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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 30, 2022
 
 
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
, 2021
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
     756,802,797  
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  
 
Auditor Firm Id:  
876

      Auditor Name:  
PricewaterhouseCoopers LLP
    Auditor Location:    
London, United Kingdom
 
 
 
 

TABLE OF CONTENTS
 
         
Page
 
        3  
   Forward-Looking Statements      4  
     
   Identity of Directors, Senior Management and Advisers      5  
        5  
   Key Information      5  
   Risk Factors      5  
        13  
   Pearson plc      13  
   Overview      14  
   Recent Developments      14  
   Selected Consolidated Financial Data      15  
   Dividend Information      16  
   The Group’s strategy      17  
   Operating Divisions      18  
   Operating Cycles      22  
   Competition      22  
   Intellectual Property      23  
   Raw Materials      23  
   Government Regulation      23  
   Climate Change      23  
   Licenses, Patents and Contracts      24  
   Legal Proceedings      24  
   Organizational Structure      25  
   Property, Plant and Equipment      26  
   Capital Expenditures      26  
        26  
        27  
   General Overview      27  
   Results of Operations      31  
   Liquidity and Capital Resources      40  
   Accounting Policies      43  
        44  
   Directors and Senior Management      44  
   Compensation of Senior Management      48  
   Share Options of Senior Management      58  
   Share Ownership of Senior Management      58  
   Employee Share Ownership Plans      59  
   Board Practices      60  
   Employees      61  
        62  
        62  
        62  
        63  
   Articles of Association      63  
   Material Contracts      69  
   Exchange Controls      70  
 
1

         
Page
 
   Tax Considerations      70  
   Documents on Display      73  
   Quantitative and Qualitative Disclosures about Market Risk      73  
   Introduction      73  
   Capital Risk      73  
   Interest and Foreign Exchange Rate Management      74  
   Liquidity and Re-financing Risk Management      74  
   Financial Counterparty Risk Management      74  
   Description of Securities Other Than Equity Securities      74  
   American Depositary Shares      74  
   Fees paid by ADR holders      74  
   Fees incurred in past annual period and fees to be paid in the future      75  
     
        76  
        76  
        76  
   Disclosure Controls and Procedures      76  
   Management’s Annual Report on Internal Control over Financial Reporting      76  
   Change in Internal Control over Financial Reporting      76  
        76  
        77  
        77  
        77  
        77  
        78  
        78  
        79  
        79  
     
        80  
        80  
        80  
 
2

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 consolidated 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 UK
(“UK-adopted
IFRS”), which was brought into law on 31 December 2020, and adopted by the Group on 1 January 2021. The change constitutes a change in accounting framework, but there was no impact on recognition, measurement or disclosure in the period as a result of the change in framework. The consolidated financial statements have also been prepared in conformity with the requirements of the Companies Act 2006. 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, in respect of accounting standards applied by the Group, there is no difference between the
UK-adopted
IFRS and IASB issued 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 = $1.35, the noon buying rate in The City of New York for cable transfers and foreign currencies as certified by the Federal Reserve Bank of New York for customs purposes on December 31, 2021. 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, 2022 the noon buying rate for sterling was £1.00 = $1.34.
The Group currently consists of its education business only. In September 2021, the Group acquired the remaining stake in Faethm Holdings Pty Limited to bring its ownership up to 100% of the share capital of the Company. 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-F90.
 
3

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 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.
 
4

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
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.
Content & Channel Risk
If the Group fails to successfully invest in and deliver the right products and services and to respond to competitive threats, its sales and profits could be adversely impacted.
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 has led to changes in consumers’ perception of value and the publisher’s position between consumers, retailers, and authors, and has required the Group to make changes in product and content distribution.
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.
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.
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, which requires continued development of both content and the method of delivery to be able to provide differentiated products and services, and can result in competitive disadvantage and missed opportunity for revenue and growth.
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.
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) increase the risk that bad actors will infringe the Group’s content rights (print and digital counterfeit, digital piracy), which will reduce sales and/or erode sales.
 
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Although the Group’s intellectual property rights (IPR) in brands and content — historically its core assets — are generally well established in key markets, as technology and digital delivery of content have become an increasingly critical component of the Group’s business strategy, the Group has grown its patent portfolio to expand its protection of high value technology 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 or legitimate appearance. From an IPR perspective, increasing the Group’s digital business continues to expose it to evolving trademark, copyright and patent infringement risks.
The Group’s forward-looking IPR strategy includes efforts to maintain a broad footprint of intellectual property rights in key markets outside the US. However, the Group also conducts business in other countries where its intellectual property protection efforts have been limited or where legal protection for intellectual property may be uncertain and these limitations 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.
Risks Related to the Competitive Marketplace
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 and the efforts to contain it, or the unfolding situation in Ukraine, there is a risk of a weakening in trading conditions, which could adversely impact the Group’s 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.
Increased competitive pressure or reduced demand due to changing consumer learning preferences may adversely impact the Group’s financial performance and reduce the expected return on investment.
The Group competes in 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. In addition, new competitive entrants, increased price competition or shifts in learners away from educational institutions (as seen in reduced Higher Education enrolments) may lead to lower profitability and cash flow performance.
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 and the efforts to contain it or otherwise, or the unfolding situation in Ukraine, the Group’s sales,
 
6

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.
Risks Related to the Group’s Portfolio of Businesses
The Group’s 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 investment in new markets may deliver returns that are lower than anticipated.
The Group has invested in and has plans to continue to invest in new workforce and direct to learning experiences of which the Group has less experience and faces a variety of competition to be successful. Failure to achieve our planned outcomes may lead to lower than expected sales and profitability.
The Group has businesses in a variety of geographies globally and faces political and regulatory risks, especially in emerging 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 or could result in funds being trapped in these countries, limiting the ability of the group to reinvest these or distribute them to shareholders.
Risks Related to the Group’s Responsibility & Reputation
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, including how it protects the data and privacy of customers and users. 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.
 
7

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. In particular, the Group has experienced, and may continue to experience in the future, an unauthorized disclosure of personal information despite best efforts to prevent it. Such incidents have in the past resulted, and could in future result, in damage to the customer experience and the Group’s reputation and in financial loss.
Information security and cyber risk are 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, managing the supply chain risk and increasingly sophisticated attack strategies. Across its businesses, the Group holds large volumes of personal data 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, including in 2018 in the events leading to the SEC settlement discussed in “Item 4. Information on the Company —
Legal Proceedings”,
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.
Any perceived or actual unauthorized disclosure of personal data or confidential information, whether through a breach of the Group’s network or a third party partner with whom we share data or access to our 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, impair business and operations, or subject the Group to regulatory investigations and/or to claims or litigation arising from damages suffered by individuals and customers, and thereby harm its business and operational results. Failure to adequately protect personal data and confidential information has led, in respect of the SEC settlement referred to above
,
and could potentially lead to regulatory penalties, as well as, litigation costs and 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 protection of personal data and confidential information against unauthorized disclosure, 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.
A control breakdown or service failure in the Group’s Assessment & Qualifications businesses could result in financial loss and reputational damage.
The Group’s Assessment & Qualifications 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 & Qualifications businesses, both in the US and the UK. A service failure caused by a breakdown in testing and assessment processes could lead to a
 
8

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.
Operational disruption to its business, including that 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 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.
Failure to adequately protect learners could result in significant harm to one or more learners.
Incidents have occurred and may in future occur where learners may not have been, or may not be, adequately protected. 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 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.
The Group is committed to an effective compliance program in keeping with changing regulatory expectations, and it is also committed to conducting business in a legal and ethical manner in compliance with local and international statutory requirements and standards applicable to its business. Despite those commitments, there is a risk that the Group’s management, employees or representatives may take actions that violate applicable laws and regulations including regarding accurate keeping of books and records or 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. Any regulatory inquiry or investigations, could be costly, require a significant amount of management’s time and attention, 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.
 
9

Risks Related to Operations
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 2020 and 2021. A range of transformation initiatives were completed during 2020 and 2021. 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.
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. It has a key dependency on the Chief Executive and certain key 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.
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 IT. 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.
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.
 
10

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.
Failure to meet our customers’ rapidly changing expectations in our products and services and not being able to anticipate new customer demands could result in reduced market share, profitability and brand erosion.
We continue to adjust our business model to keep a pace with the increasing end user demands. The group may not be able to adapt, change and succeed in a rapidly changing and uncertain environment resulting in competitive disadvantage, higher cost and brand erosion.
With the focus of direct to consumer strategy and the launch of new products we risk that the customer experience expectations are not met with regard to how the products and services are delivered e.g. quality and timeliness, impacting the customer’s brand loyalty and propensity to purchase; resulting in customer complaints, less favorable social media sentiment, bad reviews, low recommendations, and customer attrition.
There is also the risk that our technology and data dependent products and services do not meet accessibility requirements in respect of customers’ and prospective customers’ ability to access the products and services, and this could result in increased costs, restrictions and fines.
The Group’s business, results of operations and financial condition have been and could further be adversely affected by the effects of the global
COVID-19
pandemic and subsequent consumer and enterprise trends.
Restrictions on movement of individuals and forced business closures due to the
COVID-19
pandemic and efforts to contain it have had and could continue to have an impact on the Group’s financial results, in particular where test centres are forced to close or high stakes examinations are cancelled.
Consumer behaviours have also been changed as a result of
on-off
lockdown restrictions in major markets since March 2020. This has included increased moves to online learning, online testing (proctoring) and shifts away from multi-year formal qualifications. The Group has offerings in areas which benefit from many of these trends but the gains may not be sufficient to offset any losses from erosion of the Group’s traditional markets. In particular, these trends may lead to lower revenue, prices and profitability.
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. These may also include decisions to suspend or permanently cancel high stakes testing impacting our assessments businesses.
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
 
11

Group’s ability to collect education-related debt. State and local government leadership changes and resultant shifts in education policy can also affect the funding available for educational expenditure, which include the impact of educational reform. Similarly, changes in the government procurement process for textbooks, learning material and student tests, and vocational training programs can also affect 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.
Climate Transition — Environmental, social and governance risks may 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.
Supply Chain — 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.
Inflation — Rising global inflation could increase costs and adversely impact the Group’s profits and financial performance.
Rising global inflation factors could increase the cost of production for Pearson. There is no guarantee that we can increase prices or reduce cost for products and services that can mitigate the effects of inflation, which could lead to reduced earnings and ability to invest in future growth.
Ukraine — the unfolding situation in Ukraine and its regulatory and macroeconomic consequences, including in respect of sanctions, could impact the Group’s cost base and supply chain and have a material adverse impact on the Group’s operations, profits and financial performance.
On 24 February 2022, Russian troops entered Ukraine. This has resulted in sanctions being imposed on Russia and Belarus by numerous countries, including the United Kingdom and the United States. As Pearson’s operations in Russia, Belarus and Ukraine are small, the direct impact of the invasion and related sanctions on Group sales, profits and cash is expected to be immaterial. However, the full impact, particularly in the event of an escalation of the conflict beyond those countries, cannot be determined at this time. The conflict and associated sanctions could also increase the risk associated with other risks such as inflation due to energy and food supply issues or increased risk of cyber attacks, any of which could have a material adverse impact on the Group’s operations, profits and financial performance.
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
 
12

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.
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.
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.
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 2021, being the date of the last triennial 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.
 
ITEM 4.
INFORMATION ON THE COMPANY
Pearson plc, (Pearson or the Group) is a worldwide learning company with its principal operations in the education, assessment 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
 
13

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 has a presence in circa 200 countries around the world, today its largest markets are North America (67% of 2021 sales) and Europe (including the UK) (18% of 2021 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 five main global business divisions, each of which are reporting segments (Virtual Learning, Higher Education, English Language Learning, Workforce Skills and Assessment & Qualifications). 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 results of the Businesses under Strategic Review are reported separately.
Recent developments
On 11 March 2022, Apollo Global Management, Inc. and its subsidiaries (“Apollo”), on behalf of certain of its affiliated funds, announced that it was in the preliminary stages of evaluating a possible cash offer by certain of Apollo’s affiliated funds for Pearson. Apollo further noted that there could be no certainty that any offer would be made, nor as to the terms on which any such offer might be made, and that, in accordance with Rule 2.6(a) of the City Code on Takeovers and Mergers (the “Code”), Apollo was required, by not later than 5.00 p.m. UK on 8 April 2022 either to announce a firm intention to make an offer for Pearson in accordance with Rule 2.7 of the Code or announce that it does not intend to make an offer for Pearson, in which case the announcement would be treated as a statement to which Rule 2.8 of the Code applies (a “Rule 2.8 Announcement”).
Further on 11 March 2022, Pearson announced that it had previously received two unsolicited, preliminary and highly conditional proposals from Apollo regarding a possible cash offer for the entire issued and to be issued share capital of the Company, on 5th November 2021 for 800 pence per share and on 7th March 2022 for a total value of 854.2 pence per share, being 840 pence per share plus the 2021 final dividend of 14.2 pence per share which has been announced but not yet paid (the “2021 Final Dividend”). The Board of Pearson had considered each of these proposals, together with its financial and legal advisers, and had concluded in each case that the proposal significantly undervalued the Company and its future prospects. Accordingly, the Board of Pearson had unanimously rejected each proposal.
On 30 March 2022, Apollo issued a Rule 2.8 Announcement confirming that it did not intend to make a formal offer for Pearson. Subsequently on 30 March 2022, Pearson acknowledged Apollo’s Rule 2.8 Announcement and noted that on 28 March 2022 it had received a third such proposal from Apollo for a total value of 884.2 pence per share, being 870 pence per share plus the 2021 Final Dividend of 14.2 pence per share for eligible shareholders, which the Board had considered, together with its financial and legal advisers, and had concluded that it significantly undervalued the Company and its future prospects and accordingly had rejected it, leading to Apollo’s Rule 2.8 Announcement earlier that day.
 
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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
UK-adopted
IFRS. The selected consolidated income statement data for the years ended December 31, 2021, 2020 and 2019 and the selected consolidated balance sheet data as at December 31, 2021 and 2020 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
K-12
courseware business. The US
K-12
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
K-12
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.
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 realising a loss on disposal of £5m in 2021.
In March 2021, the Group announced that it was launching a strategic review of its international courseware local publishing businesses. The strategic review is progressing in line with plan. The related assets have been assessed in light of IFRS 5
‘Non-current
Assets Held for Sale and Discontinued Operations’ and they do not meet the criteria to be classified as held for sale at 31 December 2021.
In October 2021, the sale of the Group’s interests in K12 Sistemas in Brazil was completed, realizing a profit of £84m.
There were no significant acquisitions made in 2019 or 2020.
In September 2021, Pearson completed the acquisition of 100% of the share capital of Faethm Holdings Pty Limited (Faethm) for £65m, having already held 9% of the share capital previously. Faethm will form part of the Workforce Skills Division.
The Group made two additional acquisitions of subsidiaries, Opinion Interactive LLC in February 2021 and MZ Development Inc. in July 2021, for total consideration of £11m. In both cases, the Group acquired 100% of the share capital of the respective entities. Both will be part of the Assessment & Qualifications division.
On 28 January 2022, the Group completed the acquisition of 100% of the share capital of Credly Inc., having previously held a 19.9% interest in the Company. Total consideration is c$200m, comprising upfront cash consideration of c$142m, Pearson’s existing interest valued at c$42m and c$16m of deferred consideration. Net assets acquired will mainly comprise acquired intangible assets. Credly will also form part of the Workforce Skills division.
In January 2022, the Group received $117m in relation to full and final payment of the remaining receivable balance which arose on the disposal of the US
K-12
business in 2019.
In February 2022, the Group renegotiated its revolving credit facility, extending the maturity of $1bn of the facility by one year to 2026.
 
15

On 24 February 2022, the Board approved a £350m share buyback programme in order to return capital to shareholders. The programme is expected to commence in 2022.
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.
For convenience, the Group has translated the 2021 amounts into US dollars at the rate of £1.00 = $1.35, the noon buying rate in The City of New York for cable transfers and foreign currencies as certified by the Federal Reserve Bank of New York for customs purposes on December 31, 2021.
 
    
Year Ended December 31
 
    
2021
   
2021
   
2020
   
2019
   
2018
   
2017
 
    
$
   
£
   
£
   
£
   
£
   
£
 
    
(In millions, except for per share amounts)
 
Consolidated Income Statement data
            
Sales
     4,628       3,428       3,397       3,869       4,129       4,513  
Operating profit/(loss)
     247       183       411       275       553       451  
Profit/(loss) after taxation from continuing operations
     216       160       310       266       590       408  
Profit/(loss) for the financial year
     216       160       310       266       590       408  
Consolidated Earnings data per share
            
Basic earnings/(loss) per equity share(1)
     28.5¢       21.1p       41.0p       34.0p       75.6p       49.9p  
Diluted earnings/(loss) per equity share(2)
     28.2¢       20.9p       41.0p       34.0p       75.5p       49.9p  
Basic earnings/(loss) from continuing operations per equity share(1)
     28.5¢       21.1p       41.0p       34.0p       75.6p       49.9p  
Diluted earnings/(loss) from continuing operations per equity share(2)
     28.2¢       20.9p       41.0p       34.0p       75.5p       49.9p  
Dividends per ordinary share
     27.7¢       20.5p       19.5p       19.5p       18.5p       17.0p  
Consolidated Balance Sheet data at period end
            
Total assets
(non-current
assets plus current assets)
     9,913       7,343       7,451       7,650       7,905       7,888  
Net assets
     5,778       4,280       4,134       4,323       4,525       4,021  
Long-term obligations(3)
     (2,002     (1,483     (1,672     (1,835     (1,246     (1,662
Capital stock
     255       189       188       195       195       200  
Number of equity shares outstanding (millions of ordinary shares)
     757       757       753       782       781       802  
 
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.
(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, long-term provisions, 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
 
16

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 29, 2022 shareholders will be asked to approve a final dividend of 14.2p per ordinary share for the year ended December 31, 2021.
The table below sets forth the amounts of interim, final and total dividends paid in respect of each fiscal year indicated and is translated into cents per ordinary share at the noon buying rate in The City of New York on each of the respective payment dates for interim and final dividends. The final dividend for the 2021 fiscal year will be paid on May 6, 2022 (subject to shareholder approval).