FINANCIAL REVIEW

Operating result

Sales for the six months to 30 June 2025 decreased on a headline basis by £32m or 2% from £1,754m for the six months to 30 June 2024 to £1,722m for the same period in 2025 and adjusted operating profit decreased by 3% on a headline basis to £242m in the first half of 2025 compared to £250m in the first half of 2024 (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 2025 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 2024 or 2025 and by ensuring the contribution from acquisitions is comparable year on year. For prior year acquisitions, the corresponding pre-acquisition period is excluded from the current year. Portfolio changes mainly relate to the disposal of Copp Clark in 2025.

On an underlying basis, sales increased by 2% in the first six months of 2025 compared to the equivalent period in 2024 and adjusted operating profit increased by 2%. Currency movements decreased sales by £58m and adjusted operating profit by £11m, and portfolio changes had no impact on sales and decreased adjusted operating profit by £1m. There were no new accounting standards adopted in the first half of 2025 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 reorganisation, when relevant, property charges and one off-costs related to the UK pension scheme. A summary of these adjustments is included below and in note 2 to the condensed consolidated financial statements.

Costs of major reorganisation - In the first half of 2025 and 2024, there were no costs of major reorganisation. In the second half of 2024, there was a release of £2m relating to amounts previously accrued.

Intangible amortisation charges to the end of June 2025 were £20m compared to a charge of £20m in the equivalent period in 2024.

UK pension discretionary increases in 2024 relate to one-off pension increases awarded to certain cohorts of pensioners in response to the cost of living crisis. There were no such amounts in 2025.

Other net gains and losses in 2025 relate to the gain on disposal of a business in our Higher Education division, a fair value gain relating to a previous disposal and costs relating to prior year acquisitions and disposals. Other net gains and losses in 2024 relate to costs related to prior year acquisitions and disposals, partially offset by a gain on the partial disposal of our investment in an associate.

Property charges in 2025 are a gain of £11m, relating to reversals of impairments of property assets that were previously impaired through property charges. There are no such amounts in 2024.

The reported operating profit of £240m in the first half of 2025 compares to a profit of £219m in the first half of 2024. The increase has been driven by operating leverage on sales growth, gains on disposals and the reversal of impairments on property assets, partially  offset by inflation and unfavourable foreign exchange movements.

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.

Net finance costs

Net finance costs increased on a headline basis from a net cost of £7m in the first half of 2024 to a net cost of £22m in the same period in 2025. The increase is primarily due to increased borrowing costs as a result of the bond issued in September 2024 and losses on derivatives held at fair value through profit and loss (FVTPL) compared to gains in 2024, offset by reduced fees related to drawings on the revolving credit facility and an increase in returns on cash deposits.

Adjusted net finance costs reflected in adjusted earnings to 30 June 2025 was £24m, compared to a net cost of £21m in the first half of 2024. The increase is primarily due to increased borrowing costs as a result of the bond issued in September 2024, offset by reduced fees related to drawings on the revolving credit facility and an increase in returns on cash deposits.

In the period to 30 June 2025, the total of items excluded from adjusted earnings was net income of £2m compared to net income of £14m in the first half of 2024. 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 2025 was a charge of £52m compared to a charge of £54m in the period to 30 June 2024. This equates to an effective tax rate of 23.9% (2024: 25.5%), with the reduction from prior year principally being due to an impairment reversal which is not taxable.

The total adjusted tax charge for the period was £54m (2024: £54m), corresponding to an effective tax rate on adjusted profit before tax of 24.5% (2024: 23.6%). For a reconciliation of the adjusted measure see note 4 to the condensed consolidated financial statements.

In the first half of 2025, there was a net tax receipt of £35m (2024: £69m net tax payment). This includes a £97m repayment from HMRC in respect of the State Aid matter, with an additional £17m of associated interest also received in the period, classified within interest received in the cash flow statement. This repayment is a result of the Court of Justice of the European Union ('CJEU') handing down its decision on 19 September 2024 determining that the United Kingdom controlled foreign company group financing partial exemption ('FCPE') did not constitute State Aid, thereby resulting in a refund of the £97m of tax paid (plus £17m of interest) under the Charging Notices issued by HMRC in 2021. The balance excluding the State Aid repayment, principally relates to tax payments in the US and the UK.

Other comprehensive income

Included in other comprehensive income are the net exchange differences on translation of foreign operations. The loss on translation of £263m at 30 June 2025 compares to a loss at 30 June 2024 of £9m. The loss in 2025 arises from an overall weakening of the majority of currencies to which the Group is exposed, in particular 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 2025 was £1:$1.37 compared to the opening rate of £1:$1.25. At the end of June 2024, the US dollar rate was £1:$1.26 compared to the opening rate of £1:$1.27.

Also included in other comprehensive income at 30 June 2025 is an actuarial loss of £12m in relation to retirement benefit obligations. The loss arises largely from losses on assets and experience losses, offset by a decrease in liabilities driven by lower long-term inflation rates. The loss in 2025 compares to an actuarial gain at 30 June 2024 of £1m.

Fair value losses of £6m (2024: losses of £4m) have been recognised in other comprehensive income and relate to movements in the value of investments in unlisted securities held at fair value through other comprehensive income (FVOCI).

Cash flow and working capital

Our operating cash flow measure is used to align cash flows with our adjusted profit measures (see note 12 to the condensed consolidated financial statements). Operating cash flow decreased on a headline basis by £3m from an inflow of £129m in the first half of 2024 to an inflow of £126m in the first half of 2025. The decrease is largely explained by good working capital management offset by unfavourable FX movements. 

The equivalent statutory measure, net cash generated from operations, was an inflow of £188m in 2025 compared to an inflow of £185m in 2024. Compared to operating cash flow, this measure includes reorganisation 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 2025, reorganisation cash outflow was £nil compared to £5m in the same period in 2024.

Free cash flow increased on a headline basis by £129m from £27m in 2024 to £156m in 2025. When compared to operating cash flow, free cash flow includes tax paid/received, net finance costs paid and net costs paid for major reorganisation. The increase year on year is mainly due to the receipt of monies in respect of the State Aid tax matter.

In the first half of 2025, there was an overall decrease of £196m in cash and cash equivalents from £543m at the end of 2024 to £347m at 30 June 2025. The decrease in 2025 is primarily due to the cash inflow from operations of £188m, net tax received of £35m and net proceeds from borrowings of £46m, offset by dividends paid of £110m, share buyback programme payments of £158m, own share purchases of £72m, capital expenditure on property, plant, equipment and software of £62m and payments of lease liabilities of £38m.

Liquidity and capital resources

The Group's net debt increased from £853m at the end of 2024 to £1,027m at the end of June 2025. The increase is largely due to free cash flow of £156m including the State Aid repayment which are more than offset by the share buyback programme, other own share purchases and dividend payments. In May 2025, the Group repaid its €300m bond and closed out various related derivatives. In June 2025, the Group secured a new three-year, $800 million revolving credit facility (RCF). This facility can be utilised for general corporate purposes, enhancing our liquidity, and is in addition to the Group's existing RCF. At 30 June 2025, the Group had drawn £300m on its Revolving Credit Facilities.

At 30 June 2025, the Group had approximately £1.2bn in total liquidity immediately available from cash and its RCFs maturing February and June 2028. In assessing the Group's ability to continue as a going concern for the period until 31 December 2026, 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 2025, 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 2026. In all scenarios, 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 concluded that the likelihood of the reverse stress test scenario was remote.

Post-retirement benefits

Pearson operates a variety of pension and post-retirement plans. The 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. We have some smaller defined benefit sections in the US and Canada but, outside the UK, most of the companies operate defined contribution plans.

The charge to profit in respect of worldwide pensions and retirement benefits amounted to £21m in the period to 30 June 2025 (30 June 2024: £30m) of which a charge of £33m (30 June 2024: £41m) was reported in operating profit and income of £12m (30 June 2024: £11m) was reported against other net finance costs. In the period to 30 June 2024, a charge of £5m related to one-off discretionary pension increases was excluded from adjusted operating profit, with no such amounts in 2025.

The overall surplus on UK Group pension plans of £484m at the end of 2024 has decreased to a surplus of £482m at the end of June 2025. The decrease has arisen principally due to asset returns being lower than expected and inflation over the period being slightly higher than was expected at the beginning of the year. In total, our worldwide net position in respect of pensions and other post-retirement benefits increased from a net asset of £450m at the end of 2024 to a net asset of £453m at the end of June 2025.

Businesses acquired and disposed

The Group made no acquisitions of subsidiaries in the first half of 2025 or 2024. The cash outflow in the first half of 2025 relating to acquisition of subsidiaries was £4m arising from the payment of deferred consideration in respect of prior year acquisitions. The cash outflow in the first half of 2024 relating to acquisitions of subsidiaries was £38m, arising from the payment of deferred consideration in respect of prior year acquisitions, mainly Credly and Mondly, which were acquired in 2022. In addition, there was a cash outflow relating to investments of £5m (2024: £7m).

The Group disposed of Copp Clark in the first half of 2025 for consideration of £9m, resulting in a gain on disposal of £8m, which has been recorded within other net gains and losses. There were no disposals of subsidiaries in the first half of 2024. In 2025, the cash inflow relating to the disposal of businesses was £9m (2024: outflow of £6m).

On 24 July 2025, the Group completed the acquisition of 100% of eDynamic Holdings LP ('eDynamic Learning'), a leading Career and Technical Education (CTE) curriculum solutions provider, having obtained all necessary approvals. Since the acquisition closed subsequent to the half year date, it has not been reflected in the interim financial statements. For further details, see note 15 to the condensed consolidated financial statements.

Dividends

The dividend accounted for in the six months to 30 June 2025 is the final dividend in respect of 2024 of 16.6p. An interim dividend for 2025 of 7.8p was declared by the Board in July 2025 and will be accounted for in the second half of 2025. The interim dividend will be paid on 15 September 2025 to shareholders who are on the register of members at close of business on 15 August 2025 (the Record Date). Shareholders may elect to reinvest their dividend in the Dividend Reinvestment Plan (DRIP). The last date for receipt of DRIP elections and revocations will be 22 August 2025. A Dividend Reinvestment Plan (DRIP) is provided by our Registrar, Computershare Investor Services. The DRIP enables the Company's shareholders to elect to have their cash dividend payments used to purchase the Company's shares. More information can be found at www.computershare.com/Investor

Share buyback

On 27 February 2025, the Board approved a £350m share buyback programme in order to return capital to shareholders. In the first half of 2025, c15m shares have been bought back at a cash cost of £158m. A £18m liability for the remainder of the first tranche of the programme plus related costs has been accrued as at 30 June 2025. The nominal value of the cancelled shares of £3m has been transferred to the capital redemption reserve. In the period from 1 to 30 July 2025, an additional c4m of shares have been repurchased.

Principal risks and uncertainties

In the 2024 Annual Report and Accounts, we set out our assessment of the principal risk issues that face the business under the categories: accreditation risk, artificial intelligence, content and channel risks, capability risk, competitive marketplace, customer expectations, portfolio change, and reputation and responsibility. We also noted in our 2024 Annual Report and Accounts that the Group continues to closely monitor significant near-term and emerging risks which have been identified as climate transition, economic changes, tax, sanctions and geopolitics.

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 2024 Annual Report.

Accreditation Risk

Termination or modification 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. Awarding bodies may also require modification of tests to continue to receive accreditation which may reduce the convenience to learners or increase the cost of delivery.

Artificial Intelligence, Content and Channel Risk

The risk that our intellectual property is harder to protect as a result of increased content generation through artificial intelligence and that our content and method of delivery (channel) is, or is perceived to be, insufficiently differentiated in terms of outcomes or learner experience. 

Capability Risk

Inability to meet our contractual obligations or to transform as required by our strategy, due to infrastructure, systems 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, in-sourcing of learning and assessment by customers, open educational resources, a shift from in-person to virtual learning or vice versa, or innovations in areas such as generative AI).

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 business units and geographic markets, due to either execution failures or inability to secure transactions at appropriate valuations.

Reputation and Responsibility

Reputational and responsibility risks involve failing to meet obligations and demands of key stakeholders, including legal, regulatory, ethical and behavioural expectations. These risks extend beyond direct consequences to include broader societal and cultural perceptions.