REG - Quarto Group Inc - Final Results
17/03/2022 09:15
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RNS Number : 1212F Quarto Group Inc 17 March 2022
The Quarto Group Inc.
("Quarto", the "Company", or the "Group")
Final Results for the Year Ended 31 December 2021
The Quarto Group Inc. (LSE: QRT), the leading global illustrated book
publisher, announces its audited results for the year ended 31 December 2021.
Results ($m) 2021 2020
Revenue 151.5 126.9
Adjusted operating profit(1) 16.0 10.6
Exceptional items - (0.4)
Operating profit 16.0 9.3
Adjusted profit before tax(1) 14.2 7.9
Profit before tax 14.2 6.6
Profit for the year 9.9 4.6
Adjusted diluted earnings per share from continuing operations(2) 24.3c 14.1c
Basic earnings per share from continuing operations 24.3c 11.7c
Net debt(3) 5.5 19.7
1 Adjusted items excludes the amortization of acquired intangibles and
exceptional items.
2 There is no exceptional items or dilutive share options and only $7k
amortization of acquired intangibles in 2021.
3 Net debt excludes lease liabilities relating to right of use assets (IFRS
16).
Operating Highlights
· Successful completion of 2018 turnaround plan against continuing
backdrop of Covid pandemic
· Clear focus on maximizing the Group's core strengths, retaining a
disciplined business model, further debt reduction and developing future
growth opportunities
· Increase in Adjusted Operating Profit of 51% driven by improved
trading and cost control
· Profit Before Tax up 115% at $14.2m with interest charges down $0.9m
· Revenue of custom channel of $10.7m, up 80% year on year
· Net debt down 72% at $5.5m(2)
· Banking facilities extended in February 2021 to 16 July 2024
· "Beautiful Boards: 50 Amazing Snack Boards for Any Occasion" by
Maegan Brown was #1 bestselling cookbook on Amazon during 2021
· Launch of Ivy Kids being the most environmentally friendly publishing
initiative in the market, Highly Commended in the Sustainability category at
the Future Book Awards
· Launch of Happy Yak featuring playful, mass-market children's books
· Rockport Publishers, an art and design imprint, has partnered with
Saturday AM to publish collections of manga-inspired webcomics that feature
diversity and inclusion through the BIPOC and LGBTQ+ characters
Commenting on the results, Group Chief Executive Officer, Alison Goff said:
During 2021 the business was faced with multiple lockdowns in various
countries around the world but, even when physical bookstores were closed,
consumer support for books remained strong and they continued to source books
from on-line retailers and, through the grocery sector which remained open.
Children's books and practical titles which support hobby interests, performed
particularly well which favored the products Quarto produces.
The company ended the year with sales of $151.5m which was ahead of the prior
year by 19% (2020: $126.9m); adjusted operating profit increased by 51% to
$16.0m (2020: $10.6m); profit before tax increased to $14.2m (2020: $6.6m) and
the strength of the balance sheet improved to $53.2m (2020: $43.7m). The
group ended the year with net debt down 72.8% at $5.5m (2020: $19.7m). Results
were driven by improved trading and reduced finance costs.
The balance of our business remains broadly 63% of revenue being derived from
adult titles and 37% from children's. New books accounted for 42% of total
sales and the backlist continues to deliver strong sales delivering 58% of our
revenue.
=====
The Legal Identifier of the Company is 549300BJ2WPX3QUATW58.
For further information, please contact:
The Quarto Group Inc.
Michael Clarke, Company Secretary
+44 20
7700 6700
About The Quarto Group
The Quarto Group (LSE: QRT) creates a wide variety of books and intellectual
property products, with a mission to inspire life's experiences. Produced in
many formats for adults, children and the whole family, our products are
visually appealing, information rich and stimulating.
The Group encompasses a diverse portfolio of imprints and businesses that are
creatively independent and expert in developing long-lasting content across
specific niches of interest. Quarto sells and distributes its products
globally in over 50 countries and 40 languages, through a variety of sales
channels, partnerships and routes to market.
Quarto employs c.300 talented people in the US and the UK. The group was
founded in London in 1976. It is domiciled in the US and listed on the London
Stock Exchange.
For more information, visit quarto.com or follow us on Twitter at
@TheQuartoGroup.
Business Overview
During 2021 the business was faced with multiple lockdowns in various
countries around the world but, even when physical bookstores were closed,
consumer support for books remained strong and they continued to source books
from on-line retailers and, through the grocery sector which remained open.
Children's books and practical titles which support hobby interests, performed
particularly well which favoured the products Quarto produces.
The company ended the year with sales of $151.5m which was ahead of the prior
year by 19% (2020: $126.9m); adjusted operating profit increased by 51% to
$16.0m (2020: $10.6m); profit before tax increased to $14.2m (2020: $6.6m) and
the strength of the balance sheet improved to $53.2m (2020: $43.7m). The
group ended the year with net debt down 72.8% at $5.5m (2020: $19.7m). Results
were driven by improved trading and reduced finance costs.
The balance of our business remains broadly 63% of revenue being derived from
adult titles and 37% from children's. New books accounted for 42% of total
sales and the backlist continues to deliver strong sales delivering 58% of our
revenue.
Our most valuable series Little People Big Dreams continues to perform well
accounting for over $10m revenue in the year and having now sold over 7
million copies worldwide in all formats. We have also now acquired the foreign
language rights to this series and are successfully selling these around the
world. These foreign language sales delivered $1.5m revenue in 2021 and are
expected to continue to grow in the coming year. The standout title in the
year was David Attenborough which sold over 87,000 copies in the UK.
Other significant series include The Story Orchestra, $2.5m revenue, and
Creative Keepsakes which accounted for over $2m in the year.
Stand-out performance in the year also came from the continued strong sell-on
of Beautiful Boards and the new companion title by the same author Spectacular
Spreads.
Key Strategies
PUBLISHING
Quarto's publishing remains focussed on its key categories: Cookery, Home and
Garden, Art and Craft, Children's, Reference and Wellbeing. These sectors
remain strong internationally and our extensive backlist continues to offer
opportunities for repurposing content to create new products from owned IP.
During 2021 our key actions were:
· The launch of Ivy Kids which is the most environmentally friendly
publishing initiative in the market today and has already been recognized as
Highly Commended in the Sustainability category at the Future Book Awards
· The launch of Happy Yak featuring playful, mass-market children's
books
· The relaunch of the adult list Aurum as a narrative non-fiction
imprint. This list is building and has already published 2 titles which are
currently being made into major movies (Thirteen Lessons that saved Thirteen
Lives - The Thai cave rescue). As this list grows it will feed our ebook and
audiobook programme.
· Frances Lincoln Children's Books remains focussed on producing
top-quality award-winning titles
· We targeted growth from the value and discount channel. This sector
has the added benefit of being non-returnable, direct from the printer sales
and delivered $26m revenue in the year up 66% on the prior year.
· We restructured our US trade imprints and reorganized them under
two creative hubs in New York and Beverly, Massachusetts. Becker & Mayer
the imprint that produced licensed books for third parties, will now work
closely with our New York group to publish its own titles. The imprints
Motorbooks and Walter Foster are now part of the Beverly group.
· Rockport Publishers, an art and design imprint, has partnered with
Saturday AM to publish collections of manga-inspired webcomics that feature
diversity and inclusion through the BIPOC and LGBTQ+ characters.
· SmartLab Toys introduced six new products that encourage children
to develop interest in STEM. One of the new items, Ultimate Squishy Human
Body, has won the 2022 CES Editor's Choice Award.
SALES PERFORMANCE
The sales teams continued to maximise every opportunity pivoting their efforts
towards whichever sectors of the market were open and trading. We sought out
new accounts and opened 157 new accounts in the UK market alone. We worked
with customers all around the world to maintain a strong book offering in
their stores and when supply chain issues delayed new titles we focussed on
selling the inventory we had on hand.
· The UK sales team topped $23m for the first time, for English
language trade sales in the UK & internationally. Foreign co-edition sales
grew 9% over 2020 with a stand out performance by French language sales which
were up 40%.
· Despite the extensive lockdowns in ANZ sales achieved through our
partner Allen & Unwin, remained level.
· Export sales were up over 40% particularly driven by Frances Lincoln
Children's Books which saw growth of 84%.
IT INFRASTRUCTURE
During the year we worked to create tools to help increase productivity in our
editorial departments. This included building a new application which allows
our custom and proprietary publishing teams to access content more quickly
from our vast backlist. This has paid dividends as we saw significant growth
in that area.
We saw continued improvement as we began fully realizing the benefits of our
investment in digital transformation, including print procurement, logistics,
and data mining which brought significant savings to the bottom line while
introducing new efficiencies throughout the organization.
SUPPLY CHAIN CHALLENGES
There were persistent disruptions to the supply chain throughout 2021 and
significant cost increases with the price of container shipping peaking at 5x
the normal rate. Paper shortages, manufacturing cost increases, labor
disruptions caused by Covid-19, container scarcity and port delays, led to a
2.4% increase in manufacturing and shipping costs. Some of these additional
costs impacted the Income Statement immediately, whilst some flowed into
inventory which will affect the forthcoming year. Supply chain delays caused
extensive rescheduling of new product release dates but despite these we
maintained healthy inventory turnover rates consistent with 2019 and 2020.
The key challenge in the coming year will be rising freight costs which will
put significant pressure on our margins and we expect paper and capacity
issues to persist.
COVID-19
The Quarto team have adapted well to a blended working model which is our
vision of the future workplace. We have seen a benefit in flexibility and how
and where our teams are able to work and adoption of digital workflows has
improved efficiency. Our offices remain open for staff who choose to come in
when government guidelines allow. During 2022 we expect to see a slow return
to office-based working which remains vital for creative collaboration, team
building and staff morale.
ACQUISITIONS
Quarto has built its business through organic growth and smart publishing but
also by acquiring other publishing businesses. We will continue to look for
such opportunities in the non-fiction sector of the market particularly where
they can be leveraged across our existing operations and provide a good fit
alongside our existing lists.
VIABILITY STATEMENT
In accordance with Provision 31 of the 2018 revision of the UK Corporate
Governance Code, the Directors assessed the prospects of the Group over both a
Going Concern period to 31 March 2023 and a Viability period to 31 December
2024. The going concern period has a greater level of certainty and was
therefore, used to set budgets for all our businesses which culminated in the
approval of a Group budget by the Board. The Directors have determined that
the three-year period is an appropriate term over which to provide its
viability statement, being aligned with both the publishing program cycle and
the long-term incentives offered to Executive Directors and certain senior
management.
The Directors have considered the underlying robustness of the Group's
business model, products and proposition and its recent trading performance,
cash flows and key performance indicators. They have also reviewed the cash
forecasts prepared for the three years ending 31 December 2024, which comprise
a detailed cash forecast for the period ending 31 December 2022 based on the
budget for that year and standard growth assumptions for revenue and costs for
the years ending 31 December 2023 and 2024. This is to satisfy themselves of
the going concern assumption used in preparing the financial statements and
the Group's viability over a three-year period ending on 31 December 2024.
As part of this work, the model was sensitized initially by a 5% reduction in
revenue to ensure headroom within the covenants. This is deemed as a
plausible scenario, given in 2020 revenue only dropped 7% year on year, even
with the challenge of Covid. Management performed a reverse stress test to
assess the point in which the banking covenants were breached. This occurred
at a reduction in revenue of 9%. It is considered unlikely that such a
reduction of revenue would occur, given, the performance in 2021 and against
the backdrop of a 7% revenue drop in 2020.
In February 2021, the Group renewed its bank facilities, retiring the current
syndicate. The new facility runs until July 2024. Management do not foresee
this creating any issues with regards to repayment of the loans or longer-term
viability of the Company. In the 3 year model we have shown that the business
is profitable and therefore capable of repaying the bank loans as per the
facility agreements. We continue to receive support from the banks. In
carrying out their analysis of viability, the Directors took account of the
Group's projected profits and cash flows and its new banking facilities and
covenants.
In addition to the agreement to the new facility, 1010 Printing Limited (a
subsidiary of the Lion Rock Group Limited) and C.K. Lau agreed to extend the
original $13m unsecured and subordinated loans to the Group, which were
entered into on 31 October 2018, on identical terms to those originally
entered into and on normal commercial terms. Furthermore, 1010 Printing
Limited agreed to provide a further $10m unsecured and subordinated loan to
the Company on normal commercial terms. These unsecured and subordinated loans
are repayable by 31 August 2024. Management do not foresee this creating any
issues with regards to repayment of the loans or longer-term viability of the
Company. In the 3 year model we have shown that the business is profitable and
therefore capable of repaying the subordinated loans as per the agreements.
The model also allows for the repayment of the $13m subordinated loan and
interest, and $2m of the second subordinated loan. Approval for these specific
subordinated loan repayments has been agreed by the banks and payment was made
in Q1 2022. We continue to receive support from 1010 Printing Limited.
The Directors also took account of the principal risks and uncertainties
facing the business referred to on pages 19 to 20. The review focused on the
occurrence of severe but plausible scenarios in respect of the principal risks
and considered the potential of these scenarios to threaten viability.
The key principal risk that the business faces is a downturn caused by a
global recession. The financial impact of this downturn has been quantified to
illustrate the Group's ability to manage the impact on liquidity and
covenants, with sensitivity analysis on the key revenue growth assumptions and
the effectiveness of available mitigating actions. In considering this
analysis, the Directors took account of the mitigating actions that had been
previously taken. These actions included reductions in investment in
pre-publication costs, print volumes, staffing levels and other variable
costs.
Based on the above indications, after taking into account the downside
scenario projections, the Directors have a reasonable expectation that the
Group has adequate resources to continue in operation and meet its liabilities
throughout the viability period to 31 December 2024.
OUTLOOK
Quarto is in a good financial position and has a strong list of new titles for
publication in 2022. The sizeable backlist continues to perform well and we
are confident in our sales teams ability to navigate the changing market. The
volatile state of the shipping market will continue to present challenges and
we expect that this will have a significant increase in shipping costs.
A key focus in 2022 is to bring increased focus to our people culture and work
on attracting and retaining high calibre staff for the long-term health of the
business. We will also explore sectors of the market in which we are not
operating where I see opportunities for growth. We remain focussed on
delivering a sustainable, profitable business for the future.
THE QUARTO GROUP, INC.
Condensed Consolidated Income Statement
For the year ended 31 December 2021
Note Year ended Year ended
31 December 2021 31 December 2020
$000 $000
Continuing operations
Revenue 2 151,483 126,883
Cost of sales (103,897) (89,298)
Gross profit 47,586 37,585
Distribution costs (8,439) (7,132)
Impairment of financial assets (874) (1,571)
Administrative expenses (22,314) (18,264)
Operating profit before amortization of acquired intangibles and exceptional 15,959 10,618
items
Amortization of acquired intangibles (7) (890)
Exceptional items 3 - (446)
Operating profit 2 15,952 9,282
Finance costs 4 (1,796) (2,693)
Profit before tax 14,156 6,589
Tax 5 (4,230) (2,020)
Profit for the year 9,926 4,569
Attributable to:
Owners of the parent 9,926 4,569
Earnings per share (cents)
From continuing operations
Basic 6 24.3 11.7
Diluted 6 24.3 11.6
THE QUARTO GROUP, INC.
Condensed Consolidated Statement of Comprehensive Income
For the year ended 31 December 2021
Year ended
Year ended 31 December 2020
31 December 2021
$000
$000
Profit for the year 9,926 4,569
Items that may be reclassified to profit or loss
Foreign exchange translation differences (506) 1,087
Tax relating to items that may be reclassified to profit or loss 66 54
Total other comprehensive income (440) 1,141
Total comprehensive income for the year net of tax 9,486 5,710
Attributable to:
Owners of the parent 9,486 5,710
THE QUARTO GROUP, INC.
Condensed Consolidated Balance Sheet
At 31 December 2021
Note 31 December 2021 Restated(1)
31 December 2020
$000
$000
Non-current assets
Goodwill 7 19,286 19,381
Other intangible assets 51 159
Property, plant and equipment 5,181 6,818
Intangible assets: Pre-publication costs 8 29,941 40,913
Deferred tax assets 2,436 1,360
Total non-current assets 56,895 68,631
Current assets
Inventories 20,393 15,465
Trade and other receivables 51,242 44,519
Cash and cash equivalents 28,432 22,079
Total current assets 100,067 82,063
Total assets 156,962 150,694
Current liabilities
Short term borrowings (5,438) (41,819)
Trade and other payables (53,789) (50,064)
Lease liabilities (1,363) (1,968)
Tax payable (7,467) (4,355)
Total current liabilities (68,057) (98,206)
Non-current liabilities
Long term borrowings (28,508) -
Deferred tax liabilities (3,130) (4,079)
Tax payable (386) (386)
Lease liabilities (3,672) (4,310)
Total non-current liabilities (35,696) (8,775)
Total liabilities (103,753) (106,981)
Net assets 53,209 43,713
Equity
Share capital 4,089 4,089
Paid in surplus 48,701 48,701
Retained earnings and other reserves 419 (9,077)
Total equity 53,209 43,713
1 Quarto US have a deferred tax asset of $3,604k and a deferred tax liability
of $2,220k. In the prior year statement of financial position these were
incorrectly disclosed as gross balances, however, in accordance with IAS 12 -
Income Taxes, the deferred tax asset and deferred tax liabilities have been
offset as they relate to the same taxable entity. The comparative numbers
within the statement of financial position have been amended to reflect the
revision. A restated statement of financial position as 1 January 2020 has not
been presented, in accordance with IAS 1 - Presentation of Financial
Statements, on the grounds that the misstatement does not impact on net assets
and as it represents a grossing up on assets and liabilities is not considered
to be qualitatively material.
THE QUARTO GROUP, INC.
Condensed Consolidated Statement of Changes in Equity
For the year ended 31 December 2021
Share capital Paid in surplus Translation Retained earnings Equity attributable to owners of the parent
reserve
$000 $000 $000 $000 $000
Balance at 1 January 2020 2,045 33,764 (6,748) (8,007) 21,054
Profit for the year - - - 4,569 4,569
Foreign exchange translation differences - - 1,087 - 1,087
Tax relating to items that may be reclassified to profit or loss - - 54 - 54
Total comprehensive income for the year - - 1,141 4,569 5,710
Share capital raised 2,044 16,307 - - 18,351
Costs of raising share capital - (1,370) - - (1,370)
Share based payments charge - - - (32) (32)
Total comprehensive income for the year 2,044 14,937 - (32) 16,949
Balance at 31 December 2020 4,089 48,701 (5,607) (3,470) 43,713
Profit for the year - - - 9,926 9,926
Foreign exchange translation differences - - (506) - (506)
Tax relating to items that may be reclassified to profit or loss - - 66 - 66
Total comprehensive income for the year - - (440) 9,926 9,486
Share based payments credit - - - 10 10
Balance at 31 December 2021 4,089 48,701 (6,047) 6,466 53,209
THE QUARTO GROUP, INC.
Condensed Consolidated Cash Flow Statement
For the year ended 31 December 2021
Year ended Year ended
31 December 2021 31 December 2020
$000 $000
Profit for the year 9,926 4,569
Adjustments for:
Net finance costs 1,796 2,693
Depreciation of property, plant and equipment 1,741 2,160
Software amortization 101 231
Tax expense 4,230 2,020
Profit on disposal of right-to-use assets - (35)
Share based (credits)/payments 10 (32)
Amortization of acquired intangibles 7 890
Amortization and amounts written off pre-publication costs 31,000 28,646
Operating cash flows before movements in working capital 48,811 41,142
(Increase)/decrease in inventories (5,036) 4,023
(Increase)/decrease in receivables (7,106) 2,721
Increase/(decrease) in payables 4,035 (9,205)
Cash generated by operations 40,704 38,681
Income taxes paid (3,053) (1,760)
Net cash from operating activities 37,651 36,921
Investing activities
Investment in pre-publication costs (20,229) (20,324)
Purchases of property, plant and equipment (111) (34)
Net cash used in investing activities (20,340) (20,358)
Financing activities
Interest payments (1,866) (1,297)
New share capital raised - 18,351
Costs of raising new share capital - (1,370)
Lease payments (1,426) (1,995)
Drawdown of revolving credit facility and other loans 22,994 4,520
Repayment of revolving credit facility and other loans (30,840) (28,413)
Net cash used in financing activities (11,138) (10,204)
Net increase in cash and cash equivalents 6,173 6,359
Cash and cash equivalents at beginning of year 22,079 15,621
Foreign currency exchange differences on cash and cash equivalents 180 99
Cash and cash equivalents at end of year 28,432 22,079
THE QUARTO GROUP, INC.
Notes to the condensed financial statements
1. Basis of preparation
The results have been extracted from the audited financial statements of the
Group for the year ended 31 December 2021. The results do not constitute
statutory accounts within the meaning of Section 434 of the Companies Act
2006. Whilst the financial information included in this announcement has been
computed in accordance with the principles of 'UK Adopted' International
Financial Reporting Standards ("IFRS") as adopted by the IFRIC interpretations
and Companies Act 2006 that applies to companies reporting under IFRS, this
announcement does not of itself contain sufficient information to comply with
IFRS. The Group will publish full financial statements that comply with IFRS.
The audited financial statements will incorporate an unmodified opinion.
Statutory accounts for the year ended 31 December 2021, will not have been
filed with the Registrar of Companies. The accounting policies applied are
consistent with those described in the Annual Report & Accounts for the
year ended 31 December 2020, apart from changes to pre-publication costs and
returns:
a) The group undertook a review of the amortization period and method of
the pre-publication costs in the development of the books title prior to
publication. The review resulted in the change of method used to amortize the
pre-publication costs in accordance with IAS 38 - Intangible Assets. The
amortization rate has now changed prospectively from a 3 year straight line to
a 50% reducing balance basis. The impact of this change is that the
amortization charge of the group for the current year has been reduced by
$1.26m.
b) During 2021, actual returns reduced by 31% year on year. As the
directors believe this to be a short-term issue, the directors have extended
the period which they monitor historical returns to ensure that the longer
term trend is reflected in the provision. Accordingly, the period that sales
and returns are reviewed was extended from 1 to 3 years. The estimated period
that returns are made from the point of sale remains at 6 months, being the
final six months of the financial year.
The Group financial statements are presented in US Dollars and all values are
shown in thousands of dollars ($000) rounded to the nearest thousand dollars,
except where otherwise stated. Each entity in the Group determines its own
functional currency and items included in the financial statements of each
entity are measured using that functional currency.
Going Concern
The Board assessed the Group's ability to operate as a going concern for at
least the next 12 months from the date of signing the financial statements.
The Directors have considered the underlying robustness of the Group's
business model, products and proposition and its recent trading performance,
cash flows and key performance indicators. They have also reviewed the cash
forecasts prepared in detail to 31 March 2023. This is to satisfy themselves
of the going concern assumption used in preparing the financial statements.
The base case model was built using a detailed sales forecast driven by the
publishing program for 2022. Core margins have been reviewed, with the ongoing
Issues of freight and shipping pushing margins down. Trade receivable days
remaining consistent with 2021.
As part of this work, the model was sensitised initially by a 5% reduction in
revenue to ensure headroom within the covenants. This is deemed as a severe
but plausible scenario. Management performed a reverse stress test to assess
the point in which the banking covenants were breached. This occurred at a
reduction in revenue of 9% from the base case. It is considered unlikely that
such a reduction of revenue would occur, given, the detailed nature of the
sales forecast and even with the challenges of 2020, revenue dropped by only
7% year on year. Should we start to see a reduction in revenue, then
mitigating action will be taken, such as reduction in investment in
pre-publication costs, print volumes, staffing levels and other variable
costs.
Based on the above indications, the Directors believe that it remains
appropriate to continue to adopt the going concern in preparing the financial
statements.
2. Operating segments
The analysis by segment is presented below. This is the basis on which the
operating results are reviewed and resources allocated by the Chief
Executive Officer, who is deemed to be the chief operating decision maker.
2021 US UK
Publishing Publishing Total
$000 $000 $000
External revenue - continuing operations 81,062 70,421 151,483
Operating profit before amortization of acquired intangibles and exceptional 10,024 7,001 17,025
items
Amortization of acquired intangibles (7) - (7)
Segment result 10,017 7,001 17,018
Unallocated corporate expenses (1,066)
Corporate exceptional items (note 3) -
Operating profit 15,952
Finance costs (1,796)
Profit before tax 14,156
Tax (4,230)
Profit after tax 9,926
US Publishing UK Publishing Total
2020
$000 $000 $000
External revenue - continuing operations 63,137 63,746 126,883
Operating profit before amortization of acquired intangibles and exceptional 3,249 8,360 11,609
items
Amortization of acquired intangibles (851) (39) (890)
Segment result 2,398 8,321 10,719
Unallocated corporate expenses (991)
Corporate exceptional items (note 3) (446)
Operating profit 9,282
Finance costs (2,693)
Profit before tax 6,589
Tax (2,020)
Profit after tax 4,569
Segmental balance sheet
2021 Restated(1)
2020
$000 $000
Quarto Publishing Group USA 54,313 69,330
Quarto Publishing Group UK 71,877 57,925
Unallocated (Deferred tax and cash) 30,772 23,439
Total Assets 156,962 150,694
Quarto Publishing Group USA 28,472 26,930
Quarto Publishing Group UK 30,351 29,413
Unallocated (Deferred tax, corporation tax and debt) 44,930 50,638
Total Liabilities 103,753 106,981
1 Please refer to Consolidated Balance Sheet.
2. Operating segments (continued)
Geographical revenue
The Group operates in the following geographical areas:
Revenue Non-current assets
2021 2020 2021 Restated(1)
$000 $000 $000 2020
$000
United States of America 93,399 76,061 31,333 36,858
United Kingdom 20,241 18,250 23,127 30,413
Europe 21,204 17,446 - -
Rest of the world 16,639 15,126 - -
Total 151,483 126,883 54,460 67,271
1 The comparative value for non-current assets held within the United States
of America operating segment has been restated. In the prior year financial
statements, the non-current assets incorrect included a balance of $3,604k in
relation to deferred tax assets. The comparative numbers have been amended to
reflect the revision.
3. Exceptional items
2021 2020
$000 $000
Staff severance costs - 251
Refinancing costs - 195
Total - 446
During the year, there were no exceptional Items (2020: $446,000), in
accordance with the accounting policy disclosed in note 1. In 2020, costs
comprised $251,000 in respect of redundancy costs following restructuring
during the Covid-19 pandemic and a further $195,000 of refinancing costs in
connection with amendments to the existing facility agreement. There was no
charge, net of taxation for the year (2020: $349,000).
4. Finance costs
2021 2020
$000 $000
Interest expense on borrowings 1,399 1,724
Amortization of debt issuance costs and bank fees 85 543
Interest expense on lease liabilities arising from adoption of IFRS 16 276 390
Other interest 36 36
Total 1,796 2,693
5. Taxation
2021 2020
$000 $000
Corporation tax
Current year 6,209 3,156
Prior periods - 2
Total current tax 6,209 3,158
Deferred tax (1,979) (1,138)
Origination and reversal of temporary differences
Total tax expense 4,230 2,020
5. Taxation (continued)
Corporation tax on UK profits is calculated at 19% (2020: 19%), based on the
UK standard rate of corporation tax of the estimated assessable profit for the
year. Taxation for other jurisdictions is calculated at the rate prevailing in
the respective jurisdictions. An increase in the UK corporation rate from 19%
to 25% is effective 1 April 2023. This will increase the company's future
current tax charge accordingly and would increase our net tax liability by
$361k.The table below explains the difference between the expected expense at
the UK statutory rate of 19% and the total tax expense for the year.
2021 2020
$000 $000
14,156 6,589
Profit before tax
2,690 1,252
Tax at the UK corporation tax rate of 19% (2020: 19%)
Effect of different tax rates of subsidiaries operating in other jurisdictions 1,058 161
Change in overseas tax rates during the year - 68
Adjustment to prior years - 2
Tax effect of items that are not deductible in determining taxable profit (16) 240
Other 498 297
Tax expense 4,230 2,020
Effective tax rate for the year 29.9% 30.7%
6. Earnings per share
2021 2020
$000 $000
From continuing operations
Profit for the year 9,926 4,569
Amortization of acquired intangibles (net of tax) 5 626
Exceptional items (net of tax) - 349
Earnings for the purposes of adjusted earnings per share 9,931 5,544
Number of shares Number Number
Weighted average number of ordinary shares 40,889,100 39,185,388
Effect of potentially dilutive share options - 123,037
Diluted weighted average number of ordinary shares 40,889,100 39,308,425
Earnings per share (cents) - continuing operations
Basic 24.3 11.7
Diluted 24.3 11.6
Adjusted earnings per share (cents)
Basic 24.3 14.1
Diluted 24.3 14.1
7. Goodwill
2021 2020
$000 $000
Cost
At 1 January 43,102 42,913
Exchange differences (95) 189
At 31 December 43,007 43,102
Accumulated impairment losses
At 1 January (23,721) (23,721)
Impairment - -
Exchange differences - -
At 31 December (23,721) (23,721)
Carrying value:
At 31 December 19,286 19,381
The cash generating units containing goodwill are as follows:
2021 2020
$000 $000
Quarto Publishing Group USA (QUS) 12,882 12,882
Quarto Publishing Group UK (QUK) 6,404 6,499
19,286 19,381
Quarto identifies its cash-generating units based on its operating model and
how data is collected and reviewed for management reporting and strategic
planning purposes, in accordance with IAS36 - Impairment of Assets. Corporate
overheads have been divided between cash-generating units and factored into
the value in use calculation.
The recoverable amount of each cash generating unit ('CGU') is determined
using the value in use basis. In determining value in use, management prepares
a detailed bottom up budget for the initial twelve-month period, with reviews
conducted at each business unit. A further two years are forecast using
relevant growth rates and other assumptions. Cash flows beyond the three-year
period are extrapolated into perpetuity, by applying a 2% growth rate from the
addressable market. The cashflows are then discounted using a country-specific
discount rate. The growth rates used are consistent with the growth
expectations for the sector in which the company operates and the discount
rate has been calculated using pre-tax Weighted Average Cost of Capital
analysis.
The key assumptions for calculating value in use are:
Terminal Growth Rates Discount Rates
2021 2020 2021 2020
United States of America 2% 2% 11.13% 11.40%
United Kingdom 2% 2% 10.86% 11.12%
Revenue growth rates: forecast sales growth rates are based on those applied
to the Board approved budget for the year ending 31 December 2022 and
three-year plan. They incorporate future expectations of growth driven by
investment plans for each CGU.
Long-term growth rates: the three-year forecasts are extrapolated to
perpetuity on the basis that the CGU's are long-established business units.
The long-term growth rates are blended rates formed from the
territory-specific long-term growth rates.
Gross margins: gross margins are based on historic performance and expected
changes to the sales mix in future periods.
The Group has undertaken various sensitivities of the QUK and QUS CGU's. There
were no reasonably possible changes in QUK that would lead to impairment. QUS,
which has the largest goodwill and non-current assets, carries a greater risk
that reasonably possible changes would result in impairment. Based on the
above long-term growth rate and discount rate, QUS exceeded the carrying value
of goodwill by $9m. The following sensitivities were applied to this CGU:
1.5% increase in discount rate, at which level there was no impairment. The
recoverable amount exceeded the carrying value of goodwill by $1.8m. The
discount rate would need to increase to 13.05% to record any impairment.
0.5% terminal growth rate, at which level there was no impairment. The
recoverable amount exceeded the carrying value of goodwill by $1.8m. The
terminal growth rate would need to be 0% before any impairment was recorded.
7. Goodwill (continued)
5% decline in first year revenues, at which level there was no impairment. The
recoverable amount exceeded the carrying value of goodwill by $5.4m.
5% decline in first year revenues and an increased discount rate of 12.3%
would cause impairment if there were no mitigation actions.
Should there be a headline change in revenues and margins, this could create
an impairment.
8. Intangible assets: Pre-publication costs
2021 2021 2021 2020 2020 2020
$000 $000 $000 $000 $000 $000
Work in progress Published products Total Work in progress Published products Total
Cost
At 1 January 11,442 86,496 97,938 12,929 118,271 131,200
Exchange difference (64) (1,037) (1,101) 147 2,056 2,203
Additions 20,229 - 20,229 20,324 - 20,324
Transfers (17,069) 17,069 - (18,508) 18,508 -
Amounts written off (4,433) - (4,433) (3,450) - (3,450)
Disposals - - - - (52,339) (52,339)
At 31 December 10,105 102,528 112,633 11,442 86,496 97,938
Amortization and impairment
At 1 January - 57,025 57,025 - 82,503 82,503
Exchange difference - (900) (900) - 1,665 1,665
Amortization charge - 19,808 19,808 - 23,304 23,304
Amounts written off - 6,759 6,759 - 1,892 1,892
Disposals - - - - (52,339) (52,339)
At 31 December - 82,692 82,692 - 57,025 57,025
Net book value 10,105 19,836 29,941 11,442 29,471 40,913
The assessment of the useful life of pre-publication costs and amortization
involves a significant management estimate based on historical trends and
future potential sales, in accordance with the accounting policy stated in
note 1. The Group undertook a review of the pre-publication cost
amortization with the benefits generated from the book title revenues.
Specific imprints that had been impaired were excluded from the review. We
concluded that a 50% reducing balance method of amortization was now
appropriate rather than the 3 year straight line basis.
Pre-publication costs form part of the carrying value of the CGU for each
segment and are considered for impairment of goodwill in note 10.
9. Alternative performance measures
The Group uses alternative performance measures to explain and judge its
performance.
Adjusted operating profit excluding amortization of acquired intangibles and
exceptional items. The Directors consider this to be a useful measure of the
Group operating performance as it shows the performance of the underlying
business.
Exceptional items are those which the Company defines as significant
non-recurring items outside the scope of normal business that need to be
disclosed by virtue of their size or incidence in order for the user to obtain
a proper understanding of the financial information.
Free cashflow is the cash generated by operations less pre-publication
investment and purchases of property, plant and equipment and software.
Backlist % refers to book titles that were published in previous calendar
years and is a key measure of the performance of our intellectual property
assets.
Intellectual property development spend refers to the amounts spent annually
on the creation and publication of book titles against which we monitor
subsequent sales (see note 8).
2021 2020
$000 $000
Adjusted Operating Profit
Operating profit (continuing operations) 15,952 9,282
Add back:
Amortization of acquired intangibles 7 890
Exceptional items (note 3) - 446
Adjusted operating profit 15,959 10,618
Adjusted profit before tax before amortization of acquired intangibles and
exceptional items
Adjusted operating profit before amortization of acquired intangibles and 15,959 10,618
exceptional items
Less: net finance costs (1,796) (2,693)
Adjusted profit before tax before amortization of acquired intangibles and 14,163 7,925
exceptional items
2021 2020
$000 $000
Net debt
Short term borrowings 5,438 41,819
Long term borrowings 28,508 -
Cash and cash equivalents (28,432) (22,079)
Net debt 5,514 19,740
10. Post balance sheet events
C.K. Lau and 1010 Printing Limited were repaid $6m and $9m respectively in Q1
2022, including accrued Interest. This repayment was made outside the
agreement due to a favourable liquidity position at this point in time.
In February 2022, we received notification from Bank of America advising that
$2.272m of the loan relating to government support given under the Coronavirus
Aid, Relief and Economic Security Act of the USA of $2.422m was being
forgiven. We are still in the process of finalising the repayment of the
unforgiven portion, which will take place once agreement has been reached.
11. Principal risks and uncertainties facing the Group
a. Economic conditions. The Group has adequate
liquidity with up to $24.7m in available debt facilities. In addition, in such
an event, the Directors have the ability to take a number of mitigating
actions, including the reduction of spend on pre-publication costs, inventory
printings and other discretionary Items. The Group offers non-Chinese
printing for customers in order to avoid US tariffs on books. The Company's
management information systems allow it to assess sales performance quickly
and so take the appropriate steps to maximise operating performance. The
Group has shown itself to be adaptable by quickly accommodating the changes
necessary to its sales and marketing activities during the Covid-19 pandemic.
The Group has a very limited exposure to the Russian and Ukrainian markets.
b. Currency. The Group has a natural hedge that
mitigates against currency movements impacting our earnings in that one of our
largest costs, which is print costs, are paid in US Dollars.
c. Loss of intellectual property. A cloud storage
solution is integrated into our production workflow to provide storage,
back-up and recovery services for product files in development. Complete
backlist archives are stored in a mirrored storage array.
d. Financial. In 2020 the Quarto progressed in its
goal to reduce its debt when it completed an open offer to shareholders in
January; the net proceeds of $17m were used to pay down bank debt. In 2021, a
new three year and five months banking facility of $20m was secured, together
with additional shareholder support. This has enabled the Company to repay the
facility that existed at the year end and a competitive auction platform
introduced during 2019 to procure printing services which is providing
additional cost savings. In 2021 the Company reduced its office footprint to
accommodate new working styles which will further reduce operating costs.
Meanwhile the Group is pursuing its strategy of organic growth through
innovation (as set out on page 8). Performance during 2021 allowed the Company
to accelerate its debt reduction.
e. Customer. The Group has a long-established strategy
of diversifying its international customer base, including specialty
retailers, resulting in the fact that with one exception no customer has over
20% of the business. Customer relations are managed to ensure a fair-trading
relationship. Management monitors debts closely and maintains close
relationships with its customers, and distributors, which may provide prior
warning of likely failure. The Group continues to adapt to supporting online
selling and continues to offer and promote e-book versions of its books.
f. Supply chain and raw materials. The Group
maintains relationships with printers in other parts of the world and is
confident that printing could be carried out by an alternative range of
printers if supply from China was interrupted or to mitigate shipping costs.
We maintain close relations with our printers, reducing the risk of a lack of
knowledge of any printer being in financial trouble. The Group has worked with
its major printers on a plan to adopt sustainable paper and recently
instituted a Forest Stewardship Council (FSC) paper or Sustainable Forestry
Initiative (SFI) paper policy across all our imprints.
Quarto monitors the Brexit-situation closely, taking note of the advice of the
UK Government and key suppliers to ensure minimal disruption. Most of Quarto's
product is shipped directly to EU countries from its printers based
principally in China. These shipments are not expected to be affected by
Brexit.
The Company recognises the disruptions from freight shipping and will take a
flexible holistic approach to its supply chain activities and will work
closely with logistics suppliers and its network of onshore and offshore
printers. The Company recognises the disruptions from freight shipping and
will take a flexible holistic approach to its supply chain activities and will
work closely with logistics suppliers and its network of onshore and offshore
printers.
g. Cyber security. The Group uses enterprise level
firewalls and IT controls to prevent attack as well as maintaining cloud-based
copies and offsite back-up of IP. Computerised files of the Group's books are
also maintained by printers. We do not store any personal or credit card data
on our websites www.quarto.com or www.quartoknows.com. The Group
undertakes industry standard system penetration testing.
h. Coronavirus. Quarto monitors and follows government
advice making the necessary adjustments in order to maintain the well-being of
its employees. Quarto promotes hygienic practices in its offices and avoids
unnecessary travel. The Group operates modern IT systems that permit remote
working with the minimum of interruption and during Q4 2021, hybrid working
practices were introduced. The Group also has the ability to immediately
reduce its investment in pre-publication costs and inventory and manage
discretionary spending. Working with its suppliers and customers, Quarto works
hard to reduce the impact of any interruption in its supply chain.
During 2021 Quarto was able to adapt to the increasing value of book sales
going online. It will continue to perfect its approach to supporting sales
as necessary.
i. Climate-related. The Group has a well-developed
and flexible supply chain. It is in regular communication with its customers
and their needs. During 2022, it will undertake a risk assessment to identify
its principal climate-related risks and incorporate these risks into its risk
management practices.
j. Product safety. All components receive safety
testing from specialist and accredited independent third parties. Management
carefully selects suppliers for components.
Quarto will monitor the regulatory impact of product testing following the
UK's departure from the European Union.
k. Laws and regulations. During 2018, an information
system was introduced Group-wide to harmonise the management of contracts.
Quarto reviews its licensing, permission-acquisitions and other contracts
routinely receiving advice from relevant professional firms (including the
possible impact of Brexit) so that legal instruments remain current and
represent best practices so that we ensure that our practices are aligned and
consistent across imprints, and Quarto's IP rights are properly protected.
11. Principal risks and uncertainties facing the Group
(continued)
l. People. During 2018, an information system was
introduced Group-wide to harmonise the management of contracts. Quarto
reviews its licensing, permission-acquisitions and other contracts routinely
receiving advice from relevant professional firms (including the possible
impact of Brexit) so that legal instruments remain current and represent best
practices so that we ensure that our practices are aligned and consistent
across imprints, and Quarto's IP rights are properly protected.
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