Pearson Regulatory News (PSON)

Pearson Interim Results for the six months to 30th June 2023 (Unaudited)

Highlights

Statutory results

Underlying sales growth1 of 6%, excluding OPM2 and Strategic Review3 businesses; 4% in aggregate

Adjusted operating profit1 up 44% on an underlying basis to £250m including realisation of just under half of the £120m cost efficiency programme

Strong operating cash flow with robust balance sheet enabling continued investment and driving increased shareholder returns

Andy Bird, Pearson's Chief Executive, said:

"Our excellent performance in the first half of 2023 means we are confident of achieving our full year expectations. We have continued to execute well operationally and maintained a sharp focus on delivering efficiencies whilst positioning our portfolio for long-term growth. The progress we are making to accelerate our digital journey, increase interconnectivity and leverage our long-standing AI capabilities will enable us to serve an ever-greater number of individuals and enterprises with our trusted, proprietary learning content."

Continued operational and strategic progress

Advancing future growth drivers across the business

Leveraging our AI capabilities alongside trusted, proprietary learning content to drive success for our learners and broader stakeholders

Maintaining focus on efficiencies

Reshaping the portfolio

Outlook reaffirmed4

Group revenue, adjusted operating profit and profit margin outlook remain in line with expectations for 2023.

We also re-iterate our guidance of mid-single digit Group revenue growth over 2022 to 2025 and for margins to rise to the upper end of mid-teens in 2025.

In terms of divisional guidance and phasing:

Contacts

Notes

Forward looking statements: Except for the historical information contained herein, the matters discussed in this statement include forward-looking statements. In particular, all statements that express forecasts, expectations and projections with respect to future matters, including trends in results of operations, margins, growth rates, overall market trends, the impact of interest or exchange rates, the availability of financing, anticipated cost savings and synergies and the execution of Pearson's strategy, are forward-looking statements. By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that will occur in future. They are based on numerous assumptions regarding Pearson's present and future business strategies and the environment in which it will operate in the future. There are a number of factors which could cause actual results and developments to differ materially from those expressed or implied by these forward-looking statements, including a number of factors outside Pearson's control. These include international, national and local conditions, as well as competition. They also include other risks detailed from time to time in Pearson's publicly-filed documents and you are advised to read, in particular, the risk factors set out in Pearson's latest annual report and accounts, which can be found on its website (www.pearsonplc.com). Any forward-looking statements speak only as of the date they are made, and Pearson gives no undertaking to update forward-looking statements to reflect any changes in its expectations with regard thereto or any changes to events, conditions or circumstances on which any such statement is based. Readers are cautioned not to place undue reliance on such forward-looking statements.

KPIs

*H1 2022 US digital registrations restated from 4.8m to 4.6m due to recategorizing 0.2m of registrations from US to International.

The above table is a subset of our full list of strategic KPIs, which will be reported on alongside full year results.

For a full list of KPI measure definitions, please refer to: https://plc.pearson.com/en-GB/purpose/our-targets-kpis

Operational review

1Throughout this announcement: a) Growth rates are stated on an underlying basis unless otherwise stated. Underlying growth rates exclude currency movements, and portfolio changes. b) The 'business performance' measures are non-GAAP measures and reconciliations to the equivalent statutory heading under IFRS are included in notes to the attached condensed consolidated financial statements 2, 3, 4, 5, 7, 14 and 16. Constant exchange rates are calculated by assuming the average FX in the prior period prevailed through the current period.

2We have completed the sale of the Pearson Online Learning Services (POLS) business and as such have removed from underlying measures throughout. Within this specific measure we exclude our entire OPM business (POLS and ASU) to aid comparison to guidance.

3Strategic Review is revenues in international courseware local publishing businesses being wound down, which will continue to be reported separately until dissipated.

42023 consensus on the Pearson website as at 19th April 2023; median adjusted operating profit of £568m at £:$ 1.20, interest charge £34m, tax rate 24%. Our Group revenue growth expectation for 2023 is low to mid-single digit, excluding OPM2 and the Strategic Review3 businesses.

5Comparative amounts have been revised, see note 1 of the condensed consolidated financial statements for further details.

6Comparative amounts have been restated to reflect the move between operating segments.

Assessment & Qualifications

In Assessment & Qualifications, sales increased 7% on an underlying basis and 12% on a headline basis. Adjusted operating profit increased 20% in underlying terms due to operating leverage on revenue growth and cost efficiencies partially offset by inflation and 28% in headline terms due to this, currency movements and portfolio changes.

Pearson VUE sales were up 12% in underlying terms as test volumes grew 22% versus the same period last year to 12.2m. Volume growth was driven by particularly good performance in the IT and healthcare segments, alongside the commencement of a number of new contracts.

In US Student Assessment, sales increased 4% in underlying terms driven by commencement of new contracts following new business wins.

In Clinical Assessment, sales increased 2% in underlying terms supported by good government funding and continued focus on health and wellbeing.

In UK and International Qualifications, sales increased 6% in underlying terms driven by price increases and good International growth.

Virtual Learning

In Virtual Learning, sales decreased 15% on an underlying basis and 4% on a headline basis due to currency movements and portfolio changes. Adjusted operating profit grew 72% in underlying terms due to efficiency improvements and phasing relating to contract closures in OPM and increased 236% in headline terms due to this, currency movements and portfolio changes.

Virtual Schools sales were down 2%, driven by enrolment declines for the 2022/23 academic year and lower district partnership renewals, offset by good retention rates and the return of a school that had previously left. New applications for the 2023/24 academic year are tracking well, but performance will be lower in the second half due to the previously cited loss of a larger partner school. Pearson will operate 45 schools in 29 states for the 2023/24 academic year.

We will be launching a new Connections Academy Career Pathways programme for middle and high school students which will deliver curated learning experiences in the fields of IT, Business, and Healthcare. These initiatives will launch in select Connections Academy schools in the 2023/24 school year, rolling out nationwide in following years. We have seen encouraging application trends in this programme to date.

In OPM, sales were down 69% on an underlying basis as expected.

Higher Education

In Higher Education, sales declined 2% on an underlying basis and increased 2% on a headline basis due to currency movements. Adjusted operating profit increased 25% in underlying terms driven primarily by cost efficiencies partially offset by trading and phasing related to amortisation and increased 75% in headline terms due to this and currency movements.

In the US, as expected, we saw a continuation of the trends observed in the Fall semester of the 2022/23 academic year, with a decline in enrolments and a loss of adoptions to non-mainstream publishers. Pearson+ performed well with 4.7m cumulative registered users and 938k paid subscriptions for the full academic year, the latter representing a c.200% increase compared to the prior year.

English Language Learning

In English Language Learning, sales were up 44% on an underlying basis and 51% on a headline basis due to currency movements and portfolio changes. Adjusted operating profit increased by 275% in underlying terms due to increased revenue partially offset by increased investment and increased 300% in headline terms due to this, currency movements and portfolio changes. 

PTE volumes were up 76%. The strength of growth was heightened by comparison to a prior period in which global mobility had not fully resumed and supported by favourable migration policy in Australia. We also saw market share gains in India.

Within Institutional, performance was strong, with particularly good growth in LATAM and Middle East markets.

Our Online Self-Study business, Mondly, performed well, bringing new users to the Pearson ecosystem and demonstrating interconnectivity with other divisions. Paid subscriptions increased 41% versus the prior period driven by particularly strong growth in our MondlyWorks offering.

Workforce Skills

In Workforce Skills, sales were up 9% on an underlying basis and 10% on a headline basis. Adjusted operating profit decreased by 20% in underlying terms due to trading offset by investment in the business and decreased 25% in headline terms due to this and currency movements.

The Vocational Qualifications business grew by 7% in underlying terms. The Workforce Solutions business grew by 14% in underlying terms. Pearson has a broad reach of 1,556 enterprise clients in its Workforce Skills portfolio, up 12% on last year.

Strategic Review

Sales in businesses under strategic review declined 50% on an underlying basis, in line with expectations and were down 89% on a headline basis due to currency movements and portfolio changes.

FINANCIAL REVIEW

Operating result

Sales for the six months to 30 June 2023 increased on a headline basis by £91m or 5% from £1,788m for the six months to 30 June 2022 to £1,879m for the same period in 2023 and adjusted operating profit increased by £90m or 56% from £160m in the first half of 2022 to a profit of £250m in the first half of 2023 (for a reconciliation of this measure see note 2 to the condensed consolidated financial statements).

The headline basis simply compares the reported results for the six months to 30 June 2023 with those for the equivalent period in the prior year. We also present sales and profits on an underlying basis which excludes the effects of exchange, the effect of portfolio changes arising from acquisitions and disposals and the impact of adopting new accounting standards that are not retrospectively applied, when relevant. Our portfolio change is calculated by excluding sales and profits made by businesses disposed in either 2022 or 2023 and by ensuring the contribution from acquisitions is comparable year on year. Portfolio changes mainly relate to the disposals of the Group's interest in POLS, Pearson College and our international courseware local publishing business in India in 2023, the disposal of our international courseware local publishing businesses in Europe, French-speaking Canada, South Africa and Hong Kong in 2022, the acquisition of PDRI in 2023 and the acquisitions of Credly and Mondly in 2022.

On an underlying basis, sales increased by 4% in the first six months of 2023 compared to the equivalent period in 2022 and adjusted operating profit increased by 44%. Currency movements increased sales by £62m and adjusted operating profit by £14m, and portfolio changes decreased sales by £29m and increased adjusted operating profit by £4m. There were no new accounting standards adopted in the first half of 2023 that impacted sales or profits.

Adjusted operating profit includes the results from discontinued operations when relevant but excludes charges for acquired intangible amortisation and impairment, acquisition related costs, gains and losses arising from disposals, the cost of major restructuring and one off-costs related to the UK pension scheme. A summary of these adjustments is included below and in more detail in note 2 to the condensed consolidated financial statements.

There is no cost of major restructuring in the first half of 2023. In H1 2022, there were no costs of major restructuring. In H2 2022, restructuring costs of £150m mainly related to staff redundancies and impairment of right of use property assets including the impact of updated assumptions related to the recoverability of right-of-use assets made in 2021.

Intangible amortisation charges to the end of June 2023 were £24m compared to a charge of £26m in the equivalent period in 2022. This is due to increased amortisation from recent acquisitions which is more than offset by a reduction in amortisation from intangible assets at the end of their useful life and recent disposals.

Other net gains and losses in 2023 relate largely to the gain on disposal of the POLS business and a gain resulting from the release of a provision related to a historical disposal, offset by losses on the disposal of Pearson College and costs related to current and prior year disposals and acquisitions. Other net gains and losses in the first half of 2022 largely related to the gain on disposal of the international courseware local publishing business in French-speaking Canada and a gain arising on a decrease in the deferred consideration payable on prior year acquisitions, offset by costs related to disposals and acquisitions.

The reported operating profit of £219m in the first half of 2023 compares to a profit of £148m in the first half of 2022. The increase in 2023 is mainly due to improved trading profits, partially offset by a net loss related to acquisitions and disposals compared to a net gain in the first half of 2022.

Due to seasonal bias in some of the Group's businesses, Pearson typically makes a higher proportion of its profits and operating cash flows in the second half of the year.

Revision of prior year comparative figures

In H2 2022, the Group corrected an error related to the accounting treatment for certain investments in unlisted securities. The related accounting was corrected in the second half of 2022 and the impact of the correction and the prior year restatements are reflected in the 2022 Annual Report and Accounts. In these 2023 interim condensed consolidated financial statements, comparative 2022 half year line items have been corrected to reflect the change in accounting treatment. For the period to half year 2022, the restatement has resulted in an increase in statutory profit of £5m, comprising finance income of £6m and a tax charge of £1m. Other comprehensive income has decreased by £5m but total comprehensive income is unchanged. The impact on statutory earnings per share is an increase of 0.6p and the impact on diluted earnings per share is an increase 0.7p for the period to 30 June 2022. There is no impact to any adjusted measures, net assets, cash flows nor total equity. See note 1 to the Condensed Consolidated Financial Statements for further details.

Net finance costs

Net finance income decreased on a headline basis from £37m in the first half of 2022 to £17m in the same period in 2023. The decrease is primarily due to the release, in 2022, of £35m of interest recorded in respect of provisions for uncertain tax positions, partially offset by additional finance income in respect of retirement benefits.

Net interest payable reflected in adjusted earnings to 30 June 2023 was £12m, compared to a receivable of £18m in the first half of 2022. The difference is primarily due to the release, in 2022, of £35m of interest recorded in respect of provisions for uncertain tax positions.

Net finance income relating to retirement benefits has been excluded from our adjusted earnings as we believe the income statement presentation does not reflect the economic substance of the underlying assets and liabilities. Also included in the net finance costs (but not in our adjusted measure) are interest costs relating to acquisition or disposal transactions, fair value movements on investments classified as fair value through profit and loss, foreign exchange and other gains and losses on derivatives. Interest relating to acquisition or disposal transactions is excluded from adjusted earnings as it is considered part of the acquisition cost or disposal proceeds rather than being reflective of the underlying financing costs of the Group. Foreign exchange, fair value movements and other gains and losses are excluded from adjusted earnings as they represent short-term fluctuations in market value and are subject to significant volatility. Other gains and losses may not be realised in due course as it is normally the intention to hold the related instruments to maturity. Interest on certain tax provisions is excluded from our adjusted measure in order to mirror the treatment of the underlying tax item.

In the period to 30 June 2023, the total of these items excluded from adjusted earnings was net income of £29m compared to net income of £19m in the first half of 2022. Net finance income relating to retirement benefits increased from £4m in the first half of 2022 to £13m in 2023 reflecting the comparative funding position of the plans at the beginning of each year and higher prevailing discount rates. Fair value gains on investments in unlisted securities are £5m in the first half of 2023 compared to £6m in 2022. In addition, there were similar gains on long-term interest rate hedges and an interest charge on tax provisions of £5m was recognised in 2022 in relation to the State Aid matter. For a reconciliation of the adjusted measure see note 3 to the condensed consolidated financial statements.

Taxation

The reported tax on statutory earnings for the six months to 30 June 2023 was a charge of £49m compared to a charge of £49m in the period to 30 June 2022. This equates to an effective tax rate of 20.8% (2022: 26.5%). The lower effective tax rate compared to the prior year is primarily due to a tax credit being recognised on the disposal of the POLS business.

The total adjusted tax charge for the period was £54m (2022: £9m), corresponding to an effective tax rate on adjusted profit before tax of 22.7% (2022: 5.1%). The higher effective rate compared to 2022 is primarily due to the 2022 release of tax risk provisions following the expiry of the statute of limitations in the US not recurring. For a reconciliation of the adjusted measure see notes 4 and 5 to the condensed consolidated financial statements.

In the first half of 2023, there was a net tax payment of £59m, principally relating to the US. In the six months to 30 June 2022 there was a net tax payment of £51m, also principally relating to the US.

UK legislation in relation to Pillar 2 was substantively enacted on 20 June 2023 and will be effective from 1 January 2024. An initial assessment on the impact of this legislation has been completed and this legislation is not expected to materially impact Pearson's effective tax rate in future periods.

Other comprehensive income

Included in other comprehensive income are the net exchange differences on translation of foreign operations. The loss on translation of £166m at 30 June 2023 compares to a gain at 30 June 2022 of £334m. The loss in 2023 arises from an overall weakening of the currencies to which the Group is exposed and in particular the relative movement in the US dollar. A significant proportion of the Group's operations are based in the US and the US dollar closing rate at 30 June 2023 was £1:$1.27 compared to the opening rate of £1:$1.21. At the end of June 2022, the US dollar rate was £1:$1.21 compared to the opening rate of £1:$1.35.

Also included in other comprehensive income at 30 June 2023 is an actuarial loss of £27m in relation to retirement benefit obligations. The loss arises largely from losses on assets and experience losses, partially offset by a decrease in liabilities driven by higher discount rates. The loss in 2023 compares to an actuarial gain at 30 June 2022 of £121m.

Fair value gains of £2m (2022: £19m) have been recognised in other comprehensive income and relate to movements in the value of investments in unlisted securities held at FVOCI.

In 2023, a gain of £122m was recycled from the currency translation reserve to the income statement in relation to the disposal of the POLS business. In 2022, a gain of £7m was recycled from the currency translation reserve to the income statement in relation to businesses disposed.

Cash flow and working capital

Our operating cash flow measure is used to align cash flows with our adjusted profit measures (see note 16 to the condensed consolidated financial statements). Operating cash flow increased on a headline basis by £70m from an inflow of £9m in the first half of 2022 to an inflow of £79m in the first half of 2023. The increase is largely explained by the drop-through of increased trading profits, and in particular the cost efficiency programme, as well as strong collections and portfolio changes.

The equivalent statutory measure, net cash generated from operations, was an inflow of £106m in 2023 compared to an inflow of £53m in 2022. Compared to operating cash flow, this measure includes restructuring costs but does not include regular dividends from associates. It also excludes capital expenditure on property, plant, equipment and software, and additions to right of use assets as well as disposal proceeds from the sale of property, plant, equipment and right of use assets (including the impacts of transfers to/from investment in finance lease receivable). In the first half of 2023, restructuring cash outflow was £46m compared to £13m in the same period in 2022.

In the first half of 2023, there was an overall decrease of £195m in cash and cash equivalents from £543m at the end of 2022 to £348m at 30 June 2023. The decrease in 2023 is primarily due to payments for the acquisition of subsidiaries of £173m, a net cash outflow on disposal of subsidiaries of £19m, dividends paid of £106m, own share purchases of £25m, tax paid of £59m, interest payments of £34m, capital expenditure on property, plant, equipment and software of £63m and payments of lease liabilities of £42m. These were offset by the cash inflow from operations of £106m and proceeds from borrowings of £220m.

Liquidity and capital resources

The Group's net debt increased from £557m at the end of 2022 to £911m at the end of June 2023. The increase is largely due to cash outflows on acquisitions and disposals of subsidiaries, tax payments, dividend payments and capital expenditure, partially offset by positive operating cash flow.

At 30 June 2023, the Group had drawn £220m on its Revolving Credit Facility.

At 30 June 2023, the Group had approximately £0.8bn in total liquidity immediately available from cash and its Revolving Credit Facility maturing February 2026. In assessing the Group's ability to continue as a going concern for the period until 31 December 2024, the Board analysed a variety of downside scenarios, including a severe but plausible scenario, where the Group is impacted by a combination of all principal risks from H2 2023, 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 modelled a severe reduction in revenue, profit and operating cash flow from risks continuing throughout 2024.

Post-retirement benefits

Pearson operates a variety of pension and post-retirement plans. Our UK Group pension plan has by far the largest defined benefit section. This plan has a strong funding position and a surplus with a very substantially de-risked investment portfolio including approximately 50% of the assets in buy-in contracts and no exposure to quoted equities. We have some smaller defined benefit sections in the US and Canada but, outside the UK, most of our companies operate defined contribution plans.

The charge to profit in respect of worldwide pensions and retirement benefits amounted to £23m in the period to 30 June 2023 (30 June 2022: £30m) of which a charge of £36m (30 June 2022: £34m) was reported in adjusted operating profit and income of £13m (30 June 2022: £4m) was reported against other net finance costs.

The overall surplus on UK Group pension plans of £574m at the end of 2022 has decreased to a surplus of £548m at the end of June 2023. The decrease has arisen principally due to the actuarial loss noted above in the other comprehensive income section. In total, our worldwide net position in respect of pensions and other post-retirement benefits decreased from a net asset of £520m at the end of 2022 to a net asset of £500m at the end of June 2023.

Businesses acquired

In March 2023, the Group completed the acquisition of 100% of the share capital of Personnel Decisions Research Institutes, LLC ('PDRI') for cash consideration of £152m ($187m). There is no contingent or deferred consideration. Net assets acquired of £91m were recognised on the Group's balance sheet including £117m of acquired intangible assets. Goodwill of £61m was also recognised in relation to the acquisition.

The cash outflow in 2023 relating to acquisitions of subsidiaries was £173m. In addition, there was a cash outflow relating to the acquisition of associates of £5m and investments of £6m.

The cash outflow in 2022 relating to acquisitions of subsidiaries was £221m arising primarily from the acquisitions of Credly and Mondly. In addition, there was a cash outflow relating to the acquisition of associates of £4m and investments of £4m.

Businesses disposed

In June 2023, the Group disposed of its interests in its POLS businesses in the US, UK, Australia and India. The business disposed excludes Pearson's contract with ASU. The consideration to be received is deferred and comprises a 27.5% share of positive adjusted EBITDA in each calendar year for 6 years and 27.5% of the proceeds received by the purchaser in relation to any future monetization event. The consideration has been valued at £12m and a pre-tax gain on disposal of £17m has been recognised. In addition, a gain of £9m has been recognised which arises from the release of a provision related to a historical disposal and £24m of losses arose from other immaterial disposals and costs related to previous disposals.

The cash outflow in the first half of 2023 relating to the disposal of businesses was £19m mainly relating to the disposal of POLS and Pearson College. In 2022, the cash inflow from disposals of £108m mainly related to the disposal of ERPI and the receipt of deferred proceeds from the US K12 Courseware sale in 2019.

In addition, proceeds of £3m (2022 FY: £17m) were received in relation to the disposal of investments.

Dividends

The dividend accounted for in the six months to 30 June 2023 is the final dividend in respect of 2022 of 14.9p. An interim dividend for 2023 of 7p was declared by the Board in July 2023 and will be accounted for in the second half of 2023.

Share buyback

On 28 April 2023, the Group announced its intention to commence a £300m share buyback programme in Q3 of 2023 in order to return capital to shareholders. In the period to 30 June 2023, no shares have been bought back, and no formal commitments have been made.

Principal risks and uncertainties

In the 2022 Annual Report and Accounts (and the US Form 20-F for 2022), we set out our assessment of the principal risk issues that face the business under the categories: accreditation risk, capability risk, competitive marketplace, content and channel risk, customer expectations, portfolio change, and reputation and responsibility.

We also noted in our 2022 Annual Report and Accounts that the Group continues to closely monitor significant near-term and emerging risks which have been identified as climate transition, COVID-19, inflation, recession, supply chain, tax and the war in Ukraine.

The principal risks and uncertainties are summarised below. The selection of principal risks will be reviewed in the second half of the year alongside the Group's long-term strategic planning process. However, these risks have not changed materially from those detailed in the 2022 Annual Report (and the US Form 20-F for 2022).

Accreditation Risk

Termination of accreditation due to policy changes or failure to maintain the accreditation of our courses and assessments by states, countries, and professional associations, reducing their eligibility for funding or attractiveness to learners.

Capability Risk

Inability to meet our contractual obligations or to transform as required by our strategy due to infrastructure or organisational challenges.

Competitive Marketplace

Significant changes in our target markets could make those markets less attractive. This could be due to significant changes in demand or in supply which impact the addressable market, market share and margins (e.g. changes in enrolments, insourcing of learning and assessment by customers, open educational resources, a shift from in person to virtual or vice versa or innovations in areas such as generative AI).

Content and Channel Risk

Inability to demonstrate differentiated content compared to freely available alternatives (such as generative AI) and/or failure to select appropriate content and delivery channels to conveniently deliver anticipated learning, resulting in loss of sales. 

Customer Expectations

Rising end-user expectations increase the need to offer differentiated value propositions, risking margin pressure to meet these expectations and potential loss of sales if not successful.

Portfolio Change

Failure to effectively execute desired or required portfolio changes to promote scale or capability and increase focus on key divisional and geographic markets, due to either execution failures or inability to secure transactions at appropriate valuations.

Reputation and Responsibility

The risk of serious reputational harm through failure to meet obligations to key stakeholders. These include legal and regulatory requirements, the possibility of serious unethical behaviour and serious breaches of customer trust.

CONDENSED CONSOLIDATED INCOME STATEMENT

for the period ended 30 June 2023

1. Comparative balances have been restated - see note 1 for further details.

The accompanying notes to the condensed consolidated financial statements form an integral part of the financial information.

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

for the period ended 30 June 2023

1. Comparative balances have been restated - see note 1 for further details.

CONDENSED CONSOLIDATED BALANCE SHEET

as at 30 June 2023

The condensed consolidated financial statements were approved by the Board on 30 July 2023.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

for the period ended 30 June 2023

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

for the period ended 30 June 2023

1. Comparative balances have been restated - see note 1 for further details.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

for the period ended 30 June 2023

CONDENSED CONSOLIDATED CASH FLOW STATEMENT

for the period ended 30 June 2023

1. Comparative balances have been restated - see note 1 for further details.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

for the period ended 30 June 2023

The condensed consolidated financial statements have been prepared in accordance with the Disclosure Guidance and Transparency Rules sourcebook of the UK's Financial Conduct Authority and in accordance with UK-adopted IAS 34 'Interim Financial Reporting'. The condensed consolidated financial statements should be read in conjunction with the annual financial statements for the year ended 31 December 2022, which were prepared in accordance with UK-adopted International Accounting Standards and with the requirements of the Companies Act 2006 and in accordance with IFRSs as issued by the International Accounting Standards Board (IASB). In respect of accounting standards applicable to the Group, there is no difference between UK-adopted IASs and IFRSs as issued by the IASB.

The condensed consolidated financial statements have also been prepared in accordance with the accounting policies set out in the 2022 Annual Report and have been prepared under the historical cost convention as modified by the revaluation of certain financial assets and liabilities (including derivative financial instruments) at fair value.

No new standards and interpretations that apply to annual reporting periods beginning on or after 1 January 2023 have had a material impact on the financial position of the Group.

In assessing the Group's ability to continue as a going concern for the period until 31 December 2024, the Board analysed a variety of downside scenarios, including a severe but plausible scenario, where the Group is impacted by a combination of all principal risks from H2 2023, 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 modelled a severe reduction in revenue, profit and operating cash flow from risks continuing throughout 2024.

At 30 June 2023, the Group had available liquidity of c£0.8bn, comprising central cash balances and the undrawn element of its $1bn Revolving Credit Facility (RCF) maturing February 2026. Even under a severe downside case, the Group would maintain comfortable liquidity headroom and sufficient headroom against covenant requirements during the period under assessment even before modelling the mitigating effect of actions that management would take in the event that these downside risks were to crystallise.

The directors have confirmed that they have a reasonable expectation that the Group has adequate resources to continue in operational existence for the assessment period to 31 December 2024. The condensed consolidated financial statements have therefore been prepared on a going concern basis.

The preparation of condensed consolidated financial statements requires the use of certain critical accounting assumptions. It also requires management to exercise its judgement in the process of applying the Group's accounting policies. The areas requiring a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the condensed consolidated financial statements, have been set out in the 2022 Annual Report.

In 2023, the Group disposed of its interests in its POLS business. Whether the associated results and cash flows of the POLS businesses should be classified and presented as discontinued operations is a significant judgement. The Group's judgement is that the results and cash flows of the POLS business should not be classified and presented as discontinued operations on the basis that the business disposed of does not constitute a separate major line of business or geographical area of operations, and the cashflows related to one of the large contracts within the business are being retained. The POLS business is within the Virtual Learning segment and represent £93m of sales for the period ended 30 June 2023 out of the total sales in the Virtual Learning segment of £373m. If the Group had concluded that this business represented discontinued operations, its results and the related gain on disposal would not have been included within each of the continuing operations income statement lines. Profit for the period from continuing operations would have been £14m lower and this amount would have been separately presented as profit for the period from discontinued operations as a single line item. Adjusted operating profit would be unchanged.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

for the period ended 30 June 2023

The financial information for the year ended 31 December 2022 does not constitute statutory accounts as defined in section 434 of the Companies Act 2006. A copy of the statutory accounts for that year has been delivered to the Registrar of Companies. The independent auditors' report on the full financial statements for the year ended 31 December 2022 was unqualified and did not contain an emphasis of matter paragraph or any statement under section 498 of the Companies Act 2006. The condensed consolidated financial statements and related notes for the six months to 30 June 2023 are unaudited but have been reviewed by the auditors and their review opinion is included at the end of these interim financial statements.

Comparative period revisions

Investments in unlisted securities

In 2022, the Group identified an error related to the classification of certain investments in unlisted securities as fair value through other comprehensive income rather than fair value through profit and loss. The investments are held within other financial assets on the balance sheet. The related accounting was corrected in the second half of 2022 and the impact of the correction and the prior year restatements are reflected in the 2022 Annual Report and Accounts. In these 2023 interim condensed consolidated financial statements, comparative 2022 half year line items have been corrected to reflect the change in accounting treatment. The fair value movements are now recorded within finance income in the income statement, rather than within other comprehensive income. All impacted primary statements and related notes have been restated.

For the period to half year 2022, the restatement has resulted in an increase in statutory profit of £5m, comprising finance income of £6m and a tax charge of £1m. Other comprehensive income has decreased by £5m but total comprehensive income is unchanged. The impact on statutory earnings per share is an increase of 0.6p and the impact on diluted earnings per share is an increase 0.7p for the period to 30 June 2022. Opening retained earnings at 1 January 2022 have increased by £37m and closing retained earnings have increased by £43m and equivalent decreases have been recorded to the opening and closing fair value reserve.

The restatement has no impact on the carrying amount of other financial assets on the balance sheet and has no impact on reported net assets, cash flows or total equity. The fair value movements in the income statement are excluded from adjusted earnings, as described in note 3. There is no impact to any adjusted measures.

Operating segments

In the second half of 2022, some of the businesses from the Strategic Review division were disposed of (see note 12) and the decision was made to retain the English-speaking Canadian and Australian K12 courseware businesses. Both of these businesses have been transferred from the Strategic Review division to Assessment & Qualifications. Comparative figures for half year 2022 have been restated to reflect this move between segments.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

for the period ended 30 June 2023

The Group has five main global business divisions, which are each considered separate operating segments for management and reporting purposes. These five divisions are Assessment & Qualifications, Virtual Learning, English Language Learning, Higher Education and Workforce Skills. In addition, the International Courseware local publishing businesses, most of which were disposed in 2022 with the remainder being wound down, are being managed as a separate division, known as Strategic Review.

In the second half of 2022, some of the businesses from the Strategic Review division were disposed of and the decision was made to retain the English-speaking Canadian and Australian K12 courseware businesses. Both of these businesses were transferred from the Strategic Review division to the Assessment & Qualifications division to reflect a change in reporting lines. Comparative figures for half year 2022 have been restated to reflect the move between segments, resulting in £13m of sales and £1m of adjusted operating losses being transferred from the Strategic Review division to the Assessment & Qualifications division at the 2022 half year.

There were no material inter-segment sales.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

for the period ended 30 June 2023

The Group derived revenue from the transfer of goods and services over time and at a point in time in the following major product lines:

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

for the period ended 30 June 2023

2. Segment information continued

Adjusted operating profit is one of the Group's key business performance measures. The measure includes the operating profit from the total business but excludes charges for acquired intangibles amortisation and impairment, acquisition related costs, gains and losses arising from disposals, the cost of major restructuring and one-off costs related to the UK pension scheme.

Cost of major restructuring - In August 2022, the Group announced a major restructuring programme to run in 2022. Restructuring costs of £150m in 2022 mainly related to staff redundancies and impairment of right of use property assets including the impact of updated assumptions related to the recoverability of right-of-use assets made in 2021. There is no cost of major restructuring in the first half of 2023. 

Intangible charges - These represent charges relating to intangibles acquired through business combinations. These charges are excluded as they reflect past acquisition activity and do not necessarily reflect the current year performance of the Group. Intangible amortisation charges in the first half of 2023 were £24m compared to a charge of £26m in the equivalent period in 2022.

UK pension discretionary increases - Charges in 2022 relate to one-off pension increases awarded to certain cohorts of pensioners in response to the cost of living crisis.

Other net gains and losses - These represent profits and losses on the sale of subsidiaries, joint ventures, associates and other financial assets and are excluded from adjusted operating profit as they distort the performance of the Group as reported on a statutory basis. Other net gains and losses also includes costs related to business closures and acquisitions. Other net gains and losses in 2023 relate largely to the gain on disposal of the POLS business and a gain related to the release of a provision related to a historical acquisition, offset by losses on the disposal of Pearson College and costs related to current and prior year disposals and acquisitions. Other net gains and losses in the first half of 2022 largely related to the gain on disposal of the international courseware local publishing business in French-speaking Canada and a gain arising on a decrease in the deferred consideration payable on prior year acquisitions, offset by costs related to disposals and acquisitions.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

for the period ended 30 June 2023

Adjusted operating profit should not be regarded as a complete picture of the Group's financial performance. For example, adjusted operating profit includes the benefits of major restructuring programmes but excludes the significant associated costs, and adjusted operating profit excludes costs related to acquisitions, and the amortisation of intangibles acquired in business combinations, but does not exclude the associated revenues. The Group's definition of adjusted operating profit may not be comparable to other similarly titled measures reported by other companies.

The following table reconciles adjusted operating profit to operating profit for each of our operating segments: