Digital learning Pearson Annual report and accounts 2016 Performance in 2016 Sales Key performance indicators North America 65% £2,981m A selection of our fi nancial key £4,552m (+2%) Core 18% £803m performance indicators (KPIs) Growth 17% £768m are shown here. Our full KPIs have been revised this year to refl ect and measure our broader business progress. See our full KPIs on p36 Adjusted operating profi t Percentage growth 2016 vs. 2015 North America 66% £420m is quoted on a headline basis. £635m (-12%) Core 9% £57m Growth 5% £29m Penguin Random House 20% £129m Adjusted earnings per share Operating cash fl ow Dividend -16% +52% 52.0p Sales £m $GMXVWHGRSHUDWLQJSURȴW £m 6,000 1,200 5,000 1,000 4,000 800 3,000 600 2,000 400 1,000 200 0 10 11 12 13 14 15 16 0 10 11 12 13 14 15 16 About this report Key to icons Throughout this report icons Integrated reporting In this year’s report we have indicate content related to strategy, applied some of the International Integrated performance and remuneration, and if there’s Reporting Council’s (IIRC’s) principles. We aim to more to read online. build on this in future reporting. P Performance S Strategy In addition, our sustainability reporting provides greater detail on how our business operates R Remuneration Online ethicallyand sustainably in the wider world. Online reporting Visit our online report centre at Visit pearson.com/sustainability to read more. pearson.com/ar2016.html Strategy and performance reporting The strategic report up to and including p55 is formed of three sections: ‘Overview’, ‘Our strategy in action’ and ‘Our performance’, and was approved for issue by the board on 14 March 2017 and signed on its behalf by: Coram Williams Chief fi nancial offi cer Section 1 Overview 01 Pearson’s mission In this report Strategic report Overview strategy Our action in performance Our Governance statements Financial IFC Performance in 2016 01 Pearson’s mission At Pearson we have a simple mission: 02 About Pearson 04 Chairman’s introduction to help people make progress in their S 06 CEO’s strategic overview lives through learning. We are focusing on the changing needs of the world’s education markets, while measuring this progress against S 10 Our strategy in action 12 Our business model P key performance indicators spanning 14 Develop digital and services 16 Build market presence fi nancial objectives, business measures 18 Deliver measurable outcomes 20 Sustainability and sustainability targets. Our performance against these measures is summarised opposite and explained P 28 Our performance throughout this report. 30 Financial review 36 Key performance indicators 38 Operating performance 44 Risk management 47 Principal risks and uncertainties Key achievements in 2016 £275m cost reduction to make Pearson a leaner, more focused company £700m+ organic investment in our portfolio of 56 Governance 58 Governance overview products and services to drive digital transformation 60 Leadership and eff ectiveness 70 Accountability Increase in digital and services revenues to 68% 78 Engagement 82 Report on directors’ remuneration 107 Additional disclosures 111 Statement of directors’ responsibilities 112 Financial statements 114 Independent auditor’s report to the members of Pearson plc 122 Group accounts 180 Parent company accounts 192 Five-year summary 194 Corporate and operating measures 196 Shareholder information BC Principal offi ces worldwide 02 Pearson plc Annual report and accounts 2016 About Pearson Pearson is the world’s learning company, providing a range of products and services to help people across diff erent learning stages make measurable progress in their lives. Where we operate Sales by geographies North America 65% £2,981m We report by geography because this is how we deliver Core 18% £803m learning: through providing a range of educational products Growth 17% £768m and services to institutions, governments, professional £4,552m bodies and individual learners in our key markets around Total sales the world , helping people everywhere aim higher and fulfi l their true potential. North America Core markets Growth markets Our largest market includes all Our international business in established Our growth markets in emerging and 50 US states and Canada. and mature education markets including developing economies, with investment the UK, Australia and Italy. priorities in Brazil, China, India and SouthAfrica. 70 countries We operate in 70 countries worldwide, with a focus on the markets above. Section 1 Overview 03 Overview strategy Our action in performance Our Governance statements Financial What we off er Sales by products and services 48% £2,200m We provide content, assessment and digital services Courseware 30% £1,344m to schools, colleges and universities, as well as professional Assessment 22% £1,008m and vocational education to learners to help increase Services their skills and employability prospects. Increasingly, Total sales £4,552m we do this through partnership models where we bring investment, expertise and scale to help deliver better learning outcomes. Content Bug Club We provide world-leading educational content A dynamic school phonics reading programme teaching children to for use in both traditional and digitallearning. read, through an online reading world, print books and comics. Revel 274,361 An interactive learning Revel registrations in 2016 environment that enables students to read, practise and study in one enVisionMATH2:0 continuous experience. A comprehensive maths curriculum supporting millions of students off ering the fl exibility of print, digital or blended instruction at all grade levels. Assessment UK qualifi cations We provide assessment services to measure and Pearson is the UK’s largest awarding body, off ering GCSE (9-1) validate learner progress, and to certify competency. Combined Sciencecience both academic and vocational qualifi cations. 14.9 million A guide to yoour new Pearson VUE Pearson BTTEC Nationals in Business Helps individuals prepare summative tests delivered through 5.43 million Specification a network of 8,000+ test centres Pearson Edexcel Level 1/Level 2 GCSE (9 - 1) in Combined Science (1SC0) First teaching from September 2016 fortheir next educational or GCSE/A level papers First certification from June 2018 Issue 1 career opportunity through marked in 2016 credentials that verify the 1.01 million skills and learning they need. BTEC registrations Services Virtual schools We provide integrated services that help educational Connections Academy is an accredited, online education programme off ering institutions improve learneroutcomes. students everything they need to reach their full potential. Online programme management 72,958 full-time equivalent We partner with colleges and students in 2016 universities to extend the reach of their degree programmes by scaling online. 45+ global partnerships 04 Pearson plc Annual report and accounts 2016 Chairman’s introduction “ In my fi rst full year as chairman, I have met a great number of our shareholders in person to discuss our strategy and plans. This will be a priority for me again in 2017 as we move forward together. The board has been fully engaged with the management’s review of the business and our plans to Sidney Taurel return Pearson back to growth.” Chairman Dear shareholders, All this will lead to faster progress in our We will continue to reduce our exposure high-growth businesses, such as virtual to large-scale direct delivery services which 2016 has been a diffi cult year for Pearson schools and online programme have fewer synergies with the rest of our shareholders. The challenges facing the management while also stabilising our portfolio, and focus increasingly on more business that we thought would begin to largest content and assessment businesses. scalable online, virtual and blended services, dissipate have become more acute, and across our portfolio. as a consequence, we have cut both the We will continue to forge successful short-term outlook for our profi ts and partnerships – combining our expertise We will continue to focus on cost control and the future dividends we can return to with that of schools, colleges, universities will be managing our cost base very tightly shareholders. Clearly, this is disappointing and franchise partners to meet the biggest and effi ciently. The board will also continue for everyone involved in the company. needs and seize the largest opportunities to support the team to ensure capital is in education. allocated in an appropriate way for our The management team has a clear view of fellow shareholders. With our lower profi t the issues we face, particularly in our largest Becoming a simpler, expectations for the next two years, we division, US higher education courseware. more focused business made the diffi cult decision to rebase our There is a rigorous plan to address the dividend from 2017 onwards. We will use challenges, and to accelerate the transition In 2015, Pearson sold the Financial Times and its stake in The Economist Group, to the proceeds generated in exiting Penguin to a more digital, more sustainable Random House to maintain a strong balance organisation. As we complete this transition, become a more focused company. We are now taking the fi nal step towards focusing sheet, invest in our business and to return we will create more stable and predictable excess capital to shareholders, while revenues for Pearson, and ultimately create 100% on education, through our decision to exit our stake in Penguin Random House. retaining a solid, investment grade growth opportunities. credit rating. Like the decision to sell our news Priorities for the year ahead businesses, our announcement to plan to In my fi rst full year as chairman, I have met a great number of our shareholders in When companies face severe tests, it is exit Penguin Random House is a strategic person to discuss our strategy and plans. important to act with clarity. decision that was not taken lightly.