructuring program announced in May 2017. This program began in the second half of 2017 and costs incurred related to delivery of cost efficiencies in enabling functions and the US higher education courseware business together with further rationalization of the property and supplier portfolio. The restructuring costs in 2018 and 2019 relate predominantly to staff redundancies and, in 2018, to the net cost of property rationalization. Included in the property rationalization in 2018 is the impact of the consolidation of the Group’s property footprint in London which resulted in a charge for onerous leases of £91m partially offset by profit from the sale of property of £81m.

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 service fee income from Penguin Random House. Other operating income decreased to £54m in 2019 compared to £69m in 2018 mainly due to decreased rights income, the absence of recoveries following legal settlements in 2018 and fewer asset gains in 2019.

Other net gains and losses. In 2019 gains of £16m largely relate to the sale of the K12 school courseware business in the US. In 2018 a £230m gain from the sale of businesses related to the sale of the Wall Street English language teaching business (WSE), realizing a gain of £207m, the disposal of the Group’s equity interest in UTEL, the online University partnership in Mexico, realizing a gain of £19m, and various other smaller disposal items realizing a net gain of £4m.

Share of results of joint ventures and associates

The contribution from the Group’s joint ventures and associates increased by £10m to £54m in 2019 from £44m in 2018. The increase is mainly due to reduced intangible and restructuring charges in PRH in 2019 and in addition, there were restructuring costs incurred in respect of the Group’s ACT Aspire joint venture in 2018 that were absent in 2019.

 

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Operating profit

In 2019, the Group reported an operating profit of £275m compared to an operating profit of £553m in 2018. The decrease in profit of £278m mainly reflects the absence of significant gains on disposal in 2019 compared to 2018, an increase in intangible charges and restructuring costs and the lost contribution from businesses disposed which more than offset a favorable impact from currency movements and the adoption of IFRS 16 ‘Leases’. Excluding out the effect of the sale of businesses, intangible charges, restructuring costs, one-off pension related charges and the impact of currency movements and IFRS 16, profits from trading increased by around £30m. This trading increase was primarily due to savings from restructuring and lower staff incentives which offset the impact on profits of lower sales in North America higher education courseware and inflationary pressures.

Net finance costs

Net finance costs decreased from £55m in 2018 to £43m in 2019. Net interest payable increased from £24m in 2018 to £41m in 2019. The increase is due to the adoption of IFRS 16 which resulted in an additional £34m of net interest payable in 2019. After excluding the impact of IFRS 16 there was a reduction in net interest payable due to lower levels of average net debt together with favorable movements in interest on tax and the absence of one-off costs relating to the redemption of bonds. Also included in net finance costs are net finance costs relating to employee benefit plans, foreign exchange and other gains and losses. In 2019 the total of these items was a loss of £2m compared to a loss of £31m 2018. Income relating to employee benefit plans was £2m higher in 2019 than in 2018 reflecting the higher net surplus on pension balances at the beginning of 2019 compared to the beginning of 2018. Other losses in both 2019 and 2018 primarily relate to foreign exchange differences on un-hedged cash and cash equivalents, and other financial instruments although these losses were much lower in 2019.

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 reported tax credit in 2019 was £34m (14.7%) compared to a credit of £92m (18.5%) in 2018. The movement in the tax rate reflects several one-off benefits in 2018 including provision releases due to the expiry of relevant statutes of limitation and due to the reassessment of historical positions, as well as a one-off benefit from a reassessment of the tax treatment of certain items of income and expenditure. In 2019, the credit is primarily due to US tax losses generated on the disposal of the K12 business.

Discontinued operations

There were no discontinued operations in either 2018 or 2019.

Profit for the year

The profit for the financial year in 2019 was £266m compared to a profit in 2018 of £590m. The decreased profit reflects decreased operating profit and reduced tax credits partially offset by lower net finance costs as set out above.

Earnings 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 34.0p in 2019 compared to 75.6p in 2018 based on a weighted

 

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average number of shares in issue of 777.0m in 2019 and 778.1m in 2018. The decrease in earnings per share was due to the decrease in profit for 2019 as described above and was not significantly impacted by the small decrease in the number of weighted average number of shares in 2019 compared to 2018.

The diluted earnings per ordinary share was 34.0p in 2019 and 75.5p in 2018, with the dilutive effect of options being minimal.

Exchange rate fluctuations

Currency movements increased sales by £97m and increased operating profit by £15m. 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 the performance of the Group and allocate resources to business segments over time by separating out those items of income and expenditure relating to acquisitions and disposals, major restructuring programs and certain other items that are not representative of underlying performance. Reconciliations of adjusted operating profit to statutory operating profit are included below and in note 2 within Item 18 — Financial Statements.

In the Group’s adjusted operating profit, it has excluded other net gains and losses, acquisition related costs, amortization and impairment of acquired intangibles and the cost of major restructuring programs. In 2018, the Group also excluded the impact of adjustments arising from clarification of guaranteed minimum pension (GMP) equalization legislation in the UK. 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 are non-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. The GMP equalization charge arises from the ruling in the Lloyds Bank High Court case in the UK in October 2018 that provided clarity on how pension plans should equalize GMP between males and females. The case ruling results in an income statement charge, an additional liability and the potential requirement to make back-payments to pensioners who may have been retired for some years. The Group excluded this charge from adjusted earnings as it related to historical circumstances.

 

 

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A reconciliation of operating profit to adjusted operating profit for continuing operations is included in the tables below:

 

    Year ended December 31, 2019  
    Global
Online
Learning
    Global
Assessment
    North
American
Courseware
    International     Enabling
Functions
    PRH     Total  
    £m     £m     £m     £m     £m     £m     £m  

Sales

    586       1,031       1,091       1,161       —         —         3,869  
    15     27     28     30     —         —         100

Total operating profit / (loss)

    49       317       193       189       (524     51       275  

Add back:

             

Cost of major restructuring

    —         7       51       24       75       2       159  

Intangible charges

    35       27       —         89       —         12       163  

Other net gains and losses

    —         —         (13     (3     —         —         (16

UK pension GMP equalization

    —         —         —         —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total adjusted operating profit

    84       351       231       299       (449     65       581  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

    Year ended December 31, 2018  
    Global
Online
Learning
    Global
Assessment
    North
American
Courseware
    International     Enabling
Functions
    PRH     Total  
    £m     £m     £m     £m     £m     £m     £m  

Sales

    521       955       1,461       1,192       —         —         4,129  
    13     23     35     29                 100

Total operating profit / (loss)

    49       242       293       488       (565     46       553  

Add back:

             

Cost of major restructuring

    7       33       7       9       38       8       102  

Intangible charges

    43       29       1       26       —         14       113  

Other net gains and losses

    —         —         (4     (226     —         —         (230

UK pension GMP equalization

    —         —         —         8       —         —         8  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total adjusted operating profit

    99       304       297       305       (527     68       546  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Global Online Learning

Global Online Learning sales increased by £65m or 12% from £521m in 2018 to £586m in 2019 and adjusted operating profit decreased by £15m or 15% from £99m in 2018 to £84m in 2019. The Group estimates that after excluding the impact of exchange rates, the contribution from businesses disposed in 2018 and 2019 and the impact of adopting IFRS 16 on profits, Global Online Learning sales increased by 8% in 2019 compared to 2018 and adjusted operating profit decreased by 17%. Revenue at Virtual Schools and OPM grew at 6% and 4% respectively due to increased enrolment and course registrations.

Virtual Schools grew revenue 6% and served 76,000 full time equivalent students through 42 continuing full-time virtual partner schools in 28 states, up 5% on last year. Six new full-time online, state- wide partner schools opened in the 2019-20 school year in the states of Oregon, Washington, Tennessee, Minnesota and California, while a contract was exited in North Carolina.

Higher Education Services (including OPM and Learning Studio) grew revenue 4%, due to growth in OPM, partially offset by a small drag from Learning Studio revenue, a learning management system, which was fully

 

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retire in 2019. In OPM, revenue grew 9%, with growth in course registrations of 5% and new programs launched more than offsetting programs terminated. The overall active program count grew to 347 from 325 in 2018.

During 2019, the OPM business continued to optimize its portfolio and reduced the number of partners to 25 from 35. This will allow the business to shift towards enterprise models where it has a number of programs with a single partner and can benefit from economies of scale in marketing and recruitment and integrate more content and assessment services into these partnerships.

The decrease in adjusted operating profit reflected inflation and investment in strategic growth priorities which offset the impact of sales increases, restructuring savings and lower staff incentives.

The Global Online Learning results also include costs of £nil in 2019 and £7m in 2018 in respect of the 2017- 2019 restructuring program. Amortization relating to acquired intangibles was £35m in 2019 compared to £43m in 2018 reflecting lower acquisition activity in recent years.

Global Assessment

Global Assessment sales increased by £76m or 8% from £955m in 2018 to £1,031m in 2019 and adjusted operating profit increased by £47m or 15% from £304m in 2018 to £351m in 2019. The Group estimates that after excluding the impact of exchange rates, the contribution from businesses disposed in 2018 and 2019 and the impact of adopting IFRS 16 on profits, Global Assessment sales increased by 4% in 2019 compared to 2018 and adjusted operating profit increased by 11%.

In Student Assessment, revenue declined slightly in 2019 with continued contraction in revenue associated with PARCC and ACT-Aspire multi-state contracts and contract losses which were partially offset by new contract wins. During 2019, Pearson won new contracts or signed renewals in several key incumbent states including Kentucky, Maryland, Colorado and New Jersey, as well as the federal NCES contract for delivering the National Assessment of Educational Progress (NAEP). Pearson also won back the testing contract in the state of Tennessee. Automated scoring continues to be a competitive strength for Pearson. In 2019, we scored 39 million responses with AI, up 8% from 2018.

In Professional Certification (VUE), global test volume rose 8% to c.16.5 million tests. Revenue in North America was up a high single-digit percentage, mostly driven by the IT sector with increased demand for cloud technology certifications through Microsoft and Amazon, and volume growth in an education contract launched at the end of 2018 which is now operating at its full run-rate. VUE signed over 40 new contracts in 2019, including the Project Management Institute (PMI) and our renewal rate on existing contracts continues to be over 95%.

Clinical Assessment declined as demand for new product only partially offset normal declines in products in the later stages of their lifecycle.

The increase in adjusted operating profit reflected the sales increase, the impact of restructuring savings and lower staff incentives.

The Global Assessment results also include costs of £7m in 2019 and £33m in 2018 in respect of the 2017-2019 restructuring program. Amortization relating to acquired intangibles was £27m in 2019 compared to £29m in 2018.

North American Courseware

North American Courseware sales decreased by £370m or 25% from £1,461m in 2018 to £1,091m in 2019 and adjusted operating profit decreased by £66m or 22% from £297m in 2018 to £231m in 2019. The Group estimates that after excluding the impact of exchange rates, the contribution from businesses disposed in 2018

 

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and 2019 and the impact of adopting IFRS 16 on profits, North American Courseware sales decreased by 11% in 2019 compared to 2018 and adjusted operating profit decreased by 21%. The sales decline was primarily due to North American Higher Education Courseware which declined 12% with print declining by close to 30%, partially offset by modest growth in digital.

In 2019 the weaker performance was driven by several factors: Premium-priced print and digital products were substituted for digital only formats and sales of bundle units declined 45% during 2019; Campus bookstores bought less physical inventory due to changing student behavior, with over 50% of learners now preferring an eBook to a physical text with offsetting eBook growth of 18% during 2019 and; There were modest adoption share losses caused by delivery issues due to the implementation of the new ERP system in the second half of 2018 as well as the re-organization of the sales force.

The business is focused on regaining share over time as it builds traction from the rollout of our next wave of digital products on the Pearson Learning Platform (PLP), which launched in September 2019. 60% of all Revel titles will migrate onto the PLP in 2020 enhancing the faculty and student experience. The business is also launching a direct-to-learner version of the Pearson eBook in 2020, with enhanced features and AI-driven text-to-speech.

US Higher Education Courseware digital registrations, including eBooks, declined 2%. Good registration growth in Revel, up 9%, was offset by continued market pressure in Developmental Mathematics and the planned retirement and reprioritization of niche products with lower demand. There was continued good progress with Inclusive Access signing 162 new institutions in 2019, taking the total not-for-profit and public institutions served to 779. The business now has direct relationships with over 850 institutions, including 80 longer-standing contracts with for-profit colleges. In 2019, 1.8m Inclusive Access enrolments were served up from 1.4m in 2018, making up 9% of 2019 US Higher Education Courseware revenue, up 19% on 2018 on a like-for-like basis, excluding the 80 for-profit colleges.

The decrease in adjusted operating profit reflected the sales shortfall, inflation and the disposal of the K12 business which offset the impact of restructuring savings and lower staff incentives.

The North American Courseware results also include costs of £51m in 2019 and £7m in 2018 in respect of the 2017- 2019 restructuring program. Amortization relating to acquired intangibles was £nil in 2019 compared to £1m in 2018 reflecting lower acquisition activity in recent years. Net gains on business disposals of £13m in 2019 relate to the K12 sale with £4m of profits on several small disposals in 2018.

On March 29, 2019 the Group completed the sale of the US K12 school courseware business to Nexus Capital Management LP for headline consideration of $250m comprising an initial cash payment of $25m and an unconditional vendor note for $225m expected to be repaid in three to seven years.

International

International sales decreased by £31m or 3% from £1,192m in 2018 to £1,161m in 2019 and adjusted operating profit decreased by £6m or 2% from £305m in 2018 to £299m in 2019. The Group estimates that after excluding the impact of exchange rates and the impact of adopting IFRS 16 on profits, the contribution from businesses disposed in 2018 and 2019, International sales increased by 3% in 2019 compared to 2018 and adjusted operating profit increased by 2%.

Courseware revenue declined moderately. Declines in School Courseware in the UK and Australia offset growth in Italy. In Higher Education Courseware, revenue declines in the UK and Europe more than offset growth in Australia. There was with growth in English Language Courseware in China and School Courseware in the Middle East and Hispano America, offset by declines in school courseware in India and Higher Education courseware in South Africa following a change in government funding.

 

 

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In Student Assessment and Qualifications, revenue grew strongly, due to price and volume increases for A levels and GCSE qualifications in the UK and the delivery of a new digital assessment contract in Egypt. This was partially offset by continued market declines in Apprenticeships. In 2019, the business successfully delivered the UK’s National Curriculum Test (NCT), marking 3.8m scripts, up slightly from 2018. The NCT will be delivered by another provider in 2020.

PTE Academic saw continued strong growth in test volumes in Australia and New Zealand up 14% from 2018. This was driven by its use to support visa applications to the Australian Department of Home Affairs as well as good growth in New Zealand. The business recently announced the win of the UK Secure English Language Test (SELT) contract with the UK Home Office which is expected to drive future growth.

In English Services, underlying revenue grew slightly in our English Language School franchise in Brazil due to new product launches. In School Services, underlying revenue grew slightly due to price increases and new product launches in our private sistemas in Brazil. In Higher Education Services, enrolments grew 3% at the Pearson Institute of Higher Education (formerly CTI), however revenue declined modestly due to changes in mix.

Adjusted operating profit benefitted from higher revenue together with the benefits of restructuring.

The Group’s statutory operating profit for International included restructuring costs of £24m in 2019 and £9m in 2018. Also included in the statutory operating profit is amortization and impairment of acquired intangibles and gains and losses on disposal of businesses. In 2019 intangible charges of £89m compare to a charge of £26m in 2018 and this increase was due to an additional £65m impairment charge relating to acquired intangibles in the Brazil business following a reassessment of the relative risk in that market. In 2018 gains on the disposal of businesses amounted to £226m and result from the sale of the Wall Street English language teaching business (WSE), realizing a gain of £207m and the disposal of the equity interest in UTEL, the online University partnership in Mexico, realizing a gain of £19m. Gains on disposals in 2019 of £3m relate to adjustments to prior year disposals. The statutory operating profit in 2018 also includes the one-off £8m charge in respect of guaranteed minimum pension (GMP) equalization in the UK.

Enabling Functions

Enabling functions adjusted operating loss decreased by £78m or 15% from £527m in 2018 to £449m in 2019. The Group estimates that after excluding the impact of exchange rates, the contribution from businesses disposed in 2018 and 2019, Enabling Functions adjusted operating loss also decreased by 14%. The decrease in the loss reflects restructuring savings. The Group’s statutory operating profit for Enabling Functions included restructuring costs of £75m in 2019 and £38m in 2018.

Penguin Random House

The Group owned 25% of Penguin Random House, the first truly global consumer book publishing company. The Group’s share of Penguin Random House adjusted operating profits were £65m in 2019 compared to £68m in 2018. Penguin Random House performed solidly in 2019 with underlying revenue growth from a rise in audio sales, stable print sales, and the industry’s top bestsellers, including “Where the Crawdads Sing” by Delia Owen, “Becoming” by Michelle Obama, and bestselling books by Margaret Atwood, Tara Westover, Lee Child, Jamie Oliver, Jeff Kinney, and Dr. Seuss.

In December 2019, the Group announced the sale of its remaining 25% interest in Penguin Random House. The sale is expected to complete in the first half of 2020. At the end of December our share of the assets of Penguin Random House was classified as held for sale on the balance sheet.

 

 

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Liquidity and capital resources

Cash flows and financing

Net cash generated from operations decreased to £450m in 2020 from £480m in 2019. The decrease in cash generated from operations is largely explained by the drop-through of reduced profit due to COVID-19, offset by improved working capital.

Net interest paid at £50m in 2020 compares to £64m in 2019 and reflects a reduction in interest on lease liabilities and a reduction in payments related to FX contracts. Tax received in 2020 was £2m compared to tax paid of £30m in 2019 with the decrease mainly explained by refunds received in the US and UK relating to historical periods, the settlement of a historical tax audit and the impact of the disposal of our US K12 business.

Capital expenditure on property, plant and equipment was £53m in 2020 compared to £55m in 2019. There were no material property sales in 2019 or 2020. Capital expenditure on software intangibles decreased from £138m in 2019 to £81m in 2020. The reduction in expenditure on intangible capital reflects the reduction in investment in enabling function technology as the digital transformation program comes to an end.

Cash outflow from acquisitions in 2020 was £12m compared to £97m in 2019. There were no significant acquisitions in 2020, the net cash outflow on acquisition of subsidiaries in 2020 relates to deferred payments for prior year acquisitions and investment purchases. There were two small acquisitions in 2019, Lumerit and Smart Sparrow which together accounted for £40m of cash consideration, £40m of additional capital was invested in PRH, with the balance of the cash outflow on acquisitions in 2019 being in relation to investments and prior year items. The net cash inflow in respect of businesses and investments disposed was £631m in 2020 compared to a net outflow of £96m in 2019. In 2020 the cash received largely related to the disposal of PRH and the partial repayment of the receivable held in relation to the disposal of the US K12 business. In 2019 the cash outflow mainly relates to the US K12 Courseware business and reflects the deferral of proceeds and the level of working capital in the business at the disposal date.

Dividends from joint ventures and associates decreased from £64m in 2019 to £4m in 2020. The reduction is primarily due to the fact that the PRH disposal completed in April 2020. Dividends paid to company shareholders in 2020 of £146m compares to £147m in 2019. Cash returned to shareholders via the share buyback program in H1 2020 amounted to £176m in 2020. Treasury share purchases in 2020 in respect of employee share plans were £6m compared to £52m in 2019.

The cash outflow from financing of £299m in 2020 compares to £102m in 2019 and includes the repayment of borrowings of £230m in 2020 and £48m in 2019. These repayments include the repayment of the draw down of the revolving credit facility in 2020 and in 2019 the early redemption of various bonds (and their associated swaps). In 2019, the Group announced the refinancing of its bank facility, reducing its size to $1.19bn and extending its maturity date to February 2024. Drawings of £230m representing a financing cash inflow in 2019 were outstanding on this facility at the end of December 2019 and were repaid in 2020. In March 2019, the Group executed market tenders to repurchase €55m of its €500m 1.875% notes due 2021 of which €250m were outstanding at December 31, 2018. Also included in financing cash flows are repayments of lease liabilities which increased from £91m in 2019 to £92m in 2020. Dividends paid to company shareholders in 2020 of £147m compares to £148m in 2019. Cash returned to shareholders via the 2020 share buyback program amounted to £176m. Treasury share purchases in 2020 in respect of employee share plans were £6m compared to £52m in 2019.

This was offset by proceeds from the issuance of £350m guaranteed notes maturing June 4, 2030. The notes bear a coupon of 3.75% and have been issued in accordance with the ICMA Social Bond Principles 2018. The proceeds will be primarily used to finance and re-finance delivery of education in our Connections Academy, BTEC and GED businesses to help achieve the United Nations’ 4th Sustainable Development Goal (SDG) for a Quality Education. The social bond framework is a natural progression of Pearson’s long-standing commitment to integrating social and environmental sustainability into the business.

 

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Overall the Group’s net borrowings decreased from £1,016m at the end of 2019 to £463m at the end of 2020. In addition to the cash flows referred to above, the adoption of IFRS 16 added £666m of net debt on transition after taking account of both lease liabilities and the investment in finance lease receivable brought on balance sheet at January 1, 2019.

Capital resources

The Group’s borrowings fluctuate by season because of the school year’s effect on the working capital requirements in the educational materials business. Assuming no acquisitions or disposals, the Group’s maximum level of net debt normally occurs in July, and its minimum level of net debt normally occurs in December.

In assessing the Group’s liquidity, the impact of the COVID-19 pandemic has been modeled under several scenarios to ensure that the likelihood of a prolonged period of disruption has been appropriately considered in assessing the availability of funding to the Group and the ability of the Group to comply with its banking covenants. The modeling includes a severe reduction in revenue, profit and operating cash flow that extends through the full three-year period to ensure that the Group has adequate resources to manage for a prolonged period of disruption.

In assessing the Group’s ability to continue as a going concern for the period to June 30, 2022, the board analyzed a variety of downside scenarios including a severe but plausible scenario where the Group is impacted by all principal risks from 2021 (weighted for probability of occurrence) as well as reverse stress testing to identify what would be required to either breach covenants or run out of liquidity. The severe but plausible scenario modeled an impact from COVID-19 and other risks which in aggregate were significantly greater than seen in 2020 continuing throughout 2021 to 2022.

At December 31, 2020, the Group had available liquidity of c£1.9bn, comprising central cash balances and its undrawn $1.19bn Revolving Credit Facility (RCF) maturing February 2024. Even under a severe downside case where further declines in profitability compared to 2020 are modeled in 2021 and 2022, the Group would maintain liquidity headroom in excess of £800m and sufficient headroom against covenant requirements during the period under assessment even before modeling the mitigating effect of actions that management would take in the event that these downside risks were to crystallize.

At December 31, 2020, the Group’s net debt was £463m compared to £1,016m at December 31, 2019. The decrease is largely due to the receipt of proceeds of £531m from the PRH sale, the receipt of deferred proceeds of £105m from the US K12 sale, the £48m repayment of the loan to PRH and positive operating cash flow offset by interest and dividend payments and the cash outflow of £176m from the Group’s share buyback program.

Net debt is defined as all short-term, medium-term and long-term borrowing (including leases and related derivatives), less all cash, cash equivalents, other liquid resources and the net investment in finance lease receivables. Cash equivalents comprise short-term deposits with a maturity of up to 90 days, while liquid resources comprise short-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 excluding derivatives amounted to £1,720m at December 31, 2020, compared to £1,664m at December 31, 2019 reflecting the issuance of a bond in 2020. At December 31, 2020, total cash and liquid resources were £1,116m, compared to £437m at December 31, 2019. The increase in 2020 was primarily driven by the receipt of proceeds of £531m from the PRH sale, the receipt of deferred proceeds of £105m from the US K12 sale, the £48m repayment of the loan to PRH, the £57m reduction in spending on software assets and the receipt of proceeds of £346m from the bond issue. These were offset by the cash outflow of £176m from the Group’s share buyback program and the £230m repayment of the Revolving Credit Facility which was drawn at December 31, 2019.

 

 

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In February 2021, the Group renegotiated its revolving credit facility, extending the maturity of $1bn of the facility by one year to 2025.

Contractual obligations

The following table summarizes the maturity of the Group’s borrowings, its obligations under non-cancellable leases, deferred consideration 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:

 

     Year ended December 31, 2020  
     Total      Less than
one year
     One to
Two years
     Two to
five years
     After
five years
 
     £m      £m      £m      £m      £m  

Gross Borrowings:

              

Bank loans and overdrafts

     3        3        —          —          —    

Revolving credit facility

     —          —          —          —          —    

Bonds

     965        178        86        348        353  

Lease liabilities

     752        76        77        194        405  

Deferred consideration

     30        4        3        9        14  

UK pension funding obligation

     —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     1,750        261        166        551        772  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The UK pension plan’s most recent triennial actuarial valuation for funding purposes was completed as at January 1, 2018 and this valuation revealed a technical provision funding surplus of £163m. 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 the Group.

At December 31, 2020 the Group had no capital commitments for fixed assets. There are contingent liabilities in respect of indemnities, warranties, legal and royalty claims 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 tax assessments as outlined in note 34 in “Item 18. Financial statements”. None of these claims, guarantees or assessments is currently expected to result in a material gain or loss.

Off-balance sheet arrangements

The Group does not have any off-balance sheet arrangements, as defined by the SEC for the purposes of Form 20-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.

At December 31, 2020, the Group had a $1.19bn committed revolving credit facility with a maturity date in February 2024. At December 31, 2019, none of the $1.19bn credit facility had been drawn. The facility set in place in March 2019, contains two key covenants measured for each 12-month period ending June 30 and December 31:

The Group must maintain the ratio of its profit before interest, tax and amortization to its net interest payable at no less than 3:1; and must maintain the ratio of its net debt to its EBITDA at no more than 4:1. “EBITDA” refers to earnings before interest, taxes, depreciation and amortization. The Group is currently in compliance with these covenants.

 

 

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See note 18 of “Item 18. Financial Statements” for information on the Group’s longer-term loans from banks and capital markets.

Treasury policy

The Group’s treasury policy is described in note 19 of “Item 18. Financial Statements”. For a more detailed discussion of the 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 2020, 2019 or 2018. Refer to note 36 in “Item 18. Financial Statements”.

Accounting policies

For a description of the 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

The Group is managed by a Board of Directors and a Chief Executive who reports to the Board and manages through an Executive Committee. The Group refers to the Board of Directors, the Chair of the Board of Directors and the Executive Committee as its “senior management”.

The following table sets forth information concerning Directors, as of February 28, 2021.

 

Name

   Age     

Position

Sidney Taurel

     72      Chair

Andy Bird

     57      Chief Executive Officer

Sally Johnson

     47      Chief Financial Officer

Dame Elizabeth Corley, DBE

     64      Non-executive Director

Sherry Coutu, CBE

     57      Non-executive Director

Vivienne Cox, CBE

     61      Senior Independent Director

Linda Lorimer

     68      Non-executive Director

Michael Lynton

     61      Non-executive Director

Graeme Pitkethly

     54      Non-executive Director

Tim Score

     60      Non-executive Director

Lincoln Wallen

     60      Non-executive Director

Sidney Taurel

Appointed January 1, 2016. Member of the Nomination & Governance and Remuneration Committees.

Sidney has over 45 years of experience in business and finance. He is currently a Director of IBM Corporation, a role from which he will be retiring in April 2021. Sidney is an advisory board member at pharmaceutical firm Almirall. He was Chief Executive Officer of global pharmaceutical firm Eli Lilly and Company from 1998 until 2008, Chairman from 1999 until 2008, and has been Chairman Emeritus since 2009. His 37-year career at Eli Lilly included time spent in Brazil, France, Eastern Europe, the US and the UK. He has previously held directorships at McGraw Hill Financial, Inc. and ITT Industries. In 2002, Sidney received three US presidential appointments to: the Homeland Security Advisory Council, the President’s Export Council and the Advisory Committee for Trade Policy and Negotiations. Sidney is also an officer of the French Legion of Honor. Current notable commitments: IBM Corporation (Non-Executive Director) and HIG Acquisition Corporation (Non-Executive Director).

 

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Andy Bird

Appointed to the Board May 1, 2020. Appointed as Chief Executive Officer October 19, 2020. Member of the Reputation & Responsibility Committee.

Andy has a long and distinguished career spanning 35 years in the media industry, and is an accomplished, strategic leader of global consumer content businesses. Most recently he spent 14 years working for The Walt Disney Company, joining the business as President of Walt Disney International in 2004, before being appointed Chairman in 2008. He held this role for a decade, during which time he transformed the organization into a digital first, direct-to-consumer business, focused on serving the diverse needs of customers around the world. In addition, Andy worked to establish the iconic brand in China, through the creation of Disney English, teaching English language to Chinese families through immersive learning experiences. Prior to Disney, Andy worked in a number of senior positions at AOL Time Warner, and spent the earlier part of his career at Piccadilly Radio, Virgin Broadcasting Company, BSB Music Channel, Big & Good Productions and Unique Broadcasting

Sally Johnson

Appointed April 24, 2020, Sally joined Pearson in 2000 and has held various finance and operations roles across The Penguin Group, the education business and at a corporate level. She brings to the Board extensive commercial and strategic finance experience as well as transformation, treasury, tax, risk management, business and financial operations, investor relations and M&A expertise. She has held various senior level roles across the business, most recently as Deputy CFO of Pearson. Sally is a member of the Institute of Chartered Accountants in England and Wales and trained at PricewaterhouseCoopers. She was also a Trustee for the Pearson Pension Plan from 2012 to 2018.

Dame Elizabeth Corley, DBE

Appointed May 1, 2014. Chair of the Remuneration Committee and member of the Audit and Nomination & Governance Committees.

Elizabeth has extensive experience in the financial services industry, having been CEO of Allianz Global Investors, initially for Europe then globally, from 2005 to 2016. She continued to act as an advisor to the company until the end of 2019. Previously she was at Merrill Lynch Investment Managers and Coopers & Lybrand. Elizabeth is a Non-Executive Director of BAE Systems plc and Morgan Stanley Inc. Elizabeth is active in representing the investment industry and developing standards within it. She is chair of the Impact Investing Institute; a director of the Green Finance Institute and serves on the investment committee of the Leverhulme Trust. She was appointed Dame Commander of the Order of the British Empire in the Queen’s Birthday honors in 2019 for her services to the economy and financial services. Current notable commitments: BAE Systems plc (Non-Executive Director), Morgan Stanley Inc. (Non-Executive Director).

Sherry Coutu, CBE

Sherry has extensive experience in the technology industry. She has also served on the boards of a range of companies and charities, with a focus on working with entrepreneurs and specializing in consumer digital, information services, and education. Sherry is the Chair of Founders4Schools and founder of the Scale-Up Institute. Previously, she was CEO of Interactive Investor International plc, and has served on the boards of Cambridge Assessment, Bloomberg New Energy Finance and the London Stock Exchange plc as well as being SID and Remuneration Committee Chair of RM plc. Sherry has started and/or invested in over 60 technology businesses and served on the boards of Zoopla plc, Raspberry Pi, NESTA, and the Advisory boards of the National Gallery, Royal Society and LinkedIn. She was appointed Commander of the British Empire in the 2013 New Year honors for her services to entrepreneurship. Current notable commitments: Reinvent Technology Partners.

 

 

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Vivienne Cox, CBE

Appointed on January 1, 2012. Chair of the Nomination & Governance Committee and member of the Audit and Reputation & Responsibility Committees.

Vivienne has wide experience in energy, natural resources and business innovation. She worked for BP plc for 28 years in global roles including Executive Vice President and Chief Executive of BP’s gas, power and renewables business and its alternative energy unit. She is Chair of the supervisory board of Vallourec S.A., a leader in the seamless steel pipe markets, and a Non-Executive Director at pharmaceutical company GlaxoSmithKline plc, where she also acts as Workforce Engagement Director. She also has a deep understanding of regulatory and government relationships. She serves as Chair of the Rosalind Franklin Institute and Vice Chair of the Saïd Business School (part of Oxford University). She was appointed Commander of the British Empire in the 2016 New Year honors for her services to the economy and sustainability. Current notable commitments: GlaxoSmithKline plc (Non-Executive Director), Vallourec S.A. (Chair of the supervisory board).

Linda Lorimer

Appointed July 1, 2013. Chair of the Reputation & Responsibility Committee and member of the Audit Committee.

Linda has spent almost 40 years serving higher education. She retired from Yale in 2016 after 34 years at the university where she served in an array of senior positions including Vice President for Global & Strategic Initiatives. She oversaw the development of Yale’s online education division and the expansion of Yale’s international programs and centers. During her tenure, she was responsible for many administrative services, ranging from Yale’s public communications and alumni relations to sustainability, human resources and the university press. She also served on the boards of several public companies, including as Presiding Director of the McGraw-Hill companies. Linda is a member of the board of Yale New Haven Hospital, where she chairs the nominating and governance committee and is a trustee of Hollins University. She also remains on several consequential advisory committees at Yale University.

Michael Lynton

Appointed on February 1, 2018. Member of the Audit and Reputation & Responsibility Committees.

Michael has more than thirty years of senior-level management experience, including extensive experience in consumer marketing, traditional and digital media, and the adoption of new technologies. He also has broad public company governance experience. Michael served as CEO of Sony Entertainment from 2012 until 2017, overseeing Sony’s global entertainment businesses. He was also Chairman and CEO of Sony Pictures Entertainment from 2004. Prior to that, 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., Schrödinger, Inc. and Warner Music Group, and currently serves on the boards of IEX and Ares Management Corporation LLC. Current notable commitments: Ares Management Corporation LLC (Non-Executive Director), Snap, Inc. (Chairman), Schrödinger, Inc. (Chairman), Warner Music Group (Chairman), The Boston Beer Company, Inc. (Non-Executive Director).

Graeme Pitkethly

Appointed on May 1, 2019. Member of the Audit and Reputation & Responsibility Committees.

Graeme joined Unilever in 2002 and, prior to being appointed CFO and Board member, was responsible for Unilever’s UK and Ireland business. Previously, he had held a number of senior financial and commercial roles within Unilever, including Senior Vice President of Finance for Global Markets, Group Treasurer, Global Head of M&A and Chief Financial Officer of Unilever Indonesia. Graeme spent the earlier part of his career in senior

 

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corporate finance roles in the telecommunications industry with FLAG Telecom, and started his career at PricewaterhouseCoopers. Graeme is currently Vice Chair of the Task Force on Climate Related Financial Disclosures, Vice Chair of the 100 Group Main Committee and is a Chartered Accountant. Current notable commitments: Unilever plc (Chief Financial Officer).

Tim Score

Appointed January 1, 2015. Chair 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, for 13 years. He is an experienced non-executive director and serves as Chairman of The British Land Company plc, a role to which he was appointed in July 2019, a non-executive director of HM Treasury, and a Trustee of the National theater. Tim has garnered extensive financial and listed company experience during previous and current positions. 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, LucasVarity plc and BTR plc. Current notable commitments: The British Land Company plc (Chairman).

Lincoln Wallen

Appointed January 1, 2016. Member of the Audit and Reputation & Responsibility Committees.

Lincoln has extensive experience in the technology and media industries, and is currently CTO of Improbable, a technology start-up supplying next-generation cloud hosting and networking services to the video game industry. Lincoln was CEO of DWA Nova, a software-as-aservice 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 and Head of Animation Technology. He was formerly CTO at Electronic Arts Mobile, leading their entry into the mobile gaming business internationally. Lincoln is a Non-Executive Director of the Smith Institute for Industrial Mathematics and Systems Engineering. His early career involved 20 years of professional IT and mathematics research, including as a reader in Computer Science at Oxford. Current notable commitments: Improbable (Chief Technology Officer).

The following table sets forth information concerning the Executive Committee, as at February 28, 2021.

 

Name

  

Position

Tim Bozik

   President, Global Product & North America Courseware

Rod Bristow

   President, UK & Global Online Learning

Lynne Frank

   Chief Marketing Officer and Co-President, Direct-to-Consumer

Gio Giovannelli

   President, International

Albert Hitchcock

   Chief Technology & Operations Officer

Mike Howells

   Chief Strategy Officer

Ishantha Lokuge

   Chief Product Officer and Co-President, Direct-to-Consumer

Cinthia Nespoli

   Chief Legal Officer

Anna Vikström Persson

   Chief Human Resources Officer

Bob Whelan

   President, Assessment

 

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Tim Bozik

Tim has more than 30 years of extensive leadership experience in higher education products and the business of delivering them at Pearson. Tim earned a Bachelor’s Degree from the University of Notre Dame and currently serves on the Board of Directors for the Association of American Publishers.

Rod Bristow

Rod has worked in education for more than 30 years in the UK and internationally. Rod is a trustee for the Education and Employers Taskforce, a fellow of the Royal Society for Arts, governor for Harlow College and the BMAT multiacademy trust. Rod is a graduate of University College London.

Lynne Frank

Lynne has over 25 years of experience in the media industry. Previously, she has worked in companies such as WarnerMedia, ESPN/Disney and Turner Broadcasting. Lynne holds a degree in economics and business, and a certificate in corporate board governance from the University of California, Los Angeles (UCLA).

Gio Giovannelli

Gio has over 25 years of international business experience, including four CEO roles in Brazil, one of which was Grupo Multi. Previous board roles include BOVESPA-listed Natura and CVC Viagens. Gio graduated from Bocconi University, holds an Economics Ph.D. and is OPM graduate of Harvard Business School.

Albert Hitchcock

Albert has over 30 years of experience in the technology industry. Previously, Albert was Group CIO at Vodafone and prior to this was Global CIO at Nortel Networks. Albert is a Chartered Engineer and a Fellow of the Institute of Engineering & Technology.

Mike Howells

Mike has more than 20 years of international business experience. Previously, he has worked in the British diplomatic network and the UK Foreign, Commonwealth and Development Office. Mike holds a masters degree in International Law from the University of Nottingham and an Anthropology degree from University College London.

Ishantha Lokuge

Ishantha has more than 20 years of Silicon Valley experience. Previously, he was at Shutterfly, eBay and Healtheon/WebMD. He holds degrees in computer science from Brandeis and Tufts, as well as a graduate degree in Media Arts and Sciences from the Massachusetts Institute of Technology (MIT) Media Lab.

Cinthia Nespoli

Cinthia has 17 years of international legal experience. Previously, she has worked in the manufacturing sector at multinational companies. Cinthia was admitted to the Brazilian bar in 2004 and earned her law degree from Pontifícia Universidade Católica de Campinas and a postgraduate degree in tax law from Pontifícia Universidade Católica de São Paulo.

Anna Vikström Persson

Anna Vikström Persson has over 20 years of international HR experience. Previously, Anna held executive positions at Sandvik, SSAB and Ericsson. Anna 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.

 

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Bob Whelan

Bob has over 40 years years of significant expertise in testing and assessment. Previously, Bob worked at Personnel Decisions International, as well as National Computer Systems (NCS) which Pearson acquired in 2000. Bob earned his BA from the University of Alabama in finance and economics.

On 8 March 2021 the Group announced a new strategy, including a new divisional structure. As such, the following table sets forth the composition of the Executive Committee following the implementation of the new organizational structure that will come into effect during 2021.

 

Name

  

Position

Tom ap Simon

   President, Virtual Learning

Tim Bozik

   President, Higher Education

Lynne Frank

   Chief Marketing Officer and Co-President, Direct-to-Consumer

Gio Giovannelli

   President, English Language Learning

Albert Hitchcock

   Head of Telecom and Technology Partnerships

Mike Howells

   Chief Strategy Officer and Interim President – Workforce Skills

Ishantha Lokuge

   Chief Product Officer and Co-President, Direct-to-Consumer

Cinthia Nespoli

   Chief Legal Officer

Anna Vikström Persson

   Chief Human Resources Officer

Bob Whelan

   President, Assessment & Qualifications

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 Committee are to:

 

   

Determine and regularly review the remuneration policies for the Executive Directors and other members of Pearson’s Executive management (who report directly to the Chief Executive). This includes base salary, incentive arrangements, pension arrangements, any other benefits and entitlements on termination of employment. When setting remuneration policy and packages, the Committee takes into account all factors which it deems necessary, including wider remuneration practices and related policies for the wider workforce.

 

   

Ensure the company maintains an appropriate level of engagement with its shareholders and shareholder representative bodies in relation to the Directors’ Remuneration Policy and its implementation.

 

   

Regularly review the implementation and operation of the Directors’ Remuneration Policy and approve the individual remuneration and benefits packages of Executive management.

 

   

Approve the design of, and determine targets for, any performance-related pay plans operated by the Group for Pearson Executive management and approve the total payments to be made under such plans.

 

   

Advise and decide on general and specific remuneration arrangements in connection with the termination of employment of Executive management.

 

   

Delegated responsibility for determining the remuneration and benefits package of the Chair of the Board.

 

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Review updates from management on talent, retention and gender pay gap.

 

   

Have oversight of workforce remuneration, policies and practice for the wider organization.

Remuneration policy

The 2020 Directors’ Remuneration Policy (2020 policy) described was approved by our shareholders at the Annual General Meeting held on 24 April 2020. The 2020 policy is underpinned by Pearson’s remuneration principals and aligns the remuneration arrangements for Executive Directors with our strategy and the interests of our long-term shareholders.

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 composed of fixed and performance-linked elements, with each element supporting different objectives. Base salary: helps to recruit, reward and retain employees. Base salary reflects the employment market, level, role, skills, experience and individual contribution. Allowances and benefits: help the company to recruit and retain employees. Retirement benefits: help to recruit and retain staff and recognize their long-term commitment to the company. Annual incentives: Recognize and motivate the achievement of annual business goals and strategic objectives. Annual incentives typically have a focus on key financial and non-financial metrics and reward employees for the company’s performance and their 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 to align the interests of Executives and shareholders. Long-term incentives 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, the Committee reviews remuneration by reference to different comparator groups including survey data from companies of similar size and 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 continues to review the mix of fixed and performance- linked remuneration on an annual basis, consistent with its overall philosophy.

Appointment of Chief Executive Officer

In October 2020, Andy Bird was appointed as Chief Executive after a very thorough recruitment process. In order to secure Andy Bird’s appointment, the Committee developed a remuneration package mindful of practice in Andy Bird’s home market – the US – where pay rates are substantially higher than in the UK and the way pay is structured is often very different. The Committee believe that such a package was an essential bridge between practices in order to secure an exceptional candidate who will lead Pearson through the next phase of its strategic development.

Going forward remuneration arrangements

With the exception of the co-investment award, a one-off arrangement to support his recruitment, Andy Bird’s remuneration arrangements were set in line with our approved Directors’ Remuneration Policy, which is aligned to UK market practice and key governance principles. Whilst within policy, the Committee recognizes that this package represents an uplift over his predecessor. When setting the package, the Committee considered, as is typical practice, Andy Bird’s proven skills and experience, the remuneration he received in his prior role and compensation levels for Chief Executive roles at comparable companies (including both FTSE-listed

 

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companies and global sector comparators). After careful evaluation, the Committee determined that such a package was appropriate, balancing these various reference points. While the Committee was mindful of internal relativities, it believed that securing such an exceptional candidate as Andy Bird was fundamental to Pearson’s future success.

 

Remuneration Element

  

Amount

  

Commentary

Base salary

   $1,250,000    Andy’s first salary review will be in 2023. His base salary will be fixed at $1,250,000 until then.

Retirement benefits

   16% of salary    Andy receives an annual cash allowance of 16% of base salary in lieu of pension. This is the cash allowance
Annual Incentive Plan Participation    Maximum annual
opportunity of 200% base
salary
   Andy will be eligible to participate in Pearson’s Annual Incentive Plan from 1 January 2021. He will have a maximum opportunity of 200% of base salary and a target bonus equal to 50% of the maximum opportunity.
Long-Term Incentive Plan Participation    Maximum annual opportunity of 300% base salary    From 2021, Andy will be eligible to participate in the Pearson Long-Term Incentive Plan with a maximum annual face value of 300% of base salary.

Benefits

   In accordance with the Directors’ Remuneration Policy    Andy receives benefits in line with our Directors’ Remuneration Policy, including travel- related benefits, private healthcare and risk-related benefits. In addition, the Company makes a contribution towards the rental costs of an apartment in New York to be used for business purposes, the cost of which will be capped at of $240,000 per year ($20,000 per month) prior to any taxes which may be due. The Committee considers it critical for Andy to have a base in New York so that he can be close to Pearson operations on the East Coast, while also facilitating easier travel to our London headquarters.

Shareholding requirements

   In accordance with the Directors’ Remuneration Policy    Andy will be required to hold Pearson shares with a market value of 300% of base salary, this requirement will extend for two years post-employment. As at 31 December 2020, Andy had met his shareholding requirement.

Appointment of Chief Financial Officer

Sally Johnson was appointed as Chief Financial Officer on 24 April 2020. On appointment, Sally’s base salary was set at £515,000 per annum, in line with the starting salary of Coram Williams in 2015. Her maximum AIP opportunity is 170% of salary and she will be granted an annual LTIP award with a maximum face value of 245% of salary.

 

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Base salary

Base salaries are set to provide the appropriate rate of remuneration for the job, taking into account relevant employment markets, business sectors and geographic regions.

Base salaries are typically reviewed annually taking into account: general economic and market conditions; the level of increases made across the company as a whole; particular circumstances such as changes in role, responsibilities or organization; the remuneration and level of increases for executives in similar positions in comparable companies in accordance with their regional employment market; and individual performance.

While there is no maximum salary level or maximum increase that may be offered, salary increases will normally be in line with typical increases awarded to other employees in the Group.

However, increases may be above this level in certain circumstances such as:

 

   

Where a new Executive Director has been appointed to the Board at a lower than typical market salary to allow for growth in the role. Then larger increases may be awarded to move salary positioning closer to typical market level as the Executive Director gains experience.

 

   

Where an Executive Director has been promoted or has had a change in responsibilities.

 

   

Where there has been a significant change in market practice or where there has been a significant change in the size and/or scope of the business.

Allowances and benefits

Allowances and benefits comprise cash allowances and non-cash benefits and which may include:

 

   

travel-related benefits (such as company car, car allowance and private use of a driver);

 

   

health-related benefits (such as healthcare, health assessment and gym benefit);

 

   

and risk benefits (such as additional life cover and long-term disability insurance that are not covered by the company’s retirement plans).

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 and to the same value as other employees.

Where an Executive Director is required to relocate to perform their role, appropriate one-off or on-going expatriate/relocation benefits may be provided (e.g. housing, schooling etc.).

The Committee may introduce other benefits, where it is considered appropriate to do so, taking into account the individual circumstances, the country of residence of a Director, the benefits available to all employees and the wider external market.

The cost of the provision of allowances and benefits varies from year to year depending on the cost to the company and there is no prescribed maximum limit. However, the Committee monitors annually the overall cost of the benefits provided along with market data, to ensure that it remains appropriate.

Retirement benefits

Employees in the UK are eligible to join the Money Purchase 2003 section of the Pearson Group Pension Plan. Executive Directors are eligible to join this plan or receive a cash allowance of equivalent value.

If any Executive Director is from, or works, outside the 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 value of such arrangement will reflect local market practice at the relevant time.

 

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The Committee will also honor all pre-existing retirement benefit obligations, commitments or other entitlements that were entered into by a member of the Pearson Group before that person became a Director, such as participation in the Final Pay section of the Pearson Group Pension Plan, which is closed to new members.

New appointments

From 2020, in line with our approved 2020 policy, new executive appointments to the Board are eligible to receive pension contributions of up to 16% of pensionable salary or a cash allowance of up to 16% of salary in line with the maximum company contribution as a percentage of salary that UK employees who are over 45 are eligible to receive.

UK Executive Directors who are, or become, affected by the lifetime allowance may be provided with appropriate benefits, as an alternative to further accrual of pension benefits such as a cash supplement, in line with the treatment for the employee population.

The pension entitlements of each Director are as follows:

Andy Bird

Andy Bird receives a payment in lieu of pension at 16% of his base salary. This is the new hire Executive Director rate in accordance with our Directors’ Remuneration Policy as approved at the 2020 AGM which was set in line with the pension provision for UK employees of a similar age.

Sally Johnson

Sally is an existing member of the Final Pay Section of the Pearson Pension Plan. Her accrual rate is 1/60th of pensionable salary per annum, restricted to the Plan earnings cap (£170,400 per annum in 2020/21). There are no enhanced early retirement benefits.

John Fallon

John Fallon was a member of the Final Pay Section of the Pearson Pension Plan. Mr Fallon left Pearson on 31 December 2020 at which point his benefit accrual in the Plan ceased. Mr Fallon attained the maximum service accrual for this benefit when he reached 20 years’ service in October 2017. With effect from this date, he had accrued a benefit of two-thirds of his final pensionable salary and no further service-related benefits were accrued under the Plan. Based on the 2020/21 earnings cap of £170,400, he will have accrued a pension of £108,680 per annum at this time.

In addition, during 2020 he received a taxable and non-pensionable cash supplement in lieu of the previous Funded Unapproved Retirement Benefits Scheme (FURBS) arrangement. This supplement was reduced from 26% to 23% of base salary during 2020 as the first annual step in reducing John Fallon’s pension entitlements to align with the UK workforce rate of 16% of base salary under our revised Directors’ Remuneration Policy. There are no enhanced early retirement benefits.

Coram Williams

Coram Williams was a member of the Final Pay Section of the Pearson Pension Plan. Coram left Pearson on 24 April 2020, at which point his benefit accrual in the Plan ceased. He had an accrual rate of 1/60th of pensionable salary per annum, restricted to the Plan earnings cap (£166,200 per annum in 2019/2020), with continuous service with a service gap. There are no enhanced early retirement benefits.

 

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Annual incentives

Measures and performance targets are set by the Committee at the start of the year, with payment made after year end following the Committee’s assessment of performance relative to targets.

Annual Incentive Plans are discretionary. The Committee reserves the right to adjust payments up or down if it believes that the outcome does not reflect underlying financial or non-financial performance or if such other exceptional factors warrant doing so.

The Committee may apply malus and / or clawback for a period of five years in circumstances, such as financial misstatement, individual misconduct or reputational damage to the company.

Annual incentives will not exceed 200% of base salary. For the Chief Executive, the individual maximum incentive opportunity is 200% of base salary and 170% for the Chief Financial Officer. There is normally no pay-out for performance at threshold. 50% of the maximum is payable for on-target levels of performance.

The Committee has the discretion to select the performance measures and relative weightings from year to year to ensure continuing alignment with strategy and to ensure targets are sufficiently stretching. The Committee sets performance targets for each measure annually. Annual incentives will normally be based on financial and strategic performance targets. Financial metrics will normally account for at least 75% of the total annual opportunity with the remaining portion normally being based on strategic and / or performance against personal objectives.

The plan is designed to incentivize and reward underlying performance. Actual results may be adjusted to remove the effect of foreign exchange and portfolio changes (acquisitions and disposals) and other relevant factors that the Committee considers do not reflect the underlying performance of the business in the performance year.

The funding of annual incentives will normally be related to the performance against financial and strategic imperatives performance targets. For the 2021 financial year the annual bonus will be based 30% on adjusted operating profit, 30% on sales performance, 20% on operating cash flow and 20% on strategic measures. Each performance measure will operate independently. There will be no changes to the maximum annual incentive opportunities for 2021.

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 objectives can be selected annually to support the Group’s strategy. A pay-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.

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

Awards of shares are made on an annual basis, which vest on a sliding scale based on performance, assessed against corporate performance targets measured at the end of the three-year performance period.

Awards are normally subject to a post vesting holding period for two years following the end of the performance period. For awards granted prior to 2020 the holding period applied will be in-line with the approach set out in the Directors’ Remuneration Policy in place at the time of award.

Participants may receive additional shares representing the gross value of dividends that would have been paid on shares that vest during the performance period.

 

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The Committee reserves the right to adjust pay-outs up or down before they are released if it believes that the vesting outcome does not reflect underlying financial or non-financial performance or if such other exceptional factors warrant doing so. In making such adjustments, the Committee is guided by the principle of aligning shareholder and management interests.

The Committee may apply malus and / or clawback for a period of five years in circumstances, such as financial misstatement, individual misconduct, or reputational damage to the company.

The maximum award is 350% of base salary in respect of a financial year.

The Committee will determine the performance measures, weightings and targets governing an award of 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 no pay-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 may be up to 25%.

Awards will normally be subject to the achievement of targets for earnings per share, return on invested capital and relative total shareholder return (weighted equally). The Committee may determine that different measures or weightings may apply for future awards, however, the committee would intend to consult with shareholders in advance if a different performance measure was to be used or if there was to be a significant change in the weighting of measures.

Sally Johnson was the only Executive Director eligible for a Long-Term Incentive Plan (LTIP) award in 2020. The maximum face value of the award granted was 245% of base salary. The Committee exercised its discretion in determining the appropriate share price to use for this purpose which is normally the closing share price on the trading day prior to the date of grant (which would have been 459.80p). However, mindful of recent share price volatility, the Committee exercised its discretion to use the five-day average share price to 1 March 2020, which was the share price used to determine share awards for the wider employee population and resulted in a lower number of shares being granted.

The 2020 LTIP award will vest on 1 May 2023 subject to the following performance targets:

 

EPS (1/3)

 

Net ROIC (1/3)

 

Relative TSR (1/3)

Vesting

schedule

(% of max)

 

Adjusted

EPS for FY22

 

Vesting

schedule

(% of max)

 

Adjusted net

ROIC for FY22

 

Vesting

schedule

(% of max)

 

Ranked position vs.

FTSE 100

15%

  45.5p   15%   5.2%   25%   Median

65%

  52.5p   65%   6.2%   —      

100%

  60.0p   100%   7.5%   100%   Upper quartile

 

Note:

straight line vesting between points shown, with no vesting for performance below threshold.

For 2021, Andy Bird and Sally Johnson will be granted an award of 300% of base salary and 245% of base salary, respectively. The Committee has not yet finalized setting performance targets for the 2021 LTIP, but when setting targets, the Committee follows a robust process, taking into account Pearson’s strategic plan, as well as external expectations. Targets set will be stretching in this context.

In May 2018, John Fallon and Coram Williams were made awards under the 2018 LTIP. These awards were based on performance the business delivered over the three-year period from 2018 to 2020. On leaving the Company, Coram Williams forfeited all unvested LTIP awards, including this award.

 

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The LTIP award made to John Fallon would have vested on the normal vesting date, pro-rated for time to reflect John’s departure prior to the normal vesting date, but the applicable performance targets have not been not met and therefore his award, together with awards for other participants, will lapse in full.

Co-investment award

In order to secure Andy Bird as our Chief Executive the Committee developed a one-off co-investment award, to help bridge the considerable gap in compensation practice between the UK and the US, Andy’s home market, where both amounts and structures are quite different. The Committee recognizes that such a one-off arrangement is not typical in the UK market, but believe it was the optimal structure to secure Andy Bird’s recruitment whilst incentivizing the creation of long-term shareholder value and keeping our forward-looking 2020 policy unchanged.

In order to grant the co-investment award, which was not envisaged in the Directors’ Remuneration Policy approved by shareholders at the AGM held on 24 April 2020, the Company sought shareholder approval of a resolution to amend the Directors’ Remuneration Policy on 18 September 2020. This resolution received support from 67% of shareholders. Given the unusual nature of the co-investment award in the UK market, the Board very much appreciated the support received by the majority of shareholders, although noted that a significant minority voted against the proposals. Pearson engaged extensively with shareholders during Andy’s appointment process, and in light of the General Meeting outcome, the Committee undertook a further engagement exercise to listen to and understand the views and perspectives of our shareholders.

The key features of the award are detailed below.

 

Director

   Date of award      Vesting
date
     Number of
shares
     Face value      Face value (% of
base salary)1
 

Andy Bird

     9 December 2020        See below        1,208,861      $ 9,375,000        750

 

1 

Face value was determined using a share price of 590.2p (five-day average to 24 August 2020) and a USD:GBP exchange rate of 1.314 (five-day average to 24 August 2020).

The grant of the co-investment award was conditional on Andy purchasing Pearson shares equal to 300% of base salary by 31 December 2020 (being a total value of $3.75m), which he must continue to hold throughout the period to 31 December 2023. This personal investment by Andy demonstrates his commitment to the role and creates immediate alignment with shareholders.

In consideration for this investment, Andy was granted a co-investment award equal to 750% of base salary.

The co-investment award will vest in three equal tranches as soon as practicable following 31 December 2021, 31 December 2022 and 31 December 2023 respectively and will be subject to performance underpins and Andy’s continued employment as at each vesting date.

Shares that vest will be subject to a holding period until 31 December 2023. The co-investment award was designed taking into account Andy’s home market – the US – where the structure of pay is often very different to the UK and aims to incentivise the transformation of the business and growth in the near-term. It was therefore considered appropriate that the phased vesting schedule and holding period to December 2023 reflect the period over which it is expected value will be delivered to our shareholders.

The vesting of the co-investment award is subject to the achievement of performance underpins to ensure the Committee can reduce vesting if in its opinion the performance of the business or the individual does not support this. These underpins are intended to prevent payment for failure.

 

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The vesting of each tranche of the award will be subject to the following performance underpins:

 

   

an appropriate level of progress being made in relation to delivering our strategy including our ongoing transition from print to digital

 

   

no significant ESG issues related to Andy’s tenure occurring which result in significant reputational damage

In addition, the vesting of the final tranche of the award will also be subject to the following TSR underpin:

 

   

the company’s TSR from the date of the announcement of Andy’s appointment to 31 December 2023 is either (1) positive; or (2) is at median or above when compared to the performance of the FTSE 100

If one or more of the underpins are not achieved, then the Committee would consider whether, and to what extent, a discretionary reduction in the number of shares vesting was required.

Shareholding policy

Executive Directors are expected to build up a shareholding in the company. The target holding is 300% of salary for the Chief Executive and 200% of salary for the Chief Financial Officer. Members of the executive management team are expected to build a holding of 100%.

Post-employment shareholding policy

Executive Directors are expected to retain their shareholding guideline (or actual holding if lower) for two years following stepping down as an Executive Director. This provision does not apply to any shares purchased by the Executive Director.

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 non-share-based compensation in the event of a change of control of Pearson. It is Pearson’s policy that the company may terminate the Chairman’s and Executive Directors’ service agreements by giving no more than 12 months’ notice.

Payment in lieu of notice

As an alternative, for Executive Directors, Pearson 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. 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, payment 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, payment in lieu of notice comprises 100% of the annual fees at the date of termination.

The company 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 the Director’s ability to mitigate their loss.

The company may also pay an amount considered to be reasonable by the Committee in respect of fees for legal and tax advice and outplacement support for the departing Director. The Committee reserves the right to

 

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make any other payments in connection with a Director’s cessation of office or employment where the payments are made in good faith, in discharge of an existing legal obligation (or by way of damages for breach of such an obligation) or by way of settlement of any claim arising in connection with the cessation of a Director’s office or employment.

Share awards

On cessation of employment, unless 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 termination of employment due to 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 / be released in line with normal time horizons.

 

   

Awards that are not subject to a performance condition will be released as soon as practicable following cessation of employment.

 

   

The number of shares that are released shall be pro-rated for the period of the participant’s service in the restricted period (although the Committee may in its absolute discretion waive or vary the pro-rating).

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.

The rules of Pearson’s discretionary share plans also 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.

Annual bonus

On cessation of employment, Executive Directors, participating in an Annual Incentive Plan for the relevant financial year, may, at the Committee’s discretion, retain entitlement to a pro rata annual incentive award, for their period of service during the financial year prior to their leaving date. Such pay-out will normally be calculated in good faith on the same terms and paid at the same time as for continuing Executive Directors.

Other elements of remuneration

Eligibility for allowances and benefits including retirement benefits normally cease when an employee retires or when an employee’s employment is terminated for any other reason.

John Fallon stepped down as Chief Executive and as a Director of Pearson plc on 18 October 2020. John remained an employee and adviser until 31 December 2020 to support the transition to Andy Bird as new Chief Executive Officer. Between 19 October 2020 and 31 December 2020, John was employed on his existing remuneration arrangements, save as described below.

 

   

On ceasing to be employed by Pearson, and in accordance with the terms of his contract of employment, there was no payment for loss of office

 

   

John remained eligible for an award under the AIP for the period 1 January 2020 to 31 December 2020. The award was based on Pearson group performance for 2020.

 

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John did not receive any award under the LTIP in respect of 2020.

 

   

John was treated as a good leaver in respect of his outstanding awards under the LTIP and treatment of the awards was in accordance with the relevant plan rules. The LTIP awards will vest on their normal vesting dates, subject to the achievement of the applicable performance conditions. They will be pro-rated to reflect John’s departure prior to the normal vesting date.

 

   

In accordance with the Directors’ Remuneration Policy, John was provided with appropriate support for his transition totalling a value of £60,000. Pearson will continue to support John with tax advice and filings in connection with his employment with Pearson. Pearson has also paid a total of £21,818, including associated taxes, in legal fees in connection with his departure.

 

   

In line with the Directors’ Remuneration Policy John is required to retain Pearson shares with a value of 300% of his base salary (or his actual shareholding if lower) for a period of two years from 19 October 2020. This guideline does not apply to shares purchased by John or earned prior to him being appointed as Chief Executive.

Coram Williams stepped down from the role of Chief Financial Officer on 24 April 2020. Coram Williams did not receive any payment in respect of his unserved notice period nor was there any payment for loss of office. Coram was not eligible for any AIP payment in respect of 2020 nor was he granted a 2020 LTIP. He forfeited all unvested LTIP awards on departure. In accordance with the Directors’ Remuneration Policy, Pearson continued to support Coram Williams with tax advice and filings in connection with any obligations resulting from his employment with Pearson.

Executive Directors’ Non-Executive Directorships

The Group’s policy is that Executive Directors may, by agreement with the Board, serve as Non-Executives of other companies and retain any fees payable for their services. Neither of the current Executive Directors, Andy Bird nor Sally Johnson, hold any external appointments.

Chair’s and Non-Executive Directors’ remuneration

The Chair is paid a single fee for all of their responsibilities. The Chair’s fee is set at a level that is competitive with those of Chairmen in similar positions in comparable companies.

The Non-Executive Directors are paid a basic fee. The Chair and members of the main Board Committees and the Senior Independent Director are paid an additional fee to reflect their extra responsibilities. Fees for Non-Executive Directors are determined by the full board having regard to market practice.

Additional fees or other payments may be paid to reflect additional responsibilities, roles or contribution, as appropriate.

The Chair and Non-Executive Directors are not entitled to any annual or long-term incentive, retirement or other employee benefits. Selected benefits may be introduced, if considered appropriate.

Pearson reimburses the Chair’s and Non-Executive Directors’ travel and other business expenses, and any tax incurred thereon, if applicable.

Normally a minimum of 25% of the Chair and Non-Executive Directors’ basic fee is paid in Pearson shares that the Non-Executive Directors have committed to retain for the period of their directorships. Shares are normally acquired quarterly at the prevailing market price with the individual’s after-tax fee payments.

Fee levels are reviewed on a periodic basis.

 

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The basic total fees payable to the Non-Executive Directors (excluding the Chair) are subject to the limit set out in the Articles of Association of the company (currently £750,000) and as increased by ordinary resolution from time to time.

 

     With effect from
April 24, 2020
 

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

   £ 15,000  

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

   £ 8,000  

Senior Independent Director

   £ 22,000  

 

Notes:

(1)

The fee paid to the Chair remains unchanged for 2021 at £500,000.

(2)

The fees paid to Non-Executive Directors are unchanged for 2021.

(3)

A minimum of 25% of the basic fee is paid in Pearson shares that the Chairman and Non-Executive Directors have committed to retain for the period of their directorships.

(4)

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 board of directors

The remuneration received by the Chair, Non-Executive Directors and Executive Directors in respect of the financial year ending December 31, 2020 was as follows:

 

     Base Salary/
Fees
     Allowances &
Benefits(1)
     Annual
Incentives
     Long-term
Incentives
     Retirement
Benefits
     Total  
     £000      £000      £000      £000      £000      £000  

Chair

                 

Sidney Taurel

     500        16        —          —          —          516  

Non-Executive Directors

                 

Elizabeth Corley

     115        1        —          —          —          116  

Sherry Coutu

     88        2        —          —          —          90  

Vivienne Cox

     129        3        —          —          —          132  

Josh Lewis

     28        7        —          —          —          35  

Linda Lorimer

     99        8        —          —          —          107  

Michael Lynton

     92        3        —          —          —          95  

Graeme Pitkethly

     92        1        —          —          —          93  

Tim Score

     116        1        —          —          —          117  

Andy Bird

     41        —          —          —          —          41  

Lincoln Wallen

     92        —          —          —          —          92  

Executive Directors

                 

Andy Bird

     203        98        —          —          33        334  

John Fallon

     653        24        —          —          178        855  

Sally Johnson

     353        9        —          —          45        407  

Coram Williams

     172        12        —          —          1        185  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Board of Directors

     2,773        185              257        3,215  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Notes:

(1)

Benefits include company car, car allowance, private use of a driver, healthcare, professional services and additional and subsistence expenses.

 

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(2)

Andy Bird served as Non-Executive Director between 1 May to 18 October 2020. Andy Bird was appointed to the role of Chief Executive and Executive Director from 19 October 2020.

(3)

John Fallon served as Chief Executive from 1 January 2020 to 18 October 2020.

(4)

Sally Johnson was appointed to the role of Chief Financial Officer on 24 April 2020.

(5)

Coram Williams served as Chief Financial Officer from 1 January 2020 to 24 April 2020.

(6)

The single figure remuneration for Andy Bird has been converted using a USD: GBP exchange rate of 1.2772 (average exchange rate for 2020).

Share options for senior management

Sally Johnson holds 2,658 options under the Pearson Save For Shares scheme, a savings-related share acquisition program open to all employees. These are not subject to future performance conditions.

Share ownership of senior management

The table below shows the number of ordinary shares and conditional shares held by Directors and their connected persons as at December 31 2020. 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, 2020 was 1,484,693.

 

As at 31 December 2020

   Ordinary
Shares (1)
     Conditional
Shares
 

Chair

     

Sidney Taurel

     223,406        —    

Executive Directors

     

Andy Bird

     586,437        1,208,861  

John Fallon

     450,262        587,135  

Sally Johnson

     11,822        244,052  

Coram Williams

     56,108        —    

Non-Executive Directors

     

Elizabeth Corley

     32,795        —    

Sherry Coutu

     5,061        —    

Vivienne Cox

     8,945        —    

Josh Lewis

     14,818        —    

Linda Lorimer

     13,838        —    

Michael Lynton

     18,785        —    

Graeme Pitkethly

     2,276        —    

Tim Score

     48,472        —    

Lincoln Wallen

     11,668        —    

 

Notes:

(1)

Share interests are shown as at 31 December 2020. For Directors who stepped down from the Board during the year, share interests are shown as at the date of their stepping down.

(2)

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 under the long-term incentive plan and any other share plans they might have participated in.

(3)

Conditional shares means unvested shares which remain subject to performance conditions, performance underpins and/or continuing employment for a pre-defined period.

(4)

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, 2020 was 680.40p per share and the range during the year was 423.50p to 696.20p.

 

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(5)

Graeme Pitkethly purchased 6,075 shares on 8 March 2021, taking his total holding to 8,351 shares. There have been no other changes in the interests of any Director between 31 December 2020 and 12 March 2021, being the latest practicable date prior to the publication of this report.

The total remuneration of the Executive Committee is set out in the table below:

 

All figures in £ millions

   2020  

Short-term employee benefits

     6  

Retirement benefits

     1  

Share-based payment costs

     6  
  

 

 

 

Total

     13  
  

 

 

 

Employee share ownership plans

In 1998, Pearson introduced a Worldwide Save For Shares Plan (“Plan”). Under this Plan, 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 Plan in the UK by a further ten years, until 2024 and the renewal of the directors’ authority to continue to operate equivalent arrangements for employees based outside of the UK. 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. Since 2020, Pearson has only operated a three-year Plan under the new name “Save For Shares”.

In the United States, Pearson operates an employee stock purchase plan (“ESPP”) 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.

Board practices

As at February 28, 2021, the Group’s Board comprises the Chair, two Executive Directors and eight Non-Executive Directors. The articles of association provide that at every annual general meeting, one-third of the Board of Directors, or the number nearest to one-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 for re-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 been re-elected, unless at or prior to such meeting it is expressly resolved not to fill the vacated office, or unless a resolution for the re-election of that Director has been put to the meeting and lost. The articles of association also provide that every Director be subject to re-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 for re-election on an annual basis at the company’s annual general meeting. Accordingly, all of the Directors will offer themselves for re-election at the forthcoming annual general meeting on April 23, 2021.

Pearson is listed on the New York Stock Exchange (“NYSE”). As a listed non-US issuer, the Group is required to comply with some of the NYSE’s corporate governance rules, and otherwise must disclose on its

 

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website any significant ways in which its corporate governance practices differ from those followed by US companies under the NYSE listing standards. At this time, the Group 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 are not composed entirely of independent Directors as the Chair, who is not 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 the Group’s website http://plc.pearson.com/company/business-operations

Audit Committee

This Committee appraises the Group’s financial management and reporting and assesses the integrity of its accounting procedures and financial control. Tim Score chairs this Committee and its other members are Elizabeth Corley, Vivienne Cox, Linda Lorimer, Michael Lynton, Graeme Pitkethly and Lincoln 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. Each member is “financially literate” for the purposes of the NYSE listing standards. The 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 determine the remuneration and benefits of the executive Directors and oversees remuneration arrangements for the Pearson Executive. The Committee also recommends the Chair’s remuneration to the Board of Directors for its decision. Elizabeth Corley chairs this Committee and its other members are Sherry Coutu, Tim Score and Sidney Taurel.

Nomination & Governance Committee

This Committee reviews corporate governance matters including UK Corporate Governance Code compliance and Board evaluation, considers the appointment of new 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, Sherry Coutu, Tim Score and Sidney Taurel.

Reputation & Responsibility Committee

This Committee considers the Group’s impact on society and the communities in which the Group operates, including to ensure strategies are in place to manage and improve the Group’s reputation. Linda Lorimer chairs this Committee and its other members are Andy Bird, Vivienne Cox, Michael Lynton, Graeme Pitkethly and Lincoln Wallen.

Employees

The average number of persons employed by the Group in continuing operations during each of the three fiscal years ended 2020 were as follows:

 

   

21,335 in fiscal 2020, and

 

   

22,734 in fiscal 2019, and

 

   

24,322 in fiscal 2018.

Through its subsidiaries, the Group has entered into collective bargaining agreements with employees in various locations. The Group’s management has no reason to believe that it would not be able to renegotiate any such agreements on satisfactory terms. The Group encourages employees to contribute actively to the business in the context of their particular job roles and believes that the relations with its employees are generally good.

 

 

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The table set forth below shows for 2020, 2019 and 2018 the average number of persons employed in each of the Group’s segments.

 

Average number employed

   2020      2019      2018  

UK

     4,204        4,345        4,420  

Other European Countries

     865        852        975  

US

     10,916        12,226        12,431  

Canada

     323        398        673  

Asia Pacific

     3,133        2,748        3,493  

Other Countries

     1,894        2,165        2,331  
  

 

 

    

 

 

    

 

 

 

Continuing operations

     21,335        22,734        24,322  
  

 

 

    

 

 

    

 

 

 

The average number employed in discontinued operations was nil in 2020, nil in 2019, and nil in 2018.

 

ITEM 7.

MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

As at February 28, 2021, 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*
 

Lindsell Train Limited

     84,082,002        11.18  

Schroders plc

     75,127,663        9.98  

Silchester International Investors LLP

     75,051,050        9.97  

Blackrock, Inc

     52,598,285        6.97  

Cevian Capital II GP Limited Inc

     40,623,241        5.40  

Ameriprise Financial Inc and its group

     41,236,375        5.02  

Libyan Investment Authority**

     24,431,000        3.01  

 

*

% of Issued share capital on date notified

**

Based on notification to the company dated June 7, 2010. We have been notified of no change to this holding since that date. Assets belonging to, or owned, held or controlled since September 16, 2011 by the Libyan Investment Authority and located outside Libya on that date, are frozen in accordance with The Libya (Sanctions) (EU Exit) Regulations 2020.

On February 28, 2021, 2,674 record holders with registered addresses in the United States held 21,899,175 ADRs, which represented 2.91% of the Group’s outstanding ordinary shares. Some of these ADRs are held by nominees and so these numbers may not accurately represent the number of shares beneficially owned in the United States.

Loans and equity advanced to joint ventures and associates during the year and as at December 31, 2020 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 2020.

 

ITEM 8.

FINANCIAL INFORMATION

The financial statements filed as part of this Annual Report are included on pages F-1 through F-93 hereof.

Other than those events described in note 37 in “Item 18. Financial Statements” of this Form 20-F and seasonal fluctuations in borrowings, there has been no significant change to the Group’s financial condition or

 

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results of operations since December 31, 2020. 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, the maximum level of net debt normally occurs in the third quarter, and the minimum level of net debt normally occurs in December.

However, in response to the COVID-19 outbreak, the Group took a decision to suspend the share buyback program, which helped to preserve liquidity and had positive impact on net debt and borrowings strategy for H1 2021.

The 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 the Group may be subject from time to time.

 

ITEM 9.

THE OFFER AND LISTING

The principal trading market for the Group’s ordinary shares is the London Stock Exchange which trade under the symbol “PSON”. Its 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. The Group established this facility in March 1995 and most recently amended it in August 2014 in connection with its New York Stock Exchange listing. Each ADS represents one ordinary share.

The ADSs trade on the New York Stock Exchange under the symbol “PSO”.

 

ITEM 10.

ADDITIONAL INFORMATION

Articles of association

The Group summarizes below the material provisions of its articles of association, as amended, which have been filed as an exhibit to its annual report on Form 20-F for the year ended December 31, 2020. The summary below is qualified entirely by reference to the Articles of Association. The Group has multiple business objectives and purposes and is authorized to do such things as the Board may consider fit to further its interests or incidental or conducive to the attainment of its objectives and purposes.

Directors’ powers

The Group’s business shall be managed by the Board of Directors and the Board may exercise all such of its 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.

 

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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 (or else that the Director is not aware of the interest or not aware of the transaction or arrangement in question, or else that the interest cannot be reasonably regarded to give rise to a conflict of 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, the preceding sentence only applies if the existence of such relationship has been approved by the 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.

 

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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 or sub-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 the 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 the 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 the Group’s undertaking, property and uncalled capital and to issue debentures and other securities, whether outright or as collateral security for any of its 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 the Group (and any of its 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 the Group’s funds for their services as it may from time to time determine by ordinary resolution and, in the case of non-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

 

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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 the Group’s remuneration policy. Under the articles of association, Directors currently are not required to hold any share qualification. However, the 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;

 

   

the appointment or election of Directors. Notwithstanding the provisions of the Articles, the Board has resolved that all Directors should offer themselves for re-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 chair 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 chair or, in his absence, the deputy chair or any other Director nominated by the Board, will preside as chair at every general meeting. If no Director is present at the general meeting or no Director consents to act as chair, the shareholders present shall elect one of their number to be chair 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 (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 relevant transfer by the Group’s registrar, Equiniti, Aspect House, Spencer Road, Lancing, West Sussex, BN99 6DA, United Kingdom, telephone number +44 121-415-7062.

 

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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

The Group may, from time to time by ordinary resolution subject to the Companies Act 2006:

 

   

consolidate and divide all or any of its share capital into shares of a larger nominal amount than its existing shares; or

 

   

sub-divide all of or any of its existing shares into shares of smaller nominal amounts.

The Group may, from time to time, increase its 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. The Group may also, by special resolution, reduce its 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 twenty-five pence of nominal share capital (being one ordinary share) of which he or she is the holder. Voting at any meeting of shareholders is usually on a poll rather than by show of hands. Voting on a poll is more transparent and equitable because it includes the votes of all shareholders, including those cast by proxies, rather than just the votes of those shareholders who attend the meeting. A poll may be also demanded by:

 

   

the chair 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 than one-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 than one-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 Group profits that are available by law for distribution, as the Group may declare by ordinary resolution, subject to the terms of issue thereof. However, no

 

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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. It may invest or otherwise use all dividends left unclaimed for six months after having been declared for its benefit, until claimed. All dividends unclaimed for a period of twelve years after having been declared will be forfeited and revert to 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 the Group on account of calls or otherwise in relation to its shares.

Liquidation rights

In the event of the Group’s liquidation, after payment of all liabilities, its 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 the 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 (excluding any issued as treasury shares) 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, the 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 the Group’s information request.

If the shares described in the default notice represent at least one-fourth of 1% in nominal value of the issued ordinary shares, then the default notice may additionally direct that in respect of those shares:

 

   

the Group will not pay dividends (or issue shares in lieu of dividends); and

 

   

the 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 the Group’s articles of association.

No provision of the articles of association expressly governs the ordinary share ownership threshold above which shareholder ownership must be disclosed. Under the Disclosure Guidance and Transparency Rules of the Financial Conduct Authority, any person who acquires, either alone or, in specified circumstances, with others an interest in the Group’s voting share capital equal to or in excess of 3% comes under an obligation to disclose prescribed particulars to the 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 the Group’s voting share capital in which a person has a notifiable interest reaches, exceeds or falls below 3%, 4%, 5%, 6%, 7%, 8%, 9%, 10%, and each 1% threshold thereafter up to 100%.

 

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Limitations affecting holders of ordinary shares or ADSs

Under English law 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.

Material contracts

The Group has not entered into any contracts outside the ordinary course of business during the two-year period immediately preceding the date of this annual report, other than the Trust Deed entered into in 2020 with respect to £350.0 million aggregate principal amount of 3.750% guaranteed notes due 2030, in each case, issued by a subsidiary and guaranteed by Pearson, which filed as Exhibit 2.6 of this report.

Executive employment contracts

The Group has entered into agreements with each of its Executive Directors pursuant to which such Executive Director is employed by 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 Group’s policy that it may terminate the Executive Directors’ service agreements by giving no more than 12 months’ notice. As an alternative, the Group 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 Chief Executive, payment-in-lieu of notice in installments may also be subject to mitigation. 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 Group may permit an Executive Director to stay employed after the announcement of their departure for a limited period to ensure an effective hand-over and/or allow time for a successor to be appointed. The Group 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 the Director’s ability to mitigate their loss.

Exchange controls

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 the Group’s securities, except as otherwise described under “— Tax Considerations” below.

Tax considerations

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.

 

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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 the 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 28, 2021 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 the 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 the 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 the Group’s current and accumulated earnings and profits will constitute a non-taxable return

 

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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 the 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 non-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 non-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 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 (“Treaty Non-resident”) and continues to not be resident in the UK, or continues to be Treaty Non-resident, for a period of five years or less 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 Treaty Non-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 non-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 non-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 as US-source gain or loss for US foreign tax credit purposes.

 

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Estate and gift tax

The current Estate and Gift Tax Convention (referred to in this paragraph as 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 certain EU litigation, HM Revenue & Customs (HMRC) accepted that it would no longer seek to apply the 1.5% SDRT charge when new shares are issued to a clearance service or depositary receipt system (or transferred into a clearance service or depositary receipt system, where such transfer is integral to the raising of capital by the company concerned) on the basis that the charge was not compatible with EU law. Following the UK’s departure from the EU, such pre-existing EU law rights, recognized in litigation, were preserved as a domestic law matter following the end of the implementation period on December 31, 2020 pursuant to provisions of the UK European Union (Withdrawal) Act 2018. 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. 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

The Group believes that the close company provisions of the UK Corporation Tax Act 2010 do not apply to it.

Documents on display

Copies of the Group’s Memorandum and Articles of Association are filed as exhibits to this Annual Report. We also file reports and other information with the SEC. These materials, including this Annual Report and the

 

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accompanying exhibits are available at http://plc.pearson.com/investors. In addition, shareholders may visit the Investor section of our website at corporate.pearson.com or request a copy of certain documents referred to in this Annual Report by writing to us at the following address: Pearson plc, c/o the Company Secretary, 80 Strand, London WC2R 0RL.

 

ITEM 11.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Introduction

Pearson’s treasury policies set out the group’s principles for addressing key financial risks including capital risk, liquidity risk, foreign exchange risk and interest rate risk and sets out measurable targets for each. The Audit Committee receive quarterly reports incorporating compliance with these measurable targets and review and approve the treasury policies annually.

The treasury function is permitted to use derivatives where their use reduces a risk or allows a transaction to be undertaken more cost effectively. Derivatives permitted include swaps, forwards and collars to manage foreign exchange and interest rate risk, with foreign exchange swap and forward contracts the most commonly executed. Speculative transactions are not permitted.

Capital risk

The Group’s objectives when managing capital are:

 

   

To maintain a strong balance sheet and a solid investment grade rating;

 

   

To continue to invest in the business organically and through acquisitions;

 

   

To have a sustainable and progressive dividend policy, and;

 

   

To return surplus cash to our shareholders where appropriate.

In response to the COVID-19 outbreak, the Group took a decision to suspend the share buyback program, which helped to preserve liquidity and maintain the Group’s credit metrics. In May 2020 Standard and Poor’s downgraded the Group to BBB- (stable) (2019: BBB (negative outlook)) and in August 2020 Moody’s downgraded the Group to Baa3 (stable) (2019: Baa2 (stable outlook)), reflecting weaker anticipated results for 2020 as a result of COVID-19. It is anticipated that sales and profit growth will improve the Group’s credit position following the end of widespread social distancing and lockdown measures in the Group’s major markets

Interest and foreign exchange rate management

The Group’s principal currency exposure is to the US dollar (USD) which represents more than 60% of the Group’s sales. A portion of the Group’s debt is held in US dollars to provide a natural hedge of this exposure.

Pearson achieves this mix in one of three ways:

 

   

Issuing fixed rate debt in USD;

 

   

Issuing fixed debt in euro and swapping it to British Pounds Sterling (GBP)  either at fixed or floating rates and swapping an element to USD either using cross currency swaps or foreign exchange swaps;

 

   

Borrowing in USD at floating rates on the group’s bank facility.

At December 31, 2020, the group had swap contracts and fixed rate bonds to fix the interest rate on $1,554m vs $1,058m (2019) of total fixed debt, excluding leases.

 

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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 repayments of debt at its maturity and identifying an appropriate amount of headroom to provide a reserve against unexpected outflows.

At December 31, 2020, the Group had cash of £1.1 billion and Pearson’s $1.19bn (£0.9m) US dollar denominated revolving credit facility due 2024 was undrawn

At December 31, 2019, the Group had cash of £0.4 billion and was  drawn at £230m/$315m of $1.19bn (£0.9m) US dollar denominated revolving credit facility due 2024.

The $1.19 billion facility contains interest cover and leverage covenants which the Group has complied with for both the years ended December 31, 2019 and December 31, 2020.

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 within guidelines approved by the board. Exposures and limits applicable to each financial institution are reviewed on a regular basis.

 

ITEM 12.

DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

AMERICAN DEPOSITARY SHARES

Fees paid by ADR holders

The 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 provide fee-attracting services until its fees for those services are paid.

 

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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

 

•  cancelation 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 Depositary reimburses the company for certain expenses it incurs in relation to the ADS program. The Depositary also pays the standard out-of-pocket maintenance costs for the registered ADSs, which consist of the expenses for the mailing and printing of proxy materials, distributing dividend checks, electronic filing of US federal tax information, mailing required tax forms, stationery, postage, facsimile and telephone calls. It also reimburses the company for certain investor relationship programs or special investor relations promotional activities. There are limits on the amount of expenses for which the Depositary will reimburse the company, but the amount of reimbursement is not necessarily tied to the amount of fees the Depositary collects from investors. The company received $50,000 as reimbursement from the depositary with respect to 2020.

 

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PART II

 

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 the Group’s disclosure controls and procedures as of December 31, 2020 was carried out by management, under the supervision and with the participation of the 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 Rules 13a- 15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) were effective as at December 31, 2020 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, the 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, 2020 based on the framework in Internal 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 of December 31, 2020 based on criteria in Internal 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, 2020, as stated in their report which appears on page F-2.

Change in internal control over financial reporting

During the period covered by this Annual Report on Form 20-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, in the US in 2018 and 2019 and some other countries in 2020, with a resulting change in some aspects of the control environment. Other than the foregoing, there have been no changes in our internal control over financial reporting during the year ended December 31, 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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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 the Group’s website (www.pearson.com/corporate/code-of-conduct.html). The information on this website is not incorporated by reference into this report.

 

ITEM 16C.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

In line with best practice, the Group’s relationship with PricewaterhouseCoopers LLP (PwC) is governed by its 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 those non-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 and non-audit services provided by PwC. Where appropriate, services will be tendered prior to awarding this work to the auditor.

The following table sets forth remuneration paid to PwC for 2020 and 2019:

 

Auditors’ Remuneration

   2020      2019  
     £m      £m  

Audit fees

     7        7  

Tax fees

     —          —    

Audit-related fees

     —          —    

All other fees

     —          —    

Audit fees include £35,000 (2019: £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.

Included in audit related fees is audit related work in relation to disposal transactions and other assurance work related to the audit of the Group’s efficacy program.

 

ITEM 16D.

EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

Not applicable.

 

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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
     Approximate
maximum value
of shares that
may yet be
purchased under
the plans or
programs
 

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        n/a  

February 1, 2019 – February 28, 2019

     1,500,000      £ 8.97        n/a        n/a  

March 1, 2019 – March 31, 2019

     3,000,000      £ 8.74        n/a        n/a  

October 1, 2019 – October 31, 2019

     1,600,000      £ 7.39        n/a        n/a  

January 1, 2020 – January 31, 2020

     6,680,158      £ 5.80        6,680,158      £ 310m  

February 1, 2020 – February 29, 2020

     9,958,033      £ 5.72        9,958,033      £ 253m  

March 1, 2020 - March 31, 2020

     13,239,085      £ 5.28        13,239,085        n/a  

July 1, 2020 – July 31, 2020

     1,105,402      £ 5.30        n/a        n/a  

All purchases were made in open-market transactions.

Purchases of shares in 2019 and in July 2020 were made to satisfy obligations under Pearson employee share award programs. None of the foregoing share purchases was made as part of a publicly announced plan or program.

In January 2020, the Group announced a £350m share buyback program. The program was paused until further notice in March 2020 in response to COVID-19 outbreak. Later in the year the management took a decision to suspend the share buyback program. In 2020, the Group’s brokers purchased shares at a total value of £176m. All shares had been canceled at February 28, 2021. The shares bought back were canceled and the nominal value of these shares (£7m) was transferred to a capital redemption reserve. The nominal value of shares canceled at December 31, 2020 was £18m (2019: £11m).

 

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 listed non-US issuer, the Group is required to comply with some of the NYSE’s corporate governance rules, and otherwise must disclose on its website any significant ways in which its 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 are not composed entirely of independent directors as the Chairman, who is not considered independent under NYSE rules, is a member of each committee in addition to independent directors.

 

ITEM 16H.

MINE SAFETY DISCLOSURE

Not applicable.

 

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PART III

 

ITEM 17.

FINANCIAL STATEMENTS

Not applicable.

 

ITEM 18.

FINANCIAL STATEMENTS

The financial statements filed as part of this Annual Report are included on pages F-1 through F-86 hereof.

 

ITEM 19.

EXHIBITS

 

  1.1    Articles of Association of Pearson plc. ¥
  2.1    Indenture dated May  8, 2012 between Pearson Funding Four plc, as the Issuer, Pearson plc, Guarantor, and The Bank of New York Mellon, as trustee, Paying Agent and Calculation Agent j
  2.2    Indenture dated May  8, 2013 between Pearson Funding Five plc, as the Issuer, Pearson plc, Guarantor, and The Bank of New York Mellon, as trustee, Paying Agent and Calculation Agent. q
  2.3    Trust Deed dated May  19, 2014 between Pearson Funding Five plc, as the Issuer, Pearson plc, Guarantor, and The Law Debenture Trust Corporation P.L.C, as trustee. ¥
  2.4    Trust Deed dated May  6, 2015 between Pearson Funding Five plc, as the Issuer, Pearson plc, Guarantor, and The Law Debenture Trust Corporation P.L.C, as trustee. l
  2.5    Indenture dated September  5, 2019 between Pearson Funding Four plc, as the Company, Pearson plc, Guarantor and The Bank of New York Mellon, as trustee, Paying Agent and Calculation Agent.ß
  2.6    Trust Deed dated June 4, 2020 between Pearson Funding plc, as the Issuer, Pearson plc, Guarantor, and The Law Debenture Trust Corporation P.L.C, as trustee.
  3.1    Description of securities of Pearson plc.ß
  8.1    List of Significant Subsidiaries.
12.1    Certification of Chief Executive Officer.
12.2    Certification of Chief Financial Officer.
13.1    Certification of Chief Executive Officer.
13.2    Certification of Chief Financial Officer.
15.1    Consent of PricewaterhouseCoopers LLP.
101.INS    XBRL Instance Document.
101.SCH    XBRL Taxonomy Extension Schema Document
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB    XBRL Taxonomy Extension Label Linkbase Document.
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document.

 

j

Incorporated by reference from the Form 20-F of Pearson plc for the year ended December 31, 2012 and filed March 22, 2013

q

Incorporated by reference from the Form 20-F of Pearson plc for the year ended December 31, 2013 and filed March 27, 2014.

 

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¥

Incorporated by reference from the Form 20-F of Pearson plc for the year ended December 31, 2014 and filed March 26, 2015.

l

Incorporated by reference from the Form 20-F of Pearson plc for the year ended December 31, 2015 and filed March 23, 2016.

ß

Incorporated by reference from the Form 20-F of Pearson plc for the year ended December 31, 2019 and filed April 1, 2020.

 

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Pearson plc

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 (the “Company”) as of December 31, 2020 and 2019 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, 2020, 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, 2020, based on criteria established in Internal 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 the Company as of December 31, 2020 and 2019 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020 (i) in accordance with International Accounting Standards in conformity with the requirements of the Companies Act 2006, (ii) as prepared in accordance with International Financial Reporting Standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union and (iii) as prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020 based on criteria established in Internal Control — Integrated Framework (2013) issued by the COSO.

Change in Accounting Principle

As discussed in note 1a to the consolidated financial statements, the Company changed the manner in which it

accounted for leases in 2019 due to the adoption of IFRS 16.

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’s Annual Report on Internal Control over Financial Reporting” appearing under Item 15 of this Form 20-F. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company’s internal control over financial reporting based on our 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 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 regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial 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

 

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testing and evaluating the design and operating effectiveness of internal control based 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.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Carrying value of goodwill and other intangible assets

As described in note 11 to the consolidated financial statements, the Company’s goodwill balance was £2,094 million as of December 31, 2020. In addition, other non-current intangible assets excluding goodwill amounted to £648 million. Goodwill has been allocated to cash generating units (CGUs) or to an aggregation of CGUs where goodwill could not be reasonably allocated to individual CGUs. Goodwill is tested at least annually for impairment. The recoverable amount of each CGU or aggregated CGU is based on the higher of value in use and fair value less costs of disposal. Management’s impairment assessment is based on the value in use of each CGU or aggregated CGU with the exception of Pearson Institute of Higher Education, which is held for sale as of December 31, 2020 and which has therefore been assessed for impairment by reference to its estimated net disposal proceeds. For the purpose of estimating value in use, management has used an income approach based on present value techniques. These calculations require management judgment in respect of the use of estimates for discount rates, perpetuity growth rates and sales and operating profit forecasts.

The principal considerations for our determination that performing procedures relating to the carrying value of goodwill and other intangible assets is a critical audit matter are that there were judgments and estimates made by management in determining the recoverable amount of the CGUs or aggregated CGUs. This in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures to evaluate the present value techniques used to calculate value in use such as sales and operating profit forecasts and significant assumptions, including discount rates and perpetuity growth rates. In addition, the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and in evaluating the audit evidence obtained.

 

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Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s impairment assessment of the carrying value of goodwill and other intangible assets. These procedures also included, among others:

 

 

testing the mathematical integrity of management’s value in use impairment model;

 

 

comparing the carrying amounts of net assets subject to impairment testing to the underlying accounting records;

 

 

comparing the forecast cash flows (which include forecast sales and operating profit) to board approved budgets and strategic plans and assessing how these budgets and strategic plans are compiled, including an assessment of the historical accuracy of management’s budgeting and forecasting compared to actual results;

 

 

evaluating management’s related judgments and estimates, including short-term revenue and operating profit projections;

 

 

comparing management’s forecasts and key assumptions to industry projections and to comparable companies where this information was available;

 

 

evaluating the impact of the COVID-19 pandemic on management’s future cash flow projections by comparison to external market economic forecasts;

 

 

using professionals with specialized skill and knowledge to assist in evaluating the appropriateness of the perpetuity growth rate and discount rate for each CGU or aggregated CGU by comparison with third party information, past performance and relevant risk factors;

 

 

performing independent sensitivity analysis to understand the impact of reasonably possible changes to key assumptions, including sensitivity analysis to evaluate the impact of different COVID-19 scenarios on the Company’s impairment judgments; and

 

 

evaluating the sufficiency of disclosures for CGUs or aggregated CGUs where headroom is more sensitive to changes in key assumptions.

Provisions for tax uncertainties

As described in notes 7 and 34 to the consolidated financial statements, the Company has recorded provisions for tax uncertainties amounting to £104 million as of December 31, 2020. The Company is subject to income taxes in numerous jurisdictions. Significant judgment is required in determining the estimates in relation to the worldwide provisioning for income taxes. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. The Company recognises tax provisions 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 judgment regarding the application of tax legislation, the results of any tax audits and best estimates of future settlement amounts. The Company discloses tax exposures in respect of unsettled or disputed tax liabilities, including in relation to EU state aid and an assessment from the Brazilian tax authorities, when it is considered possible that there will be a future outflow of funds to a tax authority.

The principal considerations for our determination that performing procedures relating to provisions for tax uncertainties is a critical audit matter are that there was judgment applied by management when determining uncertain tax positions, including a high degree of estimation uncertainty relative to the application of tax laws, findings of tax audits and potential for significant adjustments as a result of such audits. This in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures to evaluate the timely identification

 

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and accurate measurement of provisions for tax uncertainties. Also, the evaluation of audit evidence available to support the provisions for tax uncertainties is complex and required significant auditor judgment as the nature of the evidence is often highly subjective and the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and in evaluating the audit evidence obtained.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the identification, completeness and measurement of provisions for tax uncertainties. Using professionals with specialized skill and knowledge to assist in undertaking this testing, these procedures also included, among others:

 

 

assessing the tax impact of business developments in 2020, including the disposal of the Company’s remaining stake in Penguin Random House;

 

 

recalculating the Company’s tax provisions and considering whether the treatments adopted were in line with the Company’s tax policies and had been applied consistently;

 

 

evaluating the key underlying assumptions. In making this evaluation, the status of tax authority audits and enquiries was considered. We considered the basis and support in particular for provisions not subject to tax audit in comparison with experience of similar situations at comparable companies;

 

 

evaluating the consistency of settled amounts against provisions booked in prior years;

 

 

evaluating the consistency of management’s approach to establishing or changing prior provision estimates and considering whether changes in prior provisions reflected a change in facts and circumstances during 2020; and

 

 

evaluating the basis for management’s judgments where provisions have not been established, including for material potential exposures like EU state aid and the assessment from the Brazilian tax authorities disclosed in note 34 to the consolidated financial statements, and assessing third party advice obtained by management as we independently formed our own view about the likelihood of these possible tax risks giving rise to future cash outflows.

Sales return liability

As described in notes 3 and 24 to the consolidated financial statements, the Company’s sales return liability was £86 million as of December 31, 2020. Revenue from the sale of books is recognised net of a provision for anticipated returns. This liability requires management to consider historical return rates, customer buying patterns and retailer behaviours, including stock levels.

The principal considerations for our determination that performing procedures relating to the sales return liability is a critical audit matter are that there were estimates made by management when determining the level of provisioning. This in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures to evaluate management’s significant assumptions, including historical return rates, customer buying patterns and retailer behaviours, including stock levels.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the sales return liability. These procedures also included, among others:

 

 

assessing management’s evaluation of market trends and the Company’s responses and considering whether management’s provisioning methodology is appropriate in this context;

 

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testing the sales return liability calculation and evaluating the completeness and accuracy of historical sales and return experience data;

 

 

performing detailed testing over shipment and return levels around year-end and evaluating whether these gave rise to an increased risk of future returns;

 

 

considering whether the reduction in the sales return liability in 2020 is consistent with evidence obtained in other areas of the audit; and

 

 

evaluating whether management has adopted methods and made estimates for future returns that were supportable and appropriate.

Recoverability of pre-publication assets

As described in note 20 to the consolidated financial statements, the Company’s pre-publication assets amounted to £905 million as of December 31, 2020. 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 when the title will generate probable future economic benefits and costs can be measured reliably. Pre-publication assets are amortised on publication over their estimated economic lives. Management undertakes impairment trigger assessments at least annually or when triggering events occur. As a result of COVID-19, management has undertaken formal impairment tests of all material pre-publication assets in 2020. The estimate of the economic lives and the recoverability of pre-publication assets involves a significant degree of judgment based on management estimates of future potential sales.

The principal considerations for our determination that performing procedures relating to the recoverability of pre-publication assets is a critical audit matter are that there were judgments and estimates applied by management when assessing the estimated economic lives and the recoverability of pre-publication assets, including forecasts of future potential sales. This in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures to evaluate management’s judgments and estimates.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the pre-publication assets. These procedures also included, among others:

 

 

assessing the appropriateness of capitalisation and amortisation policies and considering whether these policies had been consistently applied;

 

 

selecting a sample of costs to test their accuracy and appropriateness for capitalisation;

 

 

evaluating the reasonableness of amortisation periods and profiles compared to sales forecasts and historical sales experience;

 

 

evaluating the carrying value of certain pre-publication assets where products are yet to be launched, are less proven or where sales are lower than originally anticipated;

 

 

comparing forecast sales with historical experience, including an evaluation of the historical accuracy of budgeting, and obtaining evidence for management’s explanations of variances;

 

 

testing the mathematical integrity of management’s impairment models, comparing the carrying amounts of the pre-publication assets subject to impairment testing to underlying accounting records and assessing the reasonableness of discount rates applied; and

 

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performing independent sensitivity analysis to understand the impact of reasonably possible changes to key assumptions.

/s/PricewaterhouseCoopers LLP

London, United Kingdom

March 31, 2021

We have served as the Company’s auditor since 1996.

 

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Consolidated income statement

Year ended 31 December 2020

 

All figures in £ millions

  Notes      2020     2019     2018  

Continuing operations

        

Sales

    2        3,397       3,869       4,129  

Cost of goods sold

    4        (1,767     (1,858     (1,943
    

 

 

   

 

 

   

 

 

 

Gross profit

       1,630       2,011       2,186  

Operating expenses

    4        (1,402     (1,806     (1,907

Other net gains and losses

    4        178       16       230  

Share of results of joint ventures and associates

    12        5       54       44  
    

 

 

   

 

 

   

 

 

 

Operating profit

    2        411       275       553  

Finance costs

    6        (107     (84     (91

Finance income

    6        50       41       36  
    

 

 

   

 

 

   

 

 

 

Profit before tax

       354       232       498  

Income tax

    7        (44     34       92  
    

 

 

   

 

 

   

 

 

 

Profit for the year

       310       266       590  
    

 

 

   

 

 

   

 

 

 

Attributable to:

        

Equity holders of the company

       310       264       588  

Non-controlling interest

       —         2       2  
    

 

 

   

 

 

   

 

 

 

Earnings per share attributable to equity holders of the company during the year (expressed in pence per share)

        

– basic

    8        41.0p       34.0p       75.6p  

– diluted

    8        41.0p       34.0p       75.5p  
    

 

 

   

 

 

   

 

 

 

 

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Consolidated statement of comprehensive income

Year ended 31 December 2020

 

All figures in £ millions

  Notes      2020     2019     2018  

Profit for the year

       310       266       590  

Items that may be reclassified to the income statement

        

Net exchange differences on translation of foreign operations – Group

       (109     (113     91  

Net exchange differences on translation of foreign operations – associates

       —         (2     (1

Currency translation adjustment disposed

       (70     4       (4

Attributable tax

    7        (13     5       (4

Items that are not reclassified to the income statement

        

Fair value gain on other financial assets

       14       20       8  

Attributable tax

    7        (6     (4     —    

Remeasurement of retirement benefit obligations – Group

    25        (23     (145     22  

Remeasurement of retirement benefit obligations – associates

       —         (4     3  

Attributable tax

    7        2       22       9  
    

 

 

   

 

 

   

 

 

 

Other comprehensive (expense)/income for the year

    29        (205     (217     124  
    

 

 

   

 

 

   

 

 

 

Total comprehensive income for the year

       105       49       714  
    

 

 

   

 

 

   

 

 

 

Attributable to:

        

Equity holders of the company

       105       47       712  

Non-controlling interest

       —         2       2  
    

 

 

   

 

 

   

 

 

 

 

F-9


Table of Contents

Consolidated balance sheet

As at 31 December 2020

 

All figures in £ millions

  Notes      2020     2019  

Assets

      

Non-current assets

      

Property, plant and equipment

    10        515       618  

Intangible assets

    11        2,742       2,900  

Investments in joint ventures and associates

    12        6       7  

Deferred income tax assets

    13        32       59  

Financial assets – derivative financial instruments

    16        45       29  

Retirement benefit assets

    25        410       429  

Other financial assets

    15        138       122  

Trade and other receivables

    22        223       313  
    

 

 

   

 

 

 
       4,111       4,477  

Current assets

      

Intangible assets – pre-publication

    20        905       870  

Inventories

    21        129       169  

Trade and other receivables

    22        1,118       1,275  

Financial assets – derivative financial instruments

    16        18       25  

Cash and cash equivalents (excluding overdrafts)

    17        1,097       437  
    

 

 

   

 

 

 
       3,267       2,776  
    

 

 

   

 

 

 

Assets classified as held for sale

    32        73       397  
    

 

 

   

 

 

 

Total assets

       7,451       7,650  
    

 

 

   

 

 

 

Liabilities

      

Non-current liabilities

      

Financial liabilities – borrowings

    18        (1,397     (1,572

Financial liabilities – derivative financial instruments

    16        (40     (24

Deferred income tax liabilities

    13        (62     (48

Retirement benefit obligations

    25        (85     (92

Provisions for other liabilities and charges

    23        (8     (13

Other liabilities

    24        (80     (86
    

 

 

   

 

 

 
       (1,672     (1,835
    

 

 

   

 

 

 

 

F-10


Table of Contents

Consolidated balance sheet continued

As at 31 December 2020

 

All figures in £ millions

  Notes      2020     2019  

Current liabilities

      

Trade and other liabilities

    24        (1,196     (1,278

Financial liabilities – borrowings

    18        (254     (92

Financial liabilities – derivative financial instruments

    16        (12     (15

Current income tax liabilities

       (84     (55

Provisions for other liabilities and charges

    23        (25     (52
    

 

 

   

 

 

 
       (1,571     (1,492
    

 

 

   

 

 

 

Liabilities classified as held for sale

    32        (74      
    

 

 

   

 

 

 

Total liabilities

       (3,317     (3,327
    

 

 

   

 

 

 

Net assets

       4,134       4,323  
    

 

 

   

 

 

 

Equity

      

Share capital

    27        188       195  

Share premium

    27        2,620       2,614  

Treasury shares

    28        (7     (24

Capital redemption reserve

       18       11  

Fair value reserve

       53       39  

Translation reserve

       388       567  

Retained earnings

       865       911  
    

 

 

   

 

 

 

Total equity attributable to equity holders of the company

       4,125       4,313  

Non-controlling interest

       9       10  
    

 

 

   

 

 

 

Total equity

       4,134       4,323  
    

 

 

   

 

 

 

These financial statements have been approved for issue by the Board of Directors on March 31, 2021 and signed on its behalf by

 

 

LOGO

Sally Johnson

Chief Financial Officer

 

F-11


Table of Contents

Consolidated statement of changes in equity

Year ended 31 December 2020

 

    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 2020

    195       2,614