Final Results

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 profit1	16.0	10.6
Exceptional items	-	(0.4)
Operatingprofit	16.0	9.3
Adjusted profit before tax1	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 operations2	24.3c	14.1c
Basic earnings per share from continuing operations	24.3c	11.7c
Net debt3	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 $5.5m²

· 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.

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The Legal Identifier of the Company is 549300BJ2WPX3QUATW58.

For further information, please contact:

The Quarto Group Inc.

Michael Clarke, Company Secretary   [phone]

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 31 December 2021 $000	Year ended 31 December 2020 $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 items		15,959	10,618
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 31 December 2021 $000	Year ended 31 December 2020 $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 $000	Restated1 31 December 2020 $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 reserve	Retained earnings	Equity attributable to owners of the parent
	$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 31 December 2021 $000	Year ended 31 December 2020 $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 Publishing	UK Publishing		Total
	$000	$000		$000
External revenue - continuing operations	81,062	70,421		151,483
Operating profit before amortization of acquired intangibles and exceptional items	10,024	7,001		17,025
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

2020	US Publishing	UK Publishing		Total
	$000	$000		$000
External revenue - continuing operations	63,137	63,746		126,883
Operating profit before amortization of acquired intangibles and exceptional items	3,249	8,360		11,609
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	Restated1 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 $000	2020 $000	2021 $000	Restated1 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
C urrent year	6,209	3,156
Prior periods	-	2
Total current tax	6,209	3,158
Deferred tax Origination and reversal of temporary differences	(1,979)	(1,138)
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 $000	2020 $000
Profit before tax	14,156	6,589
Tax at the UK corporation tax rate of 19% (2020: 19%)	2,690	1,252
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
T ax 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 $000	2021 $000	2021 $000	2020 $000	2020 $000	2020 $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:
Amortizatio nofacquiredintangibles	7	890
Exceptional items (note 3)	-	446
Adjusted operating profit	15,959	10,618
Adjusted profit before tax befor eamortizationofacquiredintangiblesand exceptionalitems
Adjusted operating profit befor eamortizationofacquiredintangiblesand exceptionalitems	15,959	10,618
Less: net finance costs	(1,796)	(2,693)
Adjusted profit before tax befor eamortizationofacquiredintangiblesand exceptionalitems	14,163	7,925
	2021	2020
	$000	$000

Net debt

Short term borrowings	5,438	41,819
Long term borrowings	28,508	-
Cas handcashequivalents	(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.

 

END

 

 

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