Annual Report 2016
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Duboko u šumi stoji malena drvena
kućica s devet krasnih prozora
i crvenim ulaznim vratima.
Kad jedan mišić zaključi da će to biti savršen dom,
dođu i ostale šumske životinje – pa i veliki medo!
No, hoće li medo uspjeti popraviti stvar
kad se njihova kuća treskom sruši?
Prelijepe ilustracije povest će vas u raskošan
bajkovit svijet ruske narodne priče.
Prvi put objavila kuća Frances Lincoln Children’s Books 2015. u Velikoj Britaniji
Biblioteka Dodo
Naslov originala Deep in the Woods
Copyright © Frances Lincoln Children’s Books, 2015.
Ilustracije copyright © Christopher Corr, 2015.
www.frenceslincoln.com
Prevela i uredila Nataša Ozmec
Grafičko oblikovanje hrvatskog izdanja Ermego d.o.o.
Nakladnik Planetopija
Za nakladnika Marina Kralj Vidačak
Para a criativa chef vegetariana Natasha Corrett e a nutricionista Vicki Edgson,
kolovoz 2016.
uma dieta equilibrada deve ser baseada nos alimentos alcalinos, pois eles ajudam
Tiskano u Kini.
Sva prava pridržana.
a manter o pH natural do corpo e facilitam a digestão e a absorção de nutrientes.
CIP zapis je dostupan u računalnome katalogu Nacionalne
Neste livro, elas ensinam mais de 100 receitas de dar água na boca, inseridas numa
i sveučilišne knjižnice u Zagrebu pod brojem 000930911.
abordagem holística de saúde, para todas as refeições – do café da manhã à ceia.
ISBN 978-953-257-343-5
As autoras explicam como iniciar a reeducação alimentar; trazem um quadro
com o índice de alcalinidade dos principais ingredientes; orientam sobre os grupos
alimentares e como balanceá-los; e sugerem atitudes para facilitar a incorporação
de novos hábitos ao cotidiano. Mostram ainda como colocar em prática a dieta com
pratos deliciosos, como a Sopa de tomate, coco e pimenta; a Salada de beterraba,
9 789532 573435
alho assado e quinoa com feta; a Fritada de batata-doce com endro;
95,00 kn
e o Sorvete de banana crocante, entre outros.
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Duboko
PLUS DE
100 INFOGRAPHIES
POUR COMPRENDRE
LES MYSTÈRES
DE L’UNIVERS
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i
Les incroyables progrès technologiques
des dernières décennies nous permettent d’avoir
enfin un aperçu réel de ce qu’est l’Univers, de sa pro-
digieuse complexité, de ses phénomènes époustouflants se
produisant à des échelles presque inimaginables et, plus que
tout, de sa beauté à couper le souffle.
Mais comment appréhender des données qui se mesurent en
années-lumière ? Comment comprendre le processus de la mort d’une
étoile ? Comment visualiser ce qu’est un trou noir, une exoplanète ou
une supernova ? Comment se faire une idée de la probabilité d’une vie
extraterrestre aux confins de la Voie lactée ?
Grâce à une approche unique, ce livre, élaboré par deux
astrophysiciens, offre une perspective nouvelle sur les
découvertes les plus récentes et l’histoire de la
conquête spatiale.
Narodna
priča
u šumi
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W
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DÉCOUVRIR L’ESPACE
EN INFOGRAPHIES
Alimentos para
o bem-estar
Restabeleça o equilíbrio e melhore
a saúde com a dieta alcalina
ISBN : 978-2-7114-2403-0
www.vigot.fr
CONTENTS
T
O
G
V
I
Natasha Corrett
Vicki Edgson
H
RT
O
STUART LOWE & CHRIS N
VIGOT
t
-
e
o
n
m
Möt några av naturens
mest äventyrliga djur på
denna upptäcktsfärd
i naturens värld.
p
a
a
a
s
s
r
r
t
Utforska SJU VÄRLDSDELSKARTOR och lär känna djur
som lever och överlever på spektakulära vis genom årets
alla växlingar. I den här boken får du färdas med NARVALAR
på deras riskfyllda turer i jakt på mat under isen, uppfostra
ORANGUTANGUNGAR i Borneo, klättra i bergen med
Kinas JÄTTEPANDOR och uppleva många andra
mäktiga DJURÄVENTYR från jordens alla hörn.
Här finns fler än 30 spännande djur, så unga
naturäventyrare kan upptäcka hundratals roliga
saker och nya fakta på varje sida i boken.
Deep In TheWoods_PLC
Size: W462mm X H306mm (15mm bleed)_ISO39L
DeepintheWoods - CasedCover_CRO.indd 1
ISBN 978-85-7914-519-3
HH JACKET FINAL BRA 2.indd 1
Atlas of Animals_CVR_SWE.indd 1
Tauch ein in die Natur und entdecke
zehn der artenreichsten Lebensräume der Erde –
kunstvoll gestaltet vom Mailänder Designduo Carnovsky.
Die beiliegende magische Farbzauberlupe macht die fantastischen
Lebenswelten des Dschungels, der Ozeane, der Steppen und Wälder
sichtbar: Die Tiere des Tages sind durch die rote Lupe zu erkennen,
die Tiere der Nacht durch die blaue und die Pflanzen durch die grüne.
Was wird dir auf deiner Reise durch die Wildnis begegnen?
AU105_R2_Fre_PLC_R1 Size:413.5X252mm Spin:21.5mm
Fotos: Lisa Linder
Christopher
Corr
ATLAS
ATLAS
FÖR
ÄVENTYRARE
ÄVENTYRARE
DJUREN I VÄRLDEN
STRATEGIC REPORT
Highlights
Quarto at a Glance
Our Imprints and Philosophy
A Global Business
Growth Strategy
Chairman’s Statement
Chief Executive Officer’s Statement
Our Business Model and Strategy
2016 Portfolio Highlights
Our Key Performance Indicators
Risk Management, Principal Risks and Uncertainties
Financial Review
Divisional Review
Our People
Corporate Responsibility and Sustainability
1
2
4
6
8
10
12
16
18
20
22
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30
36
38
Illustrerad av Lucy Letherland
Text av Rachel Williams
och Emily Hawkins
En samling av naturens mest
SPEKTAKULÄRA HÄNDELSER, MÄKTIGA
MIGRATIONER och SÄLLSAMMA
BETEENDEN
EB320663_GP4B_CYS(1)_D: KHL-HD2
Client : Frances Lincoln
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GOVERNANCE
Board of Directors
Nominations Committee Report
Audit Committee Report
Remuneration Committee Report
Annual Report on Remuneration
Directors’ Report
Statement of Directors’ Responsibilities
Independent Auditor’s Report
ISBN 978-91-7663-173-7
9 7 8 9 1 7 6 6 3 1 7 3 7 >
FINANCIAL STATEMENTS
Consolidated Income Statement
Consolidated Statement of Comprehensive Income
Consolidated Balance Sheet
• Mit F
Consolidated Statement of Changes in Equity
Consolidated Cash Flow Statement
Notes to the Financial Statements
Company Balance Sheet
Company Statement of Changes in Equity
Notes to the Company Balance Sheet
Five Year Summary
Officers and Professional Advisors
y Magische Welten
von Carnovsky • Text von Rachel Williams
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2282731973879
Entdecke
verborgene
Lebensräume
mit der
Zauberlupe!
7282_Magische Welten_cov.indd 1
18.05.16 09:56
HIGHLIGHTS
FINANCIAL
REVENUE
($M)
PUBLISHING REVENUE
($M)
ADJUSTED2 PUBLISHING
OPERATING PROFIT1
($M)
2016
2015
188.4
182.2
2016
2015
154.6
145.4
2016
20153
21.7
18.5
(LOSS)/PROFIT FOR
THE YEAR1,3
($M)
ADJUSTED2 EARNINGS
PER SHARE (EXCLUDING
BOOKS & GIFTS DIRECT)
(CENTS)
BASIC (LOSS)/EARNINGS
PER SHARE
(CENTS)
(5.3)
2016
20153
8.5
2016
2015
54.7
(28.5)
2016
46.0
20153
41.3
1
Includes the contribution from acquired businesses in 2015 and 2016 and a reduced amortisation charge in 2016 arising from the review
of useful lives of our titles, providing consistency across all imprints in the portfolio. Further details are set out in Note 1 and Note 30.
2 Adjusted measures are stated before amortisation of acquired intangible assets and other exceptional items. See Note 32 for further
explanation of these alternative performance measures.
3 Restated for an error in our Books & Gifts Direct business with respect to the valuation of stock in transit at 31 December 2015 and prior
periods. Further details are set out in Note 1.
OPERATIONAL
• Resilient performance in publishing business;
revenue up 6%, operating profit up 17%.
• Children’s publishing revenues up 34% with both
organic and acquisitive growth.
• Foreign rights revenues up 8% despite currency
headwinds in certain markets.
• Positive contribution from acquired businesses in
2016, Harvard Common Press and becker&mayer.
• Extended value of backlist confirmed by review
of useful economic lives of titles.
• Group refocused on core publishing portfolio
during the course of 2017 with new organisational
and financial reporting structure.
• Resignation of Group Chief Financial Officer
Michael Connole.
1
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSThe Quarto Group, Inc. Annual Report 2016 QUARTO AT A GLANCE
We are the leading global illustrated non-fiction
book publisher. We create and own long-lasting
content to make and sell great books that
entertain, educate and enrich the lives of adults
and children around the world.
400+
EMPLOYEES
48
IMPRINTS AND BUSINESSES
10,000
BOOKS IN OUR CATALOGUE
$37M
ANNUAL INTELLECTUAL
PROPERTY INVESTMENT
58%
OF ANNUAL SALES
FROM BACKLIST
40
YEARS
FOUNDED IN 1976
STRATEGIC PRIORITIES
ORGANIC
GROWTH
ACQUISITION
GROWTH
OPERATING
MODEL
EFFICIENCIES
INTELLECTUAL
PROPERTY
INVESTMENT
DISTRIBUTION
DEVELOPMENT
Read more on pages 16-17
2
Strategic Report EIGHT MAIN PUBLISHING CATEGORIES
BOOKS ON
FOOD AND DRINK
BOOKS ON
DESIGN, ART
AND CRAFT
BOOKS ON BODY, MIND,
SPIRIT, PARENTING AND
RELATIONSHIPS
BOOKS ON INTERIORS,
ARCHITECTURE, DIY,
PETS AND GARDENING
BOOKS ON
CARS, TRAINS,
BOATS, MOTORCYCLES
AND PLANES
BOOKS ON
BIOGRAPHY,
TRAVEL, HISTORY,
SPACE AND MORE
FUN & IMAGINATIVE
BOOKS AND KITS
FOR CHILDREN OF
ALL AGES
STATIONERY, KITS,
CALENDARS AND MORE
SIX VALUES
BE
CONSISTENT
Be clear,
concise and
clear-headed.
BE
ACCOUNTABLE
Take responsibility
and do what
you say.
BE
CURIOUS
Try things,
fail well,
do it quickly.
BE
PURPOSEFUL
Do what you love
and make
it happen.
BE
EXCELLENT
Quality matters
in everything
we do.
BE
COLLABORATIVE
Use ‘we’ and bring
the best out in
each other.
3
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSThe Quarto Group, Inc. Annual Report 2016 OUR IMPRINTS
AND PHILOSOPHY
Our imprints make up a diversified portfolio that strengthens
with each addition. They are supported by a central operational
and financial platform, allowing our creative ecosystem to
flourish without the distraction of non-core activities.
Suppliers
Sales
Quarto
Knows
Marketing
Experts
Illustrators
Finance
IT
Freelancers
Publishing
operations
Board of
Directors
Platform
Comms
Media
Foreign
rights sales
Q Partners
Customers
Authors
Legal
People
4
Quarto Children’s BooksStrategic Report CREATIVITY AT
OUR VERY CORE
In 1976, the founders of Quarto were
first publishers to make the
the
economics of illustrated books work,
by having the books co-published
across different markets so
that
print runs could be big enough to
reduce costs per unit. Quarto was
born from creativity and innovation
and 40 years later that is still in our
DNA as we constantly explore new
formats, new content ideas and new
business ventures.
We have been a global leader in
illustrated books ever since. Our size
and scale have changed, but at the
heart of what we do, our mission
has not changed – to make and sell
books that entertain, educate and
enrich the lives of adults and children
around the world. That is what we are
passionate about.
Many issues that we deal with every
day as a business are very important –
commercial and financial management,
sourcing, print buying, acquisitions
and many others – but the creative
quality of our content and books will
always be our number one priority.
Ideas are our
livelihood and the
lifeblood of Quarto. We succeed or fail
by the ideas we put into our hundreds
of books every year. Big ideas inspire
light on
they shine a
everyone;
information that most of us are unable
to see. Having the best ideas for our
imprints and our customers is what will
make us successful.
That is why our guiding philosophy has
always been – and remains – ‘creative
independence’. Each one of our 48
imprints can publish what they want.
We believe that the autonomy given to
our people ensures that we remain
market-focused and relevant to our
readers and customers. Each imprint
has its own identity, its own lifecycle,
and caters for different audiences and
markets. We work hard to manage our
intellectual property (IP) investment
accordingly, consistently and carefully
– one size does not fit all when it comes
to creativity.
In order to be creative, you need to be
effective. Our imprints are supported
by a strong central platform that
includes finance, operations, sales,
marketing and foreign rights sales.
Process will never trump passion, but
it can enable creativity when used
effectively. By removing distractions –
sharing common infrastructure and
support networks, designing efficient
back office tools and processes, and
other things that can be managed
efficiently at a central level – it frees up
time and space for our people to be
more creative, which is what Quarto is
all about.
5
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSThe Quarto Group, Inc. Annual Report 2016 A GLOBAL BUSINESS
Quarto is a global Group that has had
a strong international focus ever since
we were founded in 1976.
550+
FOREIGN CO-EDITION
CUSTOMERS
“Our Foreign Rights team achieved
a record performance in 2016 with
$32.5m revenue, an impressive 8%
increase year-on-year.”
Karine Marko
Group Director of Foreign Rights
Key
Quarto office
International partnership
English language markets
Foreign language markets
6
Strategic Report 2
INTERNATIONAL
PUBLISHING
PARTNERSHIPS
“Launching our publishing partnership
with Kalimat Group to publish and distribute
books in Arabic in the Middle East and
North Africa has been a major highlight
as we continually seek to develop alternative
models to distribute our books worldwide.”
David Inman
Managing Director, Quarto Partners
11
OFFICES
Quarto Offices
Seattle, USA
California, USA
Minneapolis, USA
Boston, USA
New York, USA
London, UK (x2)
Brighton, UK
Yate, UK
Hong Kong, China
Sydney, Australia
47
FOREIGN LANGUAGE
MARKETS
7
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSThe Quarto Group, Inc. Annual Report 2016 GROWTH STRATEGY
“Our goal is to become the dominant publisher
of illustrated books worldwide.”
Marcus E. Leaver
Chief Executive
Acquisition Growth
Acquisitive growth is a key strategic
area for the Group. As the market
leader with a global and scalable
platform
a
fragmented industry, the potential
opportunity is significant.
in what
remains
When benchmarking and evaluating
potential acquisition opportunities, we
go through an exhaustive due diligence
process and only
those
businesses that meet the specific
parameters that fit our business model
and growth strategy.
target
Quarto has a long history of acquisitions.
Most recent ones have included small
world creations in 2014, Ivy Press in
2015, and Harvard Common Press,
Burgess Lea Press and becker&mayer
in 2016. All are already contributing
positively to the Group.
Over the years, we have developed
a successful model and track record
in
integrating acquired businesses
quickly and effectively.
Businesses acquired bring additional
innovation and expertise to Quarto.
Each time we buy a company, the
culture of our whole Group changes for
the better.
Organic Growth
Growing Quarto organically, either
by bringing more creativity to market,
expanding and developing our
business with existing customers or
by gaining new business with
additional customers, is an integral
part of our strategy to enhance
shareholder value.
Building long-term relationships with
our customers: We pride ourselves in
the excellent business relationships we
have built over the years, both in our
main US and UK markets but also with
over 550 foreign language co-edition
partners around the world. By offering
the best product
range, being
knowledgeable about the marketplace,
and by providing excellent levels of
service, we have gained our customers’
trust and confidence.
Acquiring new customers: We are
constantly striving to find new customers
and opening new distribution channels.
Bookstores are only one of the many
places you can find our books in; we
sell books wherever we believe our
consumers might come across them.
That includes, for instance, Tractor
Supply, Costco, Urban Outfitters or
Holland & Barrett, among many others.
Expanding our offering: We strive to
expand our business with all our
customers, either by expanding our
product offering available to that
customer, or expanding to parts of their
operations where we might not have
previously been a recognised supplier.
8
Strategic Report OUR SIX KEY
ACQUISITION PARAMETERS:
1
CATEGORY ENHANCING
Adds new titles to our portfolio
and expands one of our categories,
e.g. Harvard Common Press.
4
STEP CHANGERS
Significant additions
to the business,
e.g. becker&mayer
2
ADDITIONAL EXPERTISE
Brings an area or market we
do not have expertise in, e.g.
small world creations, specialised
in children’s 0–3 formats.
5
ADJACENCIES
Complementary to existing
portfolio and sales channels,
such as Book Plus and
educational products,
e.g. SmartLab
3
COMPETITOR INGESTION
Synergistic consolidation,
e.g. Ivy Press,
6
DISTRIBUTION ENHANCING
A business that owns a specific
channel to market.
“We were initially a little nervous about joining a
bigger company and maybe losing control and our
identity. In reality, it has been a two-way process.
We have benefited from Quarto’s scale, size and
platform, as well as bringing our people and ideas
to the Group. Now we are part of the team.”
Simon Gwynn
Group Publisher, Ivy Press
9
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSThe Quarto Group, Inc. Annual Report 2016 CHAIRMAN’S STATEMENT
“Quarto has a clear vision, a clear
strategy for the future and an experienced
Senior Leadership Team.”
Peter Read
Chairman
2016 was my first year as Chairman of
The Quarto Group, following my election
at the Annual Meeting in May 2016.
Consistently, I have been impressed by
the quality of the people I have met
within the organisation, at all levels. They
showed restless passion and innovation
last year, whether they had been with
Quarto for a long time or have joined the
Group more recently, including those
who have joined through acquisitions.
Quarto continues to demonstrate the
market value and global demand for
illustrated print books. Since 2012, debt
has been reduced, adjusted Group
operating profit and dividends have
increased and strong foundations for
future growth have been put in place. In
resilient
2016, Quarto showed a
performance in its publishing business,
with revenue growth of 6% and adjusted
operating profit growth of 17%. The
Group achieved its largest publishing
profit ever – a gratifying result considering
the uncertain economic environment.
Quarto has a clear vision to become
the dominant publisher of illustrated
books worldwide, a clear strategy for
the future and an experienced Senior
Leadership Team.
10
In the course of 2017, the Group will be
refocused on
its core publishing
expertise, following the exit of Books &
Gifts Direct (BGD) in Australia/New
and Regent Publishing
Zealand
Services in Hong Kong. The Board has
regularly discussed whether Quarto
was
the correct owner of both
businesses. BGD has disappointed for
a number of years, and whilst Regent
Publishing Services has performed
well since it was founded in 1985, the
Board believed that Quarto should
focus on what it does best – making
and selling books.
further
Refocused on its publishing activities,
Quarto will be uniquely positioned to
create
shareholder value,
through its rich portfolio of content,
the combination of organic and
acquisitive growth, further distribution
development and added value from
the Group’s operational platform.
I joined a Board comprising three Non-
Executive Directors and two Executive
Directors,
including Chief Executive
Marcus Leaver. Our Non-Executive
Directors constructively challenge and
advise the Executive Directors, contribute
Strategic Report INVESTMENT CASE
Global leader in illustrated publishing
Resilient global book market, especially
in
illustrated books. Unrivalled footprint and size.
Substantial IP with a back catalogue of 10,000
titles and an annual investment of about $35m.
Solid expertise and performance in foreign
language rights.
Attractive, de-risked business model
Clear focus on enduring IP in the long term.
Market, channel and customer diversity. Not
dependent on immediate best-sellers with close
to 60% of sales p.a. from back catalogue.
Co-edition model
lower risk with high
revenue visibility.
is
Growth story and financial strength
Publishing revenues up 26% since 2012 and
publishing adjusted operating profit up 69%
since 2012. Net debt reduced 24% from 2012
to date.
Balanced and growing imprint portfolio
Solidity and balance – both geographical
and genre. Increasing exposure to children’s
books, one of the faster growing areas in
publishing. Organic growth supplemented by
acquisitive growth.
Global consolidation platform
International publishing platform is both flexible
and scalable. Clear acquisition strategy with
magnitude of possible opportunities in the short
to medium term. Systems and people in place;
acquisition capabilities and track record.
47
FOREIGN
LANGUAGE
MARKETS
39
LANGUAGES
to the development of strategy and
monitor the delivery of the Group’s
strategy. Michael Hartley and Jess Burley
both bring very different skill sets to the
Board and respectively chair the Audit
Committee and Remuneration Committee.
Unfortunately, our third Non-Executive
Director, Marie-Louise Windeler, stepped
down at the end of September for health
reasons. The Nominations Committee is
making good progress in its search for a
new Non-Executive Director and we
hope to provide an update soon.
submitted
his
Michael Connole
resignation as CFO on 30 March 2017.
The Board has commenced an
executive search to identify a suitable
replacement for the role. Having known
Michael for more than 25 years, I am
particularly sorry to see him leave the
Group but wish him and his family well.
Alongside Chief Executive Marcus
Leaver, Quarto has an experienced
and international operational Senior
Leadership Team that provides solid
strategic direction to the business. I
have every confidence in the successful
continued development of the Group
under their leadership.
Additionally, Quarto’s solid institutional
ownership structure, following the placing
of approximately 35% of the Company’s
shares with blue chip investors over the
last 18 months, will be a benefit to the
Company as it continues to grow and
deliver its potential over the coming years.
The Board is pleased to recommend a
final dividend of 9.87c per share,
making the total dividend for the year
15.0c per share, a 3% increase over last
year, giving dividend cover excluding
BGD, based on adjusted earnings per
share of 54.7c (2015: 46.0c) or 3.6
times (2015: 3.2 times).
On behalf of
the Board and all
shareholders, I would like to thank all our
people, as well as our global ecosystem of
partners and suppliers, for their continued
hard work and commitment to Quarto.
Peter Read
Chairman
19 April 2017
11
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSThe Quarto Group, Inc. Annual Report 2016 CHIEF EXECUTIVE
OFFICER’S STATEMENT
“We celebrated our 40th anniversary with
our largest publishing profits ever.”
Marcus E. Leaver
Chief Executive
Overview
We delivered a resilient performance in
our publishing business in 2016 and
celebrated our 40th anniversary with
our largest publishing profits ever. The
hard work and tenacity of every Quarto
the
employee
business
particularly carried
the Company
through a challenging year.
across
We exploited the size, scale and reach
we have built in the last five years and
enhanced our business with
two
strategic acquisitions that are already
contributing positively to the Group.
In 2017, our exit from both BGD and
Regent Publishing Services will allow
us to focus entirely on our publishing
long believed
portfolio. We have
that Quarto, once fully positioned on
what we do best – making and selling
books – has a unique opportunity in
a fragmented
industry to become
the dominant publisher of illustrated
books worldwide.
Strategic Update
Our children’s publishing revenues
grew by 34% year-on-year and have
increased by 135% since 2012. Our
Foreign Rights sales team achieved a
record performance with 8% revenue
growth despite
foreign currency
fluctuations in certain markets. The
extended value of our backlist was
confirmed by the review of the useful
economic lives of our titles. As we
continually seek to further expand our
scale and reach across the globe, our
new publishing partnership with
Kalimat Group to publish books in
Arabic in the Middle East and North
Africa is also a major highlight.
As in any portfolio, some areas of the
business had more success than others.
Each of our 48 imprints is at a different
stage of maturity and point in its
creative cycle, from young start-ups to
longer-running
imprints that might
need new creative injection, and to
businesses at the top of their game.
12
Strategic Report SENIOR LEADERSHIP TEAM
Michael Connole
Chief Financial Officer
Ken Fund
Chief Operating Officer
David Breuer
Chief Creative Officer
(Resignation submitted
30 March 2017)
President and CEO, Quarto
Publishing Group USA, until
31 December 2016
Managing Director, Quarto
International Co-Editions,
until 31 December 2016
Karine Marko
Group Director of
Foreign Rights
Sally Dwyer
Group Director
of People
David Inman
Managing Director,
Quarto Partners
Managing Director, Quarto
Publishing Group UK,
until 31 December 2016
Dorothée de Montgolfier
Group Director of
Communications
Anne Crompton
Group Director of Legal
and Business Affairs
13
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSThe Quarto Group, Inc. Annual Report 2016 CHIEF EXECUTIVE OFFICER’S STATEMENT CONTINUED
“The creativity, tenacity and team
spirit of everyone employed in the business,
coupled with the strategic direction provided
by our experienced Senior Leadership Team,
have been key to our ongoing success.”
The dedication, commitment and
passion of everyone employed in the
business, coupled with the strategic
direction provided by our experienced
Senior Leadership Team, have been key
to our ongoing success. In particular,
I would like to recognise Ken Fund and
David Breuer, recently appointed to
the new global roles of Chief Operating
Officer and Chief Creative Officer,
as well as Karine Marko, Group Director
of Foreign Rights, who have made
significant
the
contributions
business this year.
to
I would also like to express our thanks
to Michael Connole, Chief Financial
Officer, who has decided to resign.
Significant changes have been made
to the business over the last 18 months
or so and the Group is now well placed
as a focused publishing business. We
all wish Michael and his family the best
in the future.
Since I took over as Chief Executive in
late 2012, my aim has been to make
Quarto an even healthier and more
talented company. We have become
more profitable
in our publishing
business while continuing to invest
more in the quality of our books and in
our global sales and marketing teams.
We have attracted new, extremely
talented people to our already excellent
teams. We are strategically well placed
in our markets as our direct
relationships with retailers continue to
develop. Our model is simple but solid:
the right People, high quality and long-
lasting Product, efficient Processes,
a balanced Portfolio of imprints and a
global, scalable Platform.
The clarity of this model has facilitated
the onboarding of acquired businesses
in the last two years and we now have
a tested and solid integration process
in place.
a
and
anticipated
Operating Review
Overall, our 2016 performance is a
gratifying result set against a more
difficult trading background than we
had
tough
comparative given the success of
colouring books in 2015. Undeniably,
2016 has been an uncertain and
unpredictable year, economically and
politically, in both our largest domestic
markets. While we have fulfilled many
of the business objectives that we set
ourselves, there are others that we
have not met.
Our net debt at 31 December 2016 was
$61.9m (2015: $59.5m), a result of both
poor trading within BGD and negative
working capital timing movements in
the final quarter. However, due to the
strong underlying performance of the
business, the Board has recommended
an increase in the Company’s final
dividend. Working capital and debt
management will remain a key point of
focus in 2017.
including 2016, and
BGD has disappointed for a number of
years,
the
exceptional
impairment charge of
$14.2m has impacted our overall 2016
results negatively.
14
Strategic Report +6%
PUBLISHING
REVENUE
+17%
PUBLISHING
ADJUSTED
OPERATING
PROFIT
from
revenue
The performance of our publishing
operations is set out later in this report.
Total
publishing
operations of $154.6m showed a 6%
increase on 2015 ($145.3m). Adjusted
operating profit for these publishing
businesses for 2016 was $21.7m which
was up
17% (2015: $18.5m). We
reviewed the useful lives of our backlist
of illustrated book titles during the
year and the pre-publication costs for
all our imprints are now amortised over
three years. This review confirms the
fact that, taken across all our illustrated
titles, our backlist continues to sell for
at least three years. This has reduced
our amortisation charge
for 2016
by $2.1m.
New Organisational and
Reporting Structure
On 1 January 2017, we implemented
a new organisational structure which
establishes a stronger partnership
between creative, commercial and
financial management within the Group,
while enabling us to respond to
changing market conditions and
acquisition opportunities with enhanced
agility and purpose.
imprints no
We have moved on
from our
geographical business divisions. In line
with our philosophy of creative
longer
independence,
report into a country division but are
run as independent businesses with
creative, commercial and
financial
oversight from the centre. They are
serviced and supported by our central
and global platform.
As a consequence, starting in 2017, we
will no
longer report revenue by
the
publishing divisions, but by
geography of where transactions take
place, including the US, UK, Rest of the
World and foreign rights.
Outlook
In 2016 we delivered a
resilient
performance in our publishing business
through a combination of organic
two
growth
strategic acquisitions.
supplemented with
We were not helped by the political
climate in our two domestic markets,
nor by the resultant volatility
in
currency which resulted
in slower
trading in our traditionally stronger
second half.
In the very short term, we feel it
prudent to assume a continuation of
this uncertainty in 2017 and we are
budgeting accordingly. Nevertheless,
for the year as a whole, we expect to
show further progress in the business
and redouble our efforts in net debt
management and capital allocation
for growth.
Looking forward, the future for Quarto
remains very exciting. With
the
disposals of both BGD and Regent
Publishing Services in the first half of
2017, we shall be able to focus resolutely
on what we do best – making and
selling books. The Group is full of
running a
talented entrepreneurs
diverse portfolio of
imprints, who
leverage our global platform to grow
their businesses and to create valuable
IP, which we are selling into more
markets, in more foreign languages
and through more distribution channels
than we have ever done before.
Quarto has a unique opportunity in a
fragmented industry to become the
dominant publisher of illustrated books
worldwide, exploiting the size, scale
and reach we have built in the last five
years. In 2017, we shall continue to
pursue that goal.
Lastly, a large thank you to each one of
our employees worldwide. They make
Quarto the success that it continues
to be and their creativity, tenacity
and collaboration, especially, have
carried
through a
challenging year.
the Company
Marcus E. Leaver
Chief Executive
19 April 2017
15
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSThe Quarto Group, Inc. Annual Report 2016 OUR BUSINESS MODEL
AND STRATEGY
OUR BUSINESS MODEL
We are the leading global illustrated non-fiction book
publisher. Our mission is to make and sell great books that
entertain, educate and enrich the lives of adults and
children around the world. We make high-quality books
as economically as possible, and we sell these books
as far and wide and for as long as we possibly can.
Our model is simple but solid: the right
People, high quality and long-lasting
Product,
a
balanced Portfolio of imprints and
a global, scalable Platform.
Processes,
efficient
People
Our people and talent make Quarto.
Each of our 48 imprints is creatively
independent, publishing what they
believe is right for their customer base
and the market. That is the underpinning
ethos of Quarto.
Product
Each of our imprints has a different
vision for the products they produce.
We are proud of the wide variety of
books we publish and our unique, high
quality content.
Portfolio
All our imprints make up a diversified
portfolio that strengthens with each
addition, whether organic start-up
or acquisition.
Process
Our books are created by many
different people but underpinned by
one financial model.
1
Platform
All our imprints are sitting on the Quarto
platform of operations, people, sales
and marketing that we have built and
adhering to the financial model through
which we manage our portfolio.
Our goal in formally recognising
the ‘Quarto Pentagon’ is to systematise
our business model so that we
enhance our organisational IP, allow
transmission of the operating model easily
throughout the Group, and support the
transition of new businesses and imprints
as we grow.
16
Strategic Report OUR STRATEGY
ORGANIC
GROWTH
ACQUISITION
GROWTH
INTELLECTUAL PROPERTY
INVESTMENT
We are constantly looking to
grow our publishing revenues
organically, both by expanding
and developing our business
with existing customers and
by gaining new business with
additional customers.
We also search for businesses
that satisfy key criteria, including
earnings accretive lists, imprints
or businesses that can enhance
the marketing and sales efforts
imprints while at
of existing
the
providing
same
opportunities to extract further
value as part of The Quarto Group.
time
Quarto is committed to invest
in long-lasting IP. In pursuing
ideas, writing,
the very best
photography,
and
artwork
design, we aim to safeguard
the future revenue streams of
the business.
OPERATING MODEL
EFFICIENCIES
DISTRIBUTION
DEVELOPMENT
is
imprints and
Each of our
creatively
businesses
independent while
receiving
support, scale and reach through
the Group’s global operations,
sales and marketing platform. We
leverage our scale to buy print
and freight effectively, as well as
identifying
being relentless
other supply chain efficiencies.
in
We develop direct physical
distribution
relationships and
partnerships, and are committed
to selling our books wherever
consumers might come across
them – and in multiple markets,
languages and formats.
“Each of our imprints and businesses is creatively
independent while adhering to one financial model
and receiving support, scale and reach from our global
platform, which includes operations, sales and foreign
rights sales, marketing, IT, people and legal. We leverage
our scale to buy print and freight effectively, and we are
relentless in identifying other supply chain efficiencies.”
Ken Fund
Chief Operating Officer
17
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSThe Quarto Group, Inc. Annual Report 2016 2016 PORTFOLIO HIGHLIGHTS
“Quarto’s expertise is in creating great content that stands the
test of time and constantly reinventing long-lasting niches of
interest. Once again, highlights from 2016 show the breadth of
our books across topics, adults and children, backlist and
frontlist, individual titles and successful series.”
David Breuer
Chief Creative Officer
Color Me and Portable Color Me Series
Published 2015
$2,909,000
1.9% publishing revenue
Creative Lettering
and Beyond
Published 2014
$1,388,000
0.9% publishing revenue
Art Lab for Kids
Published 2012
$150,000
0.1% publishing revenue
Art Lab for Kids is a refreshing
source of wonderful ideas for creating
fine art with children. this step-by-step
book offers 52 fun and creative art projects
set into weekly lessons. the exercises
include drawing, move through painting
and printmaking, and build to paper,
collage, and mixed media.
• each lesson shares and relates to the
work of a contemporary artist and
their unique style.
• open-ended lessons can be explored
over and over—with different results
each time!
• the perfect book for creative families,
friends, and community groups and
works as lesson plans for both experi-
enced and new art teachers.
• Colorful photographs illustrate how
different people using the same lesson
will yield different results, bringing out
each artist’s personal style.
also available:
series
series
Print & stamp Lab
978-1-59253-598-9
drawing Lab for mixed-media artists
978-1-59253-613-9
Playing with books
978-1-59253-600-9
“ susan schwake’s Art Lab for Kids is a well-thought-out
guide, making it easy to introduce art into children’s lives.
simple, clear explanations of technique, combined with
inspiration from established artists, will enable children to
feel successful and encouraged to explore art as a form
of expression.”
—rebecca emberley
best-selling children’s book author and illustrator
“ Art Lab for Kids encourages all ages to be fearless in seek-
ing and nurturing their creativity. with lessons, inspiration,
and advice, susan schwake gives you the tools to find and
explore your artistic side.”
founder and editor of whipup.net and action-pack.com
—kathreen ricketson
N
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E
ISBN: 978-1-59253-765-5
$22.99 US | £15.99 UK | $24.99 CAN
Visit www.QuartoKnows.com
Follow us on
52 Creative adventures
in drawing, Painting,
Printmaking, PaPer,
and mixed media
For
For
Budding
Budding
Artists of All
Artists of
All Ages
Ages
series
susan s chwake
PhotograP hy by
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FOR KIDS
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10/29/15 12:55 PM
All New Square Foot
Gardening – 2nd Ed.
Published 2013
$307,000
0.2% publishing revenue
101 Dog Tricks
Published 2007
$274,000
0.2% publishing revenue
The Book of Home
How-To
Published 2014
$209,000
0.1% publishing revenue
18
Strategic Report
1001
YOU MUST SEE BEFORE YOU DIE
With more than one and a half million copies sold
worldwide in 30 languages, 1001 Movies You
Must See Before You Die celebrates the great and
groundbreaking, classic and cult, must-see movies
of all time, offering a treasure trove of incisive,
witty and revealing insights. Spanning more than a
century of extraordinary cinema, this comprehensive
volume brings together the most significant movies
from every country and all genres, from action to
Western, through animation, comedy, documentary,
musical, thriller, noir, short, romance and sci-fi.
Newly revised and updated for 2016, this
definitive edition features 500 original movie posters
and hundreds of stunning movie stills. Quotes from
movie directors and critics, together with little-
known facts, complement the penetrating reviews
and vital statistics of each movie to make this the
most fact-filled edition ever.
So, whether your passion is rom-com or art
house, The Blue Angel or Blue Velvet, 1001 Movies
You Must See Before You Die is bound to become
the only film book to which you will ever turn.
REVISED EDITION
Y
1
O
0
U
M
0
U
S
1
T
S
E
E
B
E
F
O
R
E
Y
O
U
D
I
E
STEVEN JAY SCHNEIDER
GENERAL EDITOR
STEVEN JAY SCHNEIDER
UPDATED BY
IAN HAYDN SMITH
£20.00
of movie horror, has written, talked, taught and
aesthetics and psychoanalysis to the joys of the
published extensively on all aspects of film, from
Steven Jay Schneider, one of the true connoisseurs
1001 Movies (2016 Edition)
First published 2001
$245,000
0.2% publishing revenue
favourites, and a guilty reminder of just how
makes for addictive browsing, and likewise
many great movies I haven’t seen yet . . .”
“Both a fun stroll through some all-time
comprises the best that film writing has to offer.
It includes contributors to Empire, Sight & Sound,
slasher flick. Here he has brought together more
“As edited by Steven Jay Schneider, it
CineAction, Film Quarterly, NME, the Washington
Undercurrent’s Chris Fujiwara in Tokyo, the team
From Le Monde’s Jean-Michel Frodon in Paris to
than 50 of the finest writers, reviewers, critics,
Total Film, International Film Guide, LA Weekly,
Post, Filmmaker, MovieMaker and many more.
professors, aficionados and filmmakers from
Time Out, Rolling Stone, the New York Times,
features top-quality stills.”
—Aubrey Day, Total Film
around the globe.
—Film Review
Block Wonders
Published 2016
$410,000
0.3% publishing revenue
Ian Haydn Smith is the update editor for 1001 Movies
You Must See Before You Die. He is a London-based
writer and the editor of Curzon Magazine.
Front Photo:
The Revenant © Pictorial Press Ltd/Alamy Stock Photo
Back Photo:
Mad Max: Fury Road © Village Roadshow/The Kobal Collection
ISBN 978-1-84403-889-3
9
7 8 1 8 4 4 0 3 8 8 9 3
www.octopusbooks.co.uk
The Book of Beetles
Published 2014
$203,000
0.1% publishing revenue
The KetoDiet
Cookbook
Published 2016
$242,000
0.2% publishing revenue
The Bread Lover’s Bread
Machine Cookbook
Published 2000
$237,000
0.2% publishing revenue
Vegan Bowl Attack!
Published 2016
$189,000
0.1% publishing revenue
Build the Dragon and
Build the Human Body
First published 2013
$690,000
0.4% publishing revenue
Cutest Puppies Ever
Published 2016
$439,000
0.3% publishing revenue
Secrets of... (Shine a Light)
First published 2013
$1,843,000 (nine titles)
1.2% publishing revenue
19
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSThe Quarto Group, Inc. Annual Report 2016
OUR KEY PERFORMANCE INDICATORS
Our strategy is to grow our revenue and margins
by leveraging our size, scale and reach as the
leading global illustrated book publisher, to build
a business with sustainable growth in earnings
per share while also managing our net debt.
ADJUSTED OPERATING PROFIT
BEFORE DEPRECIATION
(EBITDA)
($M)
PUBLISHING ADJUSTED
OPERATING PROFIT
($M)
2016
20151
20142
20132
20122
17.8
17.7
17.0
15.9
16.5
2016
2015
2014
2013
2012
21.7
18.5
15.8
14.3
12.8
EBITDA
is used to measure the
operational performance of the Group.
Publishing adjusted operating profit up
69% since 2012.
RETURN ON NET
OPERATING ASSETS
(%)
2016
7.4
20151
20142
20132
20122
13.4
12.0
11.8
11.0
NET DEBT
($M)
2016
2015
2014
2013
2012
61.9
59.5
66.0
71.0
81.0
long-term
The Board uses this ratio to evaluate
the
financial health of
the Group. Excluding Books & Gifts
Direct, the return on net operating
assets for 2016 was 14.1%.
Our net debt has reduced by 24% since
2012. Our 2016 net debt is a result of
both poor trading within BGD and
negative working
timing
movements in the final quarter, and we
will redouble our efforts in net debt
management in 2017.
capital
1 Restated as per Note 1.
2 The 2014 closing balance sheet restatement was all corrected through the 2014 results as it
was impractical to determine the impact on these earlier individual financial years and it is
not expected to result in a material change to these years.
3 The definitions and additional information in relation to these alternative performance measures
are included in Note 32 to the financial statements.
20
Strategic Report ADJUSTED DILUTED
EARNINGS PER SHARE
(CENTS)
2016
5.6
20151
20142
20132
20122
46.1
39.1
36.1
41.6
BACKLIST % OF SALES
(%)
2016
2015
2014
2013
2012
58.3
61.4
66.6
71.3
69.8
The Board uses this ratio to evaluate
the quality of the Company’s earnings.
Backlist has reduced as a % of sales as
we have invested in new IP.
Excluding Books and Gifts Direct, the
adjusted diluted earnings per share for
2016 was 53.5c (2015: 46.0c).
INVENTORY % OF REVENUE
(%)
2016
20151
20142
20132
20122
12.7
13.8
13.9
11.2
12.6
INTELLECTUAL PROPERTY
DEVELOPMENT SPEND
($M)
2016
2015
2014
2013
2012
37.2
34.9
33.5
31.7
30.5
This is a measure of the cash used up in
inventory as a proportion of revenue.
We have increased the IP spend to grow
the publishing portfolio organically.
Frontlist sales have grown by 74% in
the period.
PRODUCT EFFICIENCY
2016
2015
2014
2013
2012
1.57x
1.34x
1.16x
1.01x
1.02x
CHILDREN’S PUBLISHING
REVENUES
($M)
2016
2015
43.4
32.4
2014
23.0
2013
19.6
2012
18.5
This is the new title sales for any given
year divided by the IP spend of the
previous year. It is a leading indicator
of how effective and reliable our
backlist sales might be.
Children’s publishing revenues have
increased by 135% since 2012.
21
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSThe Quarto Group, Inc. Annual Report 2016 RISK MANAGEMENT, PRINCIPAL
RISKS AND UNCERTAINTIES
The Quarto Group’s risk management framework is designed
to identify and assess the likelihood of risks arising, the
consequences of them doing so and the actions necessary
in order to mitigate their impact.
The Board has carried out its periodic
assessment of the principal business
risks facing our various businesses
and has updated these risks in its risk
register, which is regularly reviewed.
The Board continues to monitor these
principal risks and associated material
controls. Details of the Group’s financial
risk management objectives and
policies are set out in Note 22 to the
financial statements. The business risk
review identified the following key risks
that face our businesses.
MARKET AND FINANCIAL RISKS
Risk
Description
Mitigating factor
Economic
conditions
Currency
The Group operates across many of the major
world economies and our revenues and profits
depend on the general state of the economy in
those territories. A downturn caused by a global
recession could reduce consumer discretionary
spending, which might result in a reduction in
profitability and operating cash flow. The UK’s
exit from the European Union and the US
elections have also caused some uncertainty in
the economic environment.
The Group’s businesses operate in a number of
different currencies giving rise to a risk of
exchange loss due to fluctuating exchange
rates.
Acquisitions
integration
strategy
The Group’s growth
includes
acquisitions. Although the Group has a tested
integration model for acquired businesses,
there is a risk that not all of the acquisitions will
be successful.
OPERATIONAL RISKS
The Group has adequate facilities with over $90m in
available debt facilities. In addition, in such an event,
the Directors have the ability to take a number of
mitigating actions,
reduction of
including
discretionary spend on pre-publication costs.
the
The Group has hedging and currency swaps in place.
We have 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. Borrowings have been taken out in different
currencies to mitigate risk of currency movements
impacting our net assets.
The Group continually reviews acquisition targets and
has established processes and procedures with regard
to detailed pre-acquisition due diligence and post-
acquisition integration.
Risk
Customer
Description
Mitigating factor
A significant dependency on a small number of
customers, for instance co-edition partners or
retailers, could be problematic if one of them
terms or
tried
stopped doing business with the Group. The
failure of a major customer could impact
revenue and profits.
renegotiating preferential
The Group has a
long-established strategy of
diversifying its customer base, resulting in the fact that
no one customer has a significant percentage of the
business. Customer relations are well managed with all
Quarto’s larger customers to ensure a fair trading
relationship. Management monitors debts closely and
maintains close relationships with all customers, which
may provide prior warning of likely failure.
22
Strategic Report OPERATIONAL RISKS
Risk
Description
Supply chain
and raw
materials
Product
safety
The Group uses a number of print suppliers,
many of which are based in Southern China.
There is a risk that an interruption in the
availability of printing services in that area or
the financial failure of one printer could disrupt
the distribution of new books to customers. Any
increase in costs such as oil, port charges etc.
would also
impact shipping costs. Any
disruption in supply of paper could lead to an
increase in costs and production disruption.
There is also a reputational risk of using non-
environmental paper.
Our business is faced with increasing safety and
testing
requirements on various product
components, especially for our Book Plus
products. The risk of a product recall due to
children’s
severe
reputational impact on the business.
safety would have a
Loss of
intellectual
property
A loss of stored IP through failure of storage
medium or loss of back-ups would impact our
ability to process reprints and revisions and
could cause a loss of revenue.
Mitigating factor
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 worked with our
major printers on a plan to move to sustainable paper
and recently instituted a Forest Stewardship Council
(FSC) paper or Sustainable Forestry Initiative (SFI)
paper policy across all our imprints.
All components receive safety testing from independent
third parties. Management carefully selects suppliers
for components. The Group has two dedicated
Sourcing and Quality Managers who handle
components sourcing and safety test management.
We regularly review our storage and back-up routines
and disciplines. A new title management system for our
Publishers that improves the security of and access to
our IP was rolled out to our US business during the year,
and we anticipate the UK roll out to be completed
in 2017.
Laws and
regulations
As a creative and IP business, any changes to
copyright laws could have an impact on the
Group’s activities and any infringement could
lead to increased costs. Inconsistent internal
practices for negotiating contracts or clearing
rights could lead to IP claims.
Quarto has recently streamlined and simplified the
number of legal entities it operates through, and reviewed
the structure of our Legal team, including hiring a new
Group Director for Legal and Business Affairs. This will
ensure that all practices are aligned and consistent across
imprints and geographies within the Group.
Cyber
security
People
Like many organisations, the Group is at risk
from cyber-attack. This presents a potentially
serious risk of disruption to the production
process and could have a significant impact on
the profitability of the business and the security
of IP assets.
As in any creative business, the Group is heavily
reliant on its people and operates with the
inherent risk of not making the ‘right’ books, or
creativity being uneven year-on-year. Failure to
retain existing talent and attract new talent
could ultimately lead to a failure to generate
new titles, leading to a drop in revenue.
The Group uses firewalls and IT controls to prevent
attack as well as maintaining 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 transactional website
quartoknows.com. We undertook a full review and
upgrade of our IT systems in 2016.
Our portfolio of imprints and large number of products
spread this risk. With the exception of colouring books
in 2015, no single book accounts for more than 1.0% of
our annual sales. Quarto’s Publishers are experienced
and talented, and strive to stay close to publishing
trends and markets. The Group also offers competitive
market rate remuneration packages and has been
working on making Quarto an attractive place to work.
23
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSThe Quarto Group, Inc. Annual Report 2016 FINANCIAL REVIEW
“Operating profit for the Group (excluding BGD)
was $17.7m, an improvement of 22%.”
Michael Connole
Chief Financial Officer
Presentation of Results
The presentation of our results for 2016
shows the results of our Books & Gifts
Direct (BGD) business separately as
we have indicated that we are exiting
this business. BGD did not meet the
criteria to be accounted for as a
discontinued operation at the balance
sheet date. The additional separate
disclosure was considered appropriate
to allow better understanding of the
Group results given the disposal of the
BGD Australian business completed
post year end.
Note 32 to the financial statements
explains the alternative performance
measures we use
the
performance of the Group.
judge
to
Group Results including BGD
Revenue for the year was $188.4m
showing an increase of 3% on the
comparative figure for 2015 of $182.2m
(as restated). The Group’s operating
profit of $1.7m shows a $13.6m
reduction on the comparative figure
for 2015 of $15.3m (as restated) and
$14.2m
principally
exceptional impairment charge relating
to the BGD business referred to above.
The loss before tax for the Group was
$1.3m (2015: profit before tax of
$12.2m, as restated), also reflecting the
exceptional impairment charge.
reflects
the
24
Strategic Report Group Results excluding BGD
The following commentary looks at our
results for 2016 excluding BGD, which
comprises our publishing business and
Regent Publishing Services in Hong
Kong. We also completed the disposal
of Regent Publishing Services on
31 March 2017.
Revenue for 2016 of $169.1m shows a
6% increase on the comparative figures
for 2015 of $160.1m. The Harvard
Common Press and becker&mayer
publishing businesses which we
acquired in the US during 2016, account
for $12.7m of 2016 revenue.
Adjusted operating profit, which is a
key measure of how the business is
performing, rose by 19% from $15.6m
in 2015 to $18.6m in 2016. This includes
a combined contribution of $2.3m
from the Harvard Common Press and
becker&mayer businesses.
It also
includes the benefit of $2.1m relating to
the reduction in the amortisation of
our capitalised pre-publication costs.
During the year, we undertook a review
of the useful lives of the pre-publication
costs incurred in the development of
illustrated book titles. Certain of our
imprints that we had either started up
or acquired in the last few years had
been employing useful lives that were
shorter than three years. We examined
the sales of
imprints and
these
determined that their respective sales
profiles now justified using a three-
year useful life. The capitalised pre-
publication costs for all our illustrated
book titles are now amortised on a
straight line basis over three years.
As stated in Note 1 to the financial
revisions were
statements,
accounted
for prospectively as a
change in accounting estimate and as
a result, the amortisation charge of the
Group for the current financial year has
been reduced by $2.1m.
the
The Quarto International Co-Editions
business had a very good 2016,
recording an adjusted operating profit
of $9.4m, an increase of 47%, with
from
another strong contribution
children’s publishing and from
Ivy
Press, which we acquired in March
2015. Quarto Publishing Group USA
also had a good year with adjusted
operating profit of $9.6m, an increase
of 8% on the 2015 figure of $8.9m. As
stated above, it benefited from the
contribution of the acquired Harvard
Common Press and becker&mayer
businesses, which helped offset the
reduction in the sales of adult art
instruction/colouring books with which
we had particular success in 2015.
Quarto Publishing Group UK had a
disappointing year with adjusted
operating profit of $2.8m showing a
15% decline on 2015, with one imprint
having a particularly disappointing
year and recording a contribution loss
for the year.
Operating profit
the Group
excluding BGD was $17.7m (2015:
$14.5m), an improvement of 22%.
for
Books & Gifts Direct
We completed the disposal of the
Australian operating company, Books
& Gifts Direct Pty Limited (BGD
Australia) on 31 March 2017. The
consideration for the sale of the
company is A$1 and Quarto will also
take an assignment of certain debts
owed by the master franchisees to
BGD Australia of A$1.9m (US$1.4m)
which will be repayable in monthly
instalments over two years, and are
interest bearing. The repayments will
be used to reduce the Group’s bank
debt as they are received. Quarto is
entitled to receive 10% of the profit
before interest and tax of the business
for the next five years. Our direct sales
business in New Zealand, remains for
sale, and we are currently discussing a
potential disposal with a number of
interested parties.
25
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSThe Quarto Group, Inc. Annual Report 2016 FINANCIAL REVIEW CONTINUED
in
cut-off
to proper
transit and
In the process of finalising the results
of the BGD business for the year ended
31 December 2016, we uncovered
errors in the cut-off procedures and
accounting for returns in relation to
stock in transit and the related liability
accounts at BGD Australia. The errors
were caused by a failure in controls
relating
and
reconciliation procedures in respect of
stock
related
purchase clearing accounts, and
accounting for returns on certain
products. The errors have required the
restatement of the result of BGD for
the year ended 31 December 2015 with
a reduction in operating profit of $0.7m
through an increase in cost of sales.
This has resulted in lower operating
margins for that year. It has also
required the restatement and reduction
of retained earnings at 1 January 2015
by $1.0m. Further details are set out in
Note 1 to the financial statements.
the
The business recorded revenue of
$19.4m for 2016, which declined by 12%
on the 2015 comparative figure of
$22.1m, indicating the continued weak
both
environment
economic
Australia and New Zealand where the
business has operated.
in
restated)
The operating loss for the year of
$16.1m (2015: operating profit of $0.8m,
as
included exceptional
impairment charges of $14.2m to write
down the net and other attributable
assets of BGD
their
recoverable value. The total impairment
charge includes $8.0m relating to the
impairment of the net operating assets
of the business, together with $6.2m
relating to the impairment of goodwill.
Further details are set out in Note 3 to
the financial statements.
reflect
to
Finance Costs
Finance costs of $3.1m (2015: $3.2m)
represent the interest costs on the
Group’s borrowings together with the
issuance
amortisation of the debt
costs. The decrease in net finance
costs despite higher net debt at
31 December 2016 arose as our interest
margin reduced.
Tax
The tax charge for the year of $4.0m
(2015: $3.7m) arises on the loss before
tax as no tax credit has been recognised
on the BGD loss before tax for the year
of $16.1m. The effective tax rate for
the Group excluding BGD is 27.3%
(2015: 25.1%). A significant proportion
of the Group’s taxable profit arises in
the US where the federal tax rate is
34%. In the absence of tax reform in
the US, we expect the effective rate to
remain at approximately the current
effective rate.
(Loss)/Earnings Per Share
Our loss per share of 28.5c (2015:
earnings per share of 41.3c, as restated)
and our adjusted basic earnings per
share of 5.7c (2015: 46.2c, as restated)
are both principally explained by the
exceptional
impairment charge of
$14.2m relating to BGD. Our adjusted
basic earnings per share for the Group
excluding BGD of 54.7c shows an
annual
the
comparative figure for 2015 of 46.0c
and reflects the increase in the profit
before tax. Note 10 to the financial
statements sets out how we calculate
the adjusted earnings per share figures.
Our adjusted dividend cover excluding
BGD was 3.6 times (2015: 3.2 times)
is calculated using adjusted
and
earnings per share. See Note 32
for details.
increase of
19% on
26
Strategic Report Return to Shareholders
The Directors are recommending a
final dividend for the year of 9.87c per
share, bringing the total dividend for
the year to 15.0c per share (2015: 14.5c
per share).
We also acquired the assets of Harvard
Common Press in February 2017 for a
total consideration of $1.0m, of which
$0.2m was paid in cash and $0.8m in
loan notes payable in 2017. Goodwill of
$0.8m arose on the acquisition.
Cash Flow
Cash generated by the operations of
the business amounted to $43.7m
(2015: $51.9m) and the reduction on
last year’s figure reflects a disappointing
last quarter of 2016 which historically is
our best quarter for generating cash,
with poor trading within BGD and
negative working
timing
movements around the year end.
capital
increase
investment
reflects
We invested $37.2m (2015: $34.9m)
in pre-publication costs using the
cash generated from operations and
in
the
in our
pre-publication costs
the
acquisitions
in the year and our
continued investment in new titles we
publish each year. This year’s new titles
become part of our backlist in the
following year. We spent $3.7m on
acquiring new businesses (2015: $1.6m)
and $1.6m on capital expenditure
(2015: $2.0m). The
in
pre-publication costs for new titles and
our
in acquiring new
businesses are key factors in driving
future revenue growth.
investment
investment
Acquisitions
We acquired becker&mayer in August
2016 for a total consideration of $11.1m.
$2.3m was paid in cash on completion,
with a further $7.5m payable in loan
notes, of which $2.5m was paid
in January 2017, with $2.5m payable in
August 2017 and $2.5m payable
in August 2018. We have also provided
for $1.5m for contingent consideration
arrangements. Provisional goodwill of
$2.3m arose on the acquisition.
Both acquisitions have been accounted
for under the acquisition method and
further details are set out in Note 30 to
the financial statements.
Net Assets
The Group’s net assets of $44.1m at
31 December 2016 show a reduction
of $9.3m on the 2015 comparative
figure of $53.4m (as restated), mainly
reflecting the loss for the year, the
dividends of $2.9m paid to shareholders
and deferred tax on certain exchange
in our currency
gains
translation reserves.
included
Indebtedness and Borrowing
Facilities
Our net debt comprising our bank
borrowings less cash balances has
increased from $59.5m to $61.9m.
Although net debt did not fall in 2016,
it has reduced by $19.1m in the last
four years since 31 December 2012.
The continued reduction of our net
debt remains a key a key objective for
the Group. Our bank borrowings at
31 December 2016 were $80.7m
(2015: $84.6m).
In February 2015, the Group agreed a
$95m multi-currency term loan and
revolving credit facility, which expires
on 30 April 2019. We repaid $5m of the
term facility in February 2016 and
February 2017.
The facility requires us to maintain
certain levels of interest cover, leverage
and cash flow in the business and
the interest payable on the debt is
based on a ratchet whereby we pay
LIBOR plus a margin of between 2.1%
and 2.8% depending on our leverage
ratio. We also have a £5m working
capital overdraft
is
renewable annually.
facility, which
27
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSThe Quarto Group, Inc. Annual Report 2016 FINANCIAL REVIEW CONTINUED
A direct result of our disappointing
cash generation in the final quarter of
2016 was that we did not pass the
cash flow after debt service (‘CFADS’)
cover covenant test at 31 December
2016, contained within our banking
facilities agreement. This does not
constitute a breach of the Group’s
banking
facilities. The agreement
states that if we do not pass a particular
quarter’s cash flow covenant test, it
does not amount to a breach provided
that it is the first time we have not
passed the test and that we pass the
test at the end of the next quarter. The
seasonality of the publishing industry
means there is always a degree of
sensitivity around our working capital
movements. We have
identified
mitigating actions that would maintain
covenant headroom in such situations
and the Directors are confident that
the Group will comply with all financial
covenants for the foreseeable future.
Please refer to Note 1 and 19 to the
financial statements for further details
relating to our banking covenants.
it also transacted
Currency
The Group reports in US Dollars, which
is the principal functional currency, but
during 2016
in
Sterling, Euros, Australian Dollars, New
Zealand Dollars and Hong Kong Dollars.
We use a currency swap arrangement
to mitigate the fluctuations between
US Dollars and Sterling. Our borrowings
are drawn in US Dollars, Sterling and
Euros to hedge the movement in our
net assets in those currencies. The key
exchange rates for the year are shown
in the table below.
Exchange Rates
In the year, all of the currencies we
transact in weakened against the US
Dollar. The net
these
currency movements on our net assets
was to increase them by $0.7m (2015:
reduction of $2.3m as restated).
impact of
Principal Risks and
Uncertainties
Details of the principal risks and
uncertainties are set out on pages 22
and 23.
Details of the Group’s financial risk
management objectives and policies
are set out in Note 22 to the financial
statements.
Going Concern and Viability
Statement
In accordance with provision c.2.2 of
the 2014 revision of the UK Corporate
Governance Code, the Directors have
assessed the prospects of the Group
over both a one-year and a three-year
period. The one-year period has a
greater
is,
therefore, used to set budgets for all
our businesses which culminates in the
approval of a Group budget for the
Board. The three-year period offers
less certainty, but is aligned with long
term incentives offered to Executive
Directors
senior
management.
level of certainty and
certain
and
Versus US Dollar
Sterling
Euro
Australian Dollar
New Zealand Dollar
Hong Kong Dollar
Year end rate
Average rate
2016
0.81
0.95
1.38
1.43
7.72
2015
0.64
0.83
1.22
1.28
7.77
%
change
27%
14%
13%
12%
(1%)
2016
0.74
0.90
1.36
1.44
7.79
2015
0.65
0.90
1.33
1.43
7.73
%
change
14%
–
2%
1%
1%
28
Strategic Report
products
The Directors have considered the
underlying robustness of the Group’s
business model,
and
proposition and
its recent trading
performance, cash flows and key
indicators. They have
performance
also reviewed the cash
forecasts
prepared for the three years ending
31 December 2019, which comprise a
detailed cash forecast for the year
ending 31 December 2017 based on the
budget for that year and standard
growth assumptions for revenue and
costs for the years ending 31 December
2018 and 2019, to satisfy themselves of
the going concern assumption used in
preparing the financial statements.
The Directors have assessed
the
Group’s viability over a three-year
period ending on 31 December 2019
based on a financial model which was
prepared as part of the process of
considering and approving the 2017
budget. The Directors used the three-
year review period for the following
reasons:
• The Group’s publishing programme
planning cycle normally works over
a two to three-year period.
• The Group’s
current banking
facilities have just over two years to
run before they will need to be
refinanced in April 2019. Consistent
with previous facilities, the Directors
have assumed that these facilities
will be renewed or extended at that
time on similar terms.
In carrying out their analysis of viability,
the Directors took account of the
Group’s projected profits and cash
flows, its banking covenants and the
impact of a downturn in trading that
the Group could endure whilst
remaining viable.
They also took account of the principal
risks and uncertainties facing the
business referred to above, a sensitivity
analysis on the key revenue growth
assumption and the effectiveness of
available mitigating actions. Based on
their assessment, the Directors have a
reasonable expectation that the Group
will be able to continue in operation
and meet all of its liabilities as they fall
due up to 31 December 2019.
For this reason, they continue to adopt
the going concern basis in preparing
the financial statements. In doing so,
it
is recognised that such future
assessments are subject to a level of
uncertainty that increases with time
and, therefore, future outcomes cannot
be guaranteed or predicted with
1 to the financial
certainty. Note
additional
provides
statements
information on the Group’s banking
covenants and sensitivity.
Michael Connole
Chief Financial Officer
19 April 2017
29
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSThe Quarto Group, Inc. Annual Report 2016 C
o
l
e
c
c
i
o
n
d
e
H
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e
s
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s
i
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n
o
s
a
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r
i
o
s
Saludos
Preparese para ser sorprendido por esta incre ble
coleccion de brillantes huesos de algunas
fascinantes criaturas prehistoricas. Descubra
lo que sus huesos revelan sobre
como viv an, y a continuacion
eche un vistazo mas de cerca
a las propias criaturas.
I
N I K K E I
F u s i ó n d e l a s c o c i n a s
j a p o n e s a y s u d a m e r i c a n a
La cocina nikkei es una celebración de las excepcionales y deliciosas recetas surgidas a
raíz del maridaje de la tradición culinaria sudamericana y la japonesa. Si bien son muchos
los restaurantes nikkei que gozan del beneplácito y el reconocimiento internacionales,
Luiz Hara se centra en este libro en el aspecto más casero de la cocina. Descubra de la
mano del autor la fascinante evolución de la cocina nikkei en Sudamérica y otros países.
Gracias a esta estupenda selección de más de un centenar de recetas, que representan lo
mejor de la cocina nikkei y que, además, cuenta con recetas de algunos de los mejores
chefs nikkei de todo el mundo, podrá cocinar con este estilo en su propia cocina.
N o. 22
Ευρωπαϊκός
σκαντζόχοιρος
Γατόπαρδος
N o. 78
Eche un vistazo más de cerca
a los cuernos distintivos de un
aterrador Triceratops.
N o. 3
E
K
K
I
N
A
R
A
H
Z
I
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Preservamos el medio ambiente
• Reciclamos y reutilizamos.
• Usamos papel de bosques gestionados
de manera responsable.
ISBN 978-84-16138-73-9
9 7 8 8 4 1 6 1 3 8 7 3 9
Who lives in the rainforest?
JKT_LA COCINA NIKKEI_son sol.indd 1
BONE DINOS_UK SPA.indd 1
N o. 2
Ελέφαντας
N
o.
1
2
{ Tiranosaurio }
0
will find a world filled with great surprises!
Explore a rainforest habitat up close and you
Shine a light behind the page and see. . .
From tree frogs living inside plants to stealthy
jaguars on the forest floor, the hidden wonders
of this amazing habitat are revealed.
Η συλλογή μου
Averigüe qué tan grande era
XX
realmente el cráneo de un
p a
ΖΩΑ
the
temible Tyrannosaurus Rex.
e
g
to light
ο κόσμος των θαυμαστών πλασμάτων
Ανακάλυψε τον υπέροχο κόσμο των ζώων μέσα σε αυτό
το βιβλίο δραστηριοτήτων με την πλούσια εικονογράφηση!
Vea cómo un grande y voluminoso
Iguanodon utilizó las púas en sus
pulgares como armas secretas.
d
l
o
h
Είναι γεμάτο απίστευτες πληροφορίες, γρίφους με ζώα,
εκπληκτικά αυτοκόλλητα και μία αφίσα για να
φρεσκάρεις τις γνώσεις σου για τα ζώα.
inside h i d d
•
e
e
s
o
t
e n
•
LUIZ HARA
Ετοιμάσου για εξερεύνηση!
F o t o g r a f í a s d e L i s a L i n d e r
N o. 27
N
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{ Plesiosaurio }
{ Lambeosaurus }
{ Stegosaurus }
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No
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Coleccion de Huesos
Dinosaurios
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y otros animales prehistóricos
Γκρίζος λύκος
Τ Ο ΚΟΛΛΗΤΑ • ΑΦΙΣ
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N o. 109
o.
6
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ΓΡΙΦ ΟΙ • Α
Α
Πολική αρκούδα
{ Pterosaurio }
Νυχτερίδα με
ρουθούνια-σωλήνες
Μεγάλος γέρβιλος
N
o.
7
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ν
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η N o. 64
N o. 78
Αρουραίος-
καγκουρό
Η συλλογή μου
XX
{ Triceratops }
ΖΩΑ
• ΒΙΒΛΙΟ ΔΡΑΣΤ Η Ρ Ι
Ο
{ Ictiosaurio }
ο κόσμος των θαυμαστών πλασμάτων
N
o.
9
8
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N o. 103 Οδόβαινος
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Πίκα
Skvělé rECEpty začínají intEnzivní Chutí
24/3/16 14:41
DIVISIONAL REVIEW
Γιγάντιο πάντα
r
E
Vaříte rádi? A chtěli byste, aby vaše kulinářské výtvory byly ještě lepší, ještě lahodnější, zkrátka
neodolatelné? Pak je tato kniha právě pro vás.
Γαλάζια φάλαινα
Zavedeme vás do království chutí a vůní. Vyluhování – neboli odborně řečeno příprava infuzí – je
postup, při němž se z bylinek, koření, ovoce a dalších ingrediencí dobývá intenzivní chuť i aroma. Není
to vůbec nic těžkého. A nebudete potřebovat ani žádnou chemickou laboratoř. Snadno si vystačíte
s tím, co máte v kuchyni.
N o. 72
X
N
Nabízíme vám 135 chuťových bomb, které pozvednou vaše kulinářské výtvory do říše delikates.
Nápoje, omáčky, oleje, octy, bittery, vývary, sladkosti, zkrátka vše, co si dovedete představit, můžete
s pomocí svých domácích výluhů lehce přetvořit v díla hodná šéfkuchaře.
ISBN 978-960-16-7079-9
ΜΕΙΓΜΑ
Χαρτί από
υπεύθυνες πηγές
7+
o.
Φακόχοιρος
Pracovní postupy jsou opravdu jednoduché. Někdy stačí jen obyčejné spaření či lehké povaření,
jako například u bylinek či ovoce. S využitím oleje, vody, octa nebo alkoholu si snadno připravíte
svůj vlastní vanilkový, citronový, pomerančový nebo mátový extrakt, osvěžující a zdravou kombuchu,
zajímavé bylinné čaje, sladké sirupy, labužnické omáčky a pikantní dochucovadla. Vše si můžete
vyzkoušet v receptech též uvedených v knize.
9 7 8 9 6 0 1 6 7 0 7 9 9
Boηθ. κωδ. μηχ/σης 11079
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N o. 77
• bittery, limonády
• omáčky
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Tauch ein in die Natur und entdecke
zehn der artenreichsten Lebensräume der Erde –
kunstvoll gestaltet vom Mailänder Designduo Carnovsky.
Die beiliegende magische Farbzauberlupe macht die fantastischen
Lebenswelten des Dschungels, der Ozeane, der Steppen und Wälder
sichtbar: Die Tiere des Tages sind durch die rote Lupe zu erkennen,
die Tiere der Nacht durch die blaue und die Pflanzen durch die grüne.
Was wird dir auf deiner Reise durch die Wildnis begegnen?
Price: £10.99
M
a
g
i
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c
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W
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l
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Carron Brown & Alyssa Nassner
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www.metafora.cz
K-SORF_Rainforest-CVR_PLC-UK.indd 1
27/06/2014 10:02
Infusing Flavors_cover_CZ_12,5.indd 1
30.10.2016 22:21:37
ISBN 978-3-7913-7282-2
2282731973879
Entdecke
verborgene
Lebensräume
mit der
Zauberlupe!
7282_Magische Welten_cov.indd 1
18.05.16 09:56
Saludos
Preparese para ser sorprendido por esta incre ble
coleccion de brillantes huesos de algunas
fascinantes criaturas prehistoricas. Descubra
lo que sus huesos revelan sobre
como viv an, y a continuacion
eche un vistazo mas de cerca
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{ Tiranosaurio }
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σκαντζόχοιρος
Eche un vistazo más de cerca
a los cuernos distintivos de un
aterrador Triceratops.
Η συλλογή μου
Averigüe qué tan grande era
XX
realmente el cráneo de un
temible Tyrannosaurus Rex.
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ο κόσμος των θαυμαστών πλασμάτων
Vea cómo un grande y voluminoso
Ανακάλυψε τον υπέροχο κόσμο των ζώων μέσα σε αυτό
o
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Iguanodon utilizó las púas en sus
το βιβλίο δραστηριοτήτων με την πλούσια εικονογράφηση!
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Είναι γεμάτο απίστευτες πληροφορίες, γρίφους με ζώα,
e
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Coleccion de Huesos
Dinosaurios
y otros animales prehistóricos
Γκρίζος λύκος
Τ Ο ΚΟΛΛΗΤΑ • ΑΦΙΣ
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Η συλλογή μου
XX
{ Triceratops }
ΖΩΑ
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• ΒΙΒΛΙΟ ΔΡΑΣΤ Η Ρ Ι
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Who lives in the rainforest?
Πίκα
Γιγάντιο πάντα
Skvělé rECEpty začínají intEnzivní Chutí
Shine a light behind the page and see. . .
Vaříte rádi? A chtěli byste, aby vaše kulinářské výtvory byly ještě lepší, ještě lahodnější, zkrátka
λ
Explore a rainforest habitat up close and you
neodolatelné? Pak je tato kniha právě pro vás.
will find a world filled with great surprises!
Γαλάζια φάλαινα
Zavedeme vás do království chutí a vůní. Vyluhování – neboli odborně řečeno příprava infuzí – je
postup, při němž se z bylinek, koření, ovoce a dalších ingrediencí dobývá intenzivní chuť i aroma. Není
to vůbec nic těžkého. A nebudete potřebovat ani žádnou chemickou laboratoř. Snadno si vystačíte
r
N o. 72
From tree frogs living inside plants to stealthy
s tím, co máte v kuchyni.
N o. 2
BONE DINOS_UK SPA.indd 1
jaguars on the forest floor, the hidden wonders
Nabízíme vám 135 chuťových bomb, které pozvednou vaše kulinářské výtvory do říše delikates.
B
o.
7+
MAE50_R3_PER_PLC Size:466x295mm Spine:14mm
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of this amazing habitat are revealed.
s pomocí svých domácích výluhů lehce přetvořit v díla hodná šéfkuchaře.
υπεύθυνες πηγές
Χαρτί από
Nápoje, omáčky, oleje, octy, bittery, vývary, sladkosti, zkrátka vše, co si dovedete představit, můžete
ISBN 978-960-16-7079-9
ΜΕΙΓΜΑ
Φακόχοιρος
Pracovní postupy jsou opravdu jednoduché. Někdy stačí jen obyčejné spaření či lehké povaření,
jako například u bylinek či ovoce. S využitím oleje, vody, octa nebo alkoholu si snadno připravíte
6
svůj vlastní vanilkový, citronový, pomerančový nebo mátový extrakt, osvěžující a zdravou kombuchu,
WWW.patakis.gr
zajímavé bylinné čaje, sladké sirupy, labužnické omáčky a pikantní dochucovadla. Vše si můžete
Boηθ. κωδ. μηχ/σης 11079
N
o.
5
vyzkoušet v receptech též uvedených v knize.
a
Γορίλλας
e
9 7 8 9 6 0 1 6 7 0 7 9 9
SHINE-A-LIGHT
n
c
s
e
e
• omáčky
• domácí oleje, octy
• bittery, limonády
N o. 77
C
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MAE61_R3_GREK_Cover_R4 Size:446.5mmX298mm Spine:6.5mm
Erin CoopEyová
{ Plesiosaurio }
{ Lambeosaurus }
PUBLISHING BUSINESSES
QUARTO INTERNATIONAL
CO-EDITIONS GROUP
QUARTO PUBLISHING
GROUP USA
REVENUE
$51.9m
(2015: $50.1m)
REVENUE
$81.2m
(2015: $72.4m)
ADJUSTED OPERATING PROFIT
ADJUSTED OPERATING PROFIT1,2
$9.4m
(2015: $6.4m)
$9.6m
(2015: $8.9m)
infuzování
esence chutí a vůní
30/07/15 12:22
International
Quarto
Co-Editions
Group performed well in 2016 and is
continuing
to grow year-on-year.
Revenue was $51.9m (2015: $50.1m),
up by 4%, and adjusted operating
profit grew by an impressive 47% to
$9.4m (2015: $6.4m). The division
benefited from good trading in our
children’s imprints – one of our key
strategic areas of focus – as well as an
outstanding performance by Ivy Press,
which we acquired in March 2015. Like
any diverse portfolio, some of our
imprints performed better than others
due to a variety of factors but we
recognise the cyclical nature of our
creative businesses and actively
manage and revitalise the portfolio
accordingly.
ThisIsYourCookbook.com had a steady
first full year following its launch in
2015 and proved
its concept of
producing personalised cookbooks.
We saw a nice uplift particularly before
the Christmas period. We will invest
some marketing funds in this business
in 2017. It is still too early to say whether
this new venture will reach commercial
success, but investment in new ways of
exploiting our IP is essential to the
ongoing health of Quarto.
Price: £10.99
Carron Brown & Alyssa Nassner
www.metafora.cz
1
2
Includes the benefit of the reduced
amortisation change arising from the
review of useful lives of our titles.
Includes the contribution from acquired
businessess.
Quarto Publishing Group USA had an
excellent year. Revenue grew by 12%
over 2016, and adjusted operating
profit improved by 8% from $8.9m to
$9.6m. This was a particularly pleasing
performance as the business replaced
in sales of adult art
the spike
instruction/colouring book titles that
we saw in 2015 with other titles. As
anticipated, we saw signs of retail
oversaturation with this category and
sales of these titles have settled to a
lower, more consistent level, but one
in which our titles still to continue
to participate.
exceeded
in August
becker&mayer, acquired
2016,
management
expectations by effectively becoming
our sixth most profitable imprint in the
year. As stated at the time of the deal,
this acquisition has further enhanced
the Group’s offering in both adult and
children’s publishing, particularly in the
USA. It is an excellent addition to our
portfolio. We continue to focus the
product of the SmartLab business
towards Book Plus products and are
pleased with the initial direction.
In addition, we are satisfied with the
integration of Harvard Common Press
and Burgess Lea Press, both also
acquired in 2016, which performed to
acquisitions
expectations.
These
leading
further our position as a
publisher of lifestyle-orientated titles
for the consumer markets.
The US presidential election
November
introduce
did
in
some
uncertainty into the marketplace and
trading was a
little weaker than
anticipated in the final weeks of the
year. We are therefore budgeting
cautiously for 2017 but we have a
strong portfolio of products and
increasingly, are strategically well
placed in the US market.
Our direct relationships with retailers
continue to develop as we focus our
publishing and distribution on niche
markets. Our strategy remains to
diversify our channels to market in a
way that matches the breadth of our
publishing programmes which cater
for enthusiasts.
QUARTO PUBLISHING
GROUP UK
REVENUE
$21.5m
(2015: $22.8m)
ADJUSTED OPERATING PROFIT1
$2.8m
(2015: $3.3m)
Quarto Publishing Group UK showed
modest growth in 2016 in absolute terms
but was badly impacted by currency
volatility, resulting overall in a 6% decline,
with revenue of $21.5m. The UK market
has been somewhat softer in 2016,
undermined to some extent by the
anticipation and result of the European
Union (EU) referendum and subsequent
currency volatility, and the weakness in
Sterling has reduced revenue growth.
As in the US, there was a slow finish to
the year and we are also budgeting
cautiously here. That said, this remains a
portfolio of good imprints that publish
excellent books.
We have seen particularly gratifying
performances from Aurum Press in
adults, as well as children’s imprints
Wide Eyed Editions and Frances
Lincoln Children’s Books.
K-SORF_Rainforest-CVR_PLC-UK.indd 1
27/06/2014 10:02
31
Infusing Flavors_cover_CZ_12,5.indd 1
30.10.2016 22:21:37
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSThe Quarto Group, Inc. Annual Report 2016
CHILDREN’S PUBLISHING
CHILDREN’S PUBLISHING
REVENUE
$43.4m
(2015: $32.4m)
Our children’s revenues have grown by
34% year-on-year, both organically
the acquisition of
and
becker&mayer, which comprises about
50% children’s books.
through
Overall, our children’s revenues have
grown by 135% since 2012 and it
remains an area of strong focus for
the Group.
Our talented creative teams around
the world are suitably teamed up with
excellent specialist children’s book
sales people and marketers.
We continue to attract and develop
talent, and constantly manage creative
imprints,
cycles by starting new
renewing publishers of long-running
imprints and examining potential
acquisitions on both sides of the
Atlantic.
“ I will be forever grateful to Quarto
for giving me such an amazing
opportunity and allowing me to
create my first book The Bear and
the Piano. Working with such a
forward thinking and creative team
whilst developing my books is a joy.
Their passion is incredibly inspiring
and their continued support allows
me to fulfil my dream job.”
David Litchfield
Author and illustrator
“ It was fantastic to turn the iconic
pop anthem ‘Footloose’ into a
children’s book working with singer
and songwriter Kenny Loggins. We
created MoonDance Press to make
books for dreamers, books that
capture young imaginations with
enthralling stories.”
Anne Landa
Group Publisher, California imprints
“ We create the most didactic titles
possible, including a wide range of
books plus titles – adding components
to books so that children can interact
with the content and learn from it.
We are the ‘go-to’ creators of
innovative books for publishers
around the world.”
Zeta Jones
Group Publisher, QED Publishing, Quarto
Children’s Books, words & pictures
32
Strategic Report
FOREIGN RIGHTS SALES
FOREIGN RIGHTS SALES
REVENUE
$32.5m
(2015: $30.1m)
children’s books, are envisaged as the
co-operation grows. We see great
scope for developing the market for
illustrated non-fiction in the United
Arab Emirates (UAE) as well as the
larger Arabic-speaking world. The
category is currently dominated by
English language imports – excluding a
significant potential readership, as
English is not that widely spoken in the
Arabic speaking world as a whole.
Our Brazilian distribution agreement
with Grupo Nobel, Quarto Editora, had
a steady performance in line with
management expectations. Our 2016
programme included 60 titles, with a
mix of core adult categories (Food and
Wine, Esoteric, Pets, Drawing) and
some new topics such as Healthy
Living, Interior, Gardening and Kids.
and
uncertainties
Our Quarto Foreign Rights team
achieved a record performance
in
2016, particularly commendable given
the
currency
headwinds in some of the markets in
which we conduct business. This
demonstrates
their expertise and
entrepreneurial approach, as well as
the solid, enduring relationships they
have built with co-edition partners all
over the world.
foreign
for growth
rights sales, we
Besides
continue to work to identify further
opportunities
in both
English and foreign language – in
existing markets and in new markets –
proceeding cautiously to ensure that
we find the right partners who share
our values.
In 2016, we entered
into a new
international publishing partnership
with Sharjah-based Kalimat Group.
Our new Kalimat Quarto
imprint
launched in November 2016 at the
Sharjah Book Fair with a range of
cookbooks in Arabic repurposed from
our existing 500 series and distributed
throughout the Middle East and North
including
Africa. Other categories,
Die beiliegende magische Farbzauberlupe macht die fantastischen
Lebenswelten des Dschungels, der Ozeane, der Steppen und Wälder
Tauch ein in die Natur und entdecke
zehn der artenreichsten Lebensräume der Erde –
kunstvoll gestaltet vom Mailänder Designduo Carnovsky.
“ The Foreign Rights team makes sure
that every book gets sold in as many
languages as possible. We’re often
described as ‘the secret sauce of
Quarto’ – few others in our industry
can compete with our scale, reach
and expertise in this field.”
die Tiere der Nacht durch die blaue und die Pflanzen durch die grüne.
sichtbar: Die Tiere des Tages sind durch die rote Lupe zu erkennen,
Was wird dir auf deiner Reise durch die Wildnis begegnen?
2282731973879
7282_Magische Welten_cov.indd 1
ISBN 978-3-7913-7282-2
• Mit F
a
r b zauberlu
p
e
•
C
a
r
n
o
v
s
k
y Magische Welten
von Carnovsky • Text von Rachel Williams
M
a
g
i
s
c
h
e
W
e
l
t
e
n
Entdecke
verborgene
Lebensräume
mit der
Zauberlupe!
18.05.16 09:56
Karine Marko
Group Director of Foreign Rights
“ Quarto is dynamic and proactive
in looking at new business
opportunities – for instance
unexploited opportunities to offer
access to our platform and
distribution network to third parties,
unexploited foreign language
territories, or unexploited copyright
opportunities.”
David Inman
Managing Director, Quarto Partners
33
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSThe Quarto Group, Inc. Annual Report 2016
TRADING BUSINESSES
QUARTO HONG KONG
REVENUE
$14.5m
(2015: $14.8m)
ADJUSTED OPERATING PROFIT
$1.6m
(2015: $1.5m)
Regent Publishing Services (Regent),
long-established print broking
our
business based
in Hong Kong,
performed to expectations in 2016 with
operating profit up 7% from revenues
down 2%.
On 3 April 2017, we announced the
completion of the disposal of our 75%
interest in Regent. The consideration
for the disposal is $7.0m, including a
payment of $2.5m (HK$19.5m) for the
Group’s share of the excess cash in
the business, payable
in cash on
completion, which is expected to take
place on 31 March 2017. The business is
being sold to 1010 Printing Group Ltd, a
Hong Kong-based printing business
listed on
the Hong Kong Stock
Exchange. The consideration will be
used to reduce the Group’s net debt.
Regent has performed well since it was
founded and 25% shareholder George
Tai has been a loyal partner to the
Group for over 30 years. 1010 Printing
Group Ltd, one of Quarto’s long-term
and most valued printing suppliers,
will be a good home for Regent and
its people.
34
Strategic Report BOOKS & GIFTS DIRECT
REVENUE
$19.4m
(2015: $22.1m)
ADJUSTED OPERATING
(LOSS)/PROFIT
$(9.8)m
(2015: $0.9m as restated)
BGD’s revenue for the year ended
31 December 2016 was $19.4m,
showing a decline of 12% on the 2015
figure of $22.1m. The operating loss for
the year was $16.1m (2015: operating
profit of $0.9m as restated), and
impairment
includes
charges of $14.2m as discussed below.
Further details of the exceptional
impairment charges are set out in
Note 5 to the financial statements.
exceptional
incorporated
On 3 April 2017, we announced the
completion of the disposal of BGD
Australia to Zooom Pty Limited (as
trustee for the Zooom
Investment
in
Trust), a company
Australia and formed for the purposes
of acquiring the business by a group
comprising certain of the master
franchisees and former employees of
the business
in Australia. The
consideration for the sale of the
company is A$1 and Quarto will also
take an assignment of certain debts
owed by the master franchisees to
BGD Australia of A$1.9m (US$1.4m)
which will be repayable in monthly
instalments over two years and are
interest bearing. The repayments will
be used to reduce the Group’s bank
debt as they are received. Quarto is
entitled to receive 10% of the profit
before interest and tax of Zooom Pty
Limited for the next five years.
We have determined that exceptional
impairment charges totalling $14.2m
are required to write down the goodwill
and other net attributable assets of the
BGD business at 31 December 2016 to
reflect the recoverable value.
the
In the process of finalising the results
of the Books and Gifts Direct business
for the year ended 31 December 2016,
errors were uncovered in the cut-off
procedures and accounting for returns
in relation to stock in transit and the
related
liability accounts at BGD
Australia. The errors related to the
value attributed to stock in transit at
each of
three years ended
31 December 2016, 31 December 2015
and 31 December 2014 where detailed
examination has shown that supplier
invoices for stock in transit were not
processed in the correct accounting
period, nor was the correct accrual or
return provision
the
financial statements. The impact of
these errors has resulted in the lower
operating margins for the year ended
31 December 2015. Full details of the
error and the restatement are set out in
Note 1 to the financial statements.
recorded
in
35
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSThe Quarto Group, Inc. Annual Report 2016 OUR PEOPLE
“Our priority is to invest in our talent to
develop and to find people who are
inspired by great work, have a growth
mindset and a strong team orientation.”
Sally Dwyer
Group Director of People
More than 400 talented people help us
make and sell great books every day.
on
dependent
As a creative business, we are
particularly
the
imagination and passion of our people.
Our priority is to invest in our own
talent to grow and develop and to find
people who are inspired by great work,
have a growth mindset and a strong
team orientation.
We focus on recruiting only the best
creative talent we can find, from
everywhere and anywhere in the world,
and we have a responsibility to ensure
that each and every member of Quarto
feels they can contribute their best
each and every day.
We believe our people are a competitive
advantage for Quarto. Their creativity,
tenacity and team spirit help grow our
business – and the businesses of our
customers – every day.
Culture and Values
Quarto is too human to be truly
corporate – our imprints and businesses
are too individual; however, we try to
create a culture in which all our people
flourish. Every business has to find
what is authentic to them, and we
believe that when our people feel able
to bring their true selves to work we
get the best from each other.
Our culture is a key indicator of how we
treat each other and the behaviours we
want to be known for. Our values shape
the way we do business and select the
people we work with.
36
Strategic Report Our Values
• BE ACCOUNTABLE
• BE PURPOSEFUL
• BE CONSISTENT
• BE EXCELLENT
• BE CURIOUS
• BE COLLABORATIVE
We believe in creative independence
and that the autonomy we give our
people ensures that we remain market-
focused and relevant to all readers and
customers. Our imprints are supported
by a strong central platform that
includes finance, operations, sales,
resources and
marketing, human
foreign rights sales.
We have designed an organisation that
at its core has de-centralised leadership
into each publishing business, so that
our Group Publishers and Publishers
are truly running their own businesses,
with complete creative control over the
books they publish.
Employee Engagement
We believe that treating our people
with
respect, providing consistent
and fair policies and allowing them to
independent helps
be creatively
demonstrate
the value we hold
them in.
In 2016, we reviewed and increased our
global benefits for maternity, paternity,
adoption and surrogacy. We updated
our internship policy to ensure that all
interns we employ across our imprints
and businesses are paid the minimum
wage. Across our UK businesses, we
harmonised the employment terms
and conditions of all our employees.
And we piloted new flexible workplace
initiatives such as Summer hours.
In early 2017, we will conduct our first
ever employee engagement survey,
which will give us insights into how we
improving the way our
can keep
teams
leaders engage with
across Quarto.
their
business
greater
environment
Today’s
demands
for
need
collaboration, ongoing learning and
agility. We believe that about 70% of
an employee’s development happens
‘on the job’ through problem solving,
shadowing and special projects, as well
as secondments and
job
rotations. About 20% comes from their
communities of practice, both within
Quarto and their external networks.
Coaching and mentoring also help
provide momentum. The final 10% is
through active learning events. To help
get the most from this 10%, we are
developing Quarto & You – which will
allow our people to acquire new skills
in a structured and consistent way.
internal
Fostering Diversity and
Inclusivity
The diversity of people and ideas is
crucial in a creative business such as
Quarto. We believe that our teams
should be as diverse as the communities
we live and work in, and the people we
publish books for. We recognise that it
is a journey and we are working to
inclusive
become an even more
business.
We do not discriminate against age,
gender, ethnicity, cultural background,
sexual orientation or religious beliefs.
We recruit, develop and promote our
staff based on their performance
alone. We review each job application
and do not filter them through a system
that disqualifies candidates based on
education, sex or age.
We also promote diversity and
inclusivity
through our publishing
programme – particularly some of our
children’s books. As part of our
continued efforts in this space, we will
soon launch a learning workshop called
‘unconscious bias’ via our Quarto &
You platform, to help our people
understand their own biases and how
these can play out in the workplace.
Sally Dwyer
Group Director of People
19 April 2017
Performance Management
Our priority is to make sure that all our
employees feel that Quarto enables
them to do their job in the best way
possible.
We ensure that individual performance
goals are connected to the overall
strategic goals of Quarto, that people
understand what behaviours are
expected of them and that they have
regular conversations about
their
performance with their line manager.
We have listened to our employees
and reviewed our annual performance
review process, moving away from
a single annual process towards a
more
formal
quarterly check-in. This allows for
more timely performance coaching
and development.
flexible
and
less
During 2016 we undertook a review of
the Quarto behaviours to ensure that
they were reflective of our values and
the behaviours that create success in
Quarto. These will launch in 2017.
Launching our Purple Quagga
Awards
We
like to celebrate our people’s
achievements and, in 2016, we launched
our first ever employee award scheme
– the Purple Quagga Awards.
–
three
These consist of 12 awards in total –
one awarded monthly and 11 awarded
annually
areas:
across
publishing (four awards), people (four
awards), and sales, marketing and
foreign rights sales (four awards). Eight
of these are nominated directly by
employees or line managers and then
chosen by a panel of judges, while a
few are metric or target driven. Winners
can be individuals or teams and prizes
range from $500 to $5,000. The 2016
winners across all categories will be
revealed in April 2017.
Learning and Development
We want to develop our people and
enable them to take on different or
more senior roles within the business.
We do
this predominately by
mentoring, coaching and on-the-job
development.
37
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSThe Quarto Group, Inc. Annual Report 2016 CORPORATE RESPONSIBILITY
AND SUSTAINABILITY
Our mission is to educate, entertain and enrich the
lives of our readers through rich content and beautifully
illustrated books, which in itself has a high social value.
We focus on integrity in all of our activities, consider
our impact on society and the environment, and
work to be a good corporate citizen.
food
dedicated to creating “a healthy and
sustainable
system”. This
donation was made through an
agreement that advances profits on
the Burgess Lea Press book Field &
Feast. Burgess Lea Press was
acquired by Quarto in May 2016 and
donates 100% of after-tax publishing
profits on every book to 501(c)(3)
organisations that address hunger
relief, farmland preservation and
culinary education.
• Our UK-based offices gave in-kind
book donations to several charities
across the year, including Help for
Heroes, Ronald McDonald House
and The Family School.
• In November 2016, our California
office supported a volunteer project
organised by the YMCA. Within just
a couple of hours, Quarto employees
helped make more than 20 blankets
to keep seniors in need warm over
the holiday season.
• Other local charities supported by
employee initiatives in our offices in
2016 include:
– Beverly Bootstraps
www.beverlybootstraps.org;
– Cradles to Crayons
www.cradlestocrayons.org;
– Second Harvest Heartland
www.2harvest.org; and
– Assistance League
of Irvine Thrift Shop
www.assistanceleague.org/irvine.
Supporting our Communities
Our people individually and collectively
contribute to the communities in which
we live and work. We are proud of the
efforts our people make to educate,
entertain and enrich the lives of many
people, not just our readers. Some
of the highlights for this year are
detailed below:
• A $10,000 donation to the Goddard
Riverside Community Center in New
York City in support of their annual
Gala. The Goddard Riverside
Community Center serves some
17,000 people each year through 26
programmes on the Upper West
Side and throughout Manhattan.
They have established a decade-
long partnership with the publishing
industry – supported by The Quarto
Group
against
homelessness.
fight
to
–
• Over £16,000 fundraised for Breast
Cancer Now by 27 UK-based Quarto
employees in May 2016, by walking
100km from London to Brighton – a
significant portion of the total of
£80,000 raised by Breast Cancer
Now through this event.
• $5,000 donated to the Stone Barns
Center for Food and Agriculture,
a 501(c)(3) nonprofit organisation
It is also worth mentioning two
publishing projects that our imprints
have worked on in 2016 in partnership
with well-established charities, and
that will publish in 2017:
• Ivy Press has created a book in
partnership with Mencap, the voice
of
learning disability, which will
receive 10% of proceeds from sales.
38
£16K
FUNDRAISED
FOR BREAST
CANCER
$5K
DONATED TO THE
STONE BARNS
CENTER FOR
FOOD AND
AGRICULTURE
Strategic Report As a consequence, we estimate that
about 90% of our published books
printed from 2017 onwards will use
FSC paper. The remaining 10% will be
moved to FSC as soon as possible and
we are in the process of sourcing FSC-
compliant materials from products
that require other specifications than
the standard paper and board we
usually use. We expect that, by the
middle of 2017, close to 100% of our
newly printed books will use FSC
paper. In 2017, we will also move to
FSC paper for all the co-edition
foreign
books we print
language customers.
for our
Where we print domestically in the US,
and FSC material is not available, we
will use Sustainable Forestry Initiative
(SFI) paper.
We continue to work with partners and
suppliers who are certified by the FSC,
IS0 14001 which covers environmental
management systems, and the ICTI
CARE process
ethical
standards of manufacturing.
covering
Developing more sustainable
operations
We are working towards developing
sustainable
as
operations
managing our carbon emissions by
ensuring that we consolidate shipments
across
the Group and ship as
infrequently as possible. This limits the
shipping of empty space across the
oceans, and reduces energy waste and
our impact on the environment.
such
We ship most of our books to two
warehouses – one in the UK and one
in the US. The majority of our books
are printed in southern China and
shipments are consolidated. As a rule,
we consolidate palletised shipments
from the printer and limit movements
to only full 40 foot containers to reduce
our impact on the environment. When
a container is not full, we will hold
shipment until the following week
barring exceptional circumstances. We
have been applying these guidelines as
standard practice
for US-bound
shipments for the last two years, and
we started for UK-bound shipments in
mid-2016. Since we started for the UK,
our average pallet loading for each
container has been 49 pallets out of a
maximum capacity of 52 – so we are
performing efficiently in this area.
The Label is a book for new parents
as a
insight
real and honest
into what it means to have a child
with Down’s Syndrome
the
21st century.
in
Imagine
• Frances Lincoln Children’s Books
has created a picture book of John
in partnership
Lennon’s
with Amnesty
International. The
book will publish on 21 September
2017 and rights have already been
sold
languages, with
Amnesty International receiving a
royalty from every copy sold.
in seven
The Quarto Foundation
In 2017, we will launch The Quarto
Foundation to further support our
local communities in areas that are
close to our hearts and business –
education and knowledge. This will
enable us to channel our charitable
efforts to fund charities that support
causes that are aligned with our
Company’s mission.
Every Quarto office will choose one
local charity to support and will
be encouraged
raise money
through mechanisms such as matched
giving,
and
in-kind
volunteering time.
donations
to
by
considering
Sustainability
We try to make our business more
sustainable
the
sustainability aspects of our most
important business decisions, where
these efforts can create value for our
to
shareholders while continuing
provide value
to our customers,
partners and communities.
including
The impact of our business on the
environment predominantly comes from
the activities we subcontract to our
suppliers
printing,
production, distribution, recycling and
disposal of printed books. We also have
office-based product development,
editorial,
administrative
activities.
sales
and
the
recently
Using sustainable paper
instituted a Forest
We
Stewardship Council
(FSC) paper
policy across all our UK and US
imprints, with the following effects:
• All of our gift and stationery
products were already printed on
FSC material in compliance with the
European Union Timber Regulation.
That remains unchanged.
• At the start of 2016, we moved to
FSC paper for all our children’s books
published under Quarto imprints.
• As of 1 January 2017, this will be
extended to all our adults’ books
published under Quarto imprints.
39
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSThe Quarto Group, Inc. Annual Report 2016 BOARD OF DIRECTORS
Peter Read (60)
Chairman
Marcus E. Leaver (46)
Chief Executive Officer
Peter joined the Board in May 2016.
Peter is currently a non-executive
director of EVR Holdings, Concha,
Quayle Munro Holdings, the
Professional Cricketers’ Association,
the Royal Automobile Club, and the
Motor Sports Association. He was
formerly chairman of KPMG’s
Telecoms, Media and Technology
practice and a partner for over
20 years.
Peter chairs the Nominations
Committee and is a member of the
Remuneration Committee.
Marcus has been Chief Executive
Officer since December 2012 having
joined the Board of Quarto as Chief
Operating Officer in May 2012. Prior
to Quarto, he worked in the USA from
2005, latterly as President of Sterling
Publishing, a subsidiary of Barnes &
Noble, the leading bricks-and-mortar
bookseller in the US.
Before living and working in the US,
he worked in London for Chrysalis
Group plc, a London Stock Exchange-
listed media company, latterly as
Chief Executive Officer of Chrysalis
Books Group, from 2002, and prior
to that as Corporate Development
Director and in a number of different
general management roles, from 1998.
Marcus graduated from the University
of East Anglia with a degree in Art
History, and received his MBA from
London Business School.
Marcus is a member of the
Nominations Committee.
Michael Connole FCA (52)
Chief Financial Officer
(resignation submitted 30 March 2017)
Michael joined Quarto as Chief
Financial Officer on 1 September 2015.
Michael has considerable experience
in media, being Chief Financial Officer
of Global Radio, the UK’s largest
commercial radio group, from June
2008 to August 2015, and before that
Group Finance Director at Chrysalis
Group plc, where he worked from
1997 to 2008. He has also been Vice
President – Finance (Europe) for
Management Consulting Group plc
and spent seven years with KPMG’s
London office. He qualified as a
chartered accountant in 1988.
Michael has decided to take a career
break after 21 years in senior finance
roles and has submitted his
resignation. An executive search is
underway for the Group’s new CFO.
In the meantime, Michael continues to
support the business during his notice
period. Accordingly, Michael is not
seeking re-election as a Director.
40
Governance Jess Burley (51)
Non-Executive Director
Michael Hartley (68)
Non-Executive Director
Anne Crompton (40)
Company Secretary
Jess has over 20 years’ experience
in media, working previously as the
Group Managing Director of Hearst in
the UK, responsible for Hearst Digital
Media and the National Magazine
Company portfolio. Jess joined m/SIX
(the WPP joint venture between
CHI&Partners and GroupM) as Chief
Executive Officer in May 2010, bringing
a wealth of knowledge across all
media. Jess has also held a number
of non-executive roles working
previously with UK Mail Group Plc, the
fashion retailer Jacques Vert Plc and
TalkTalk Telecom Plc. She is also a
trustee of the young people’s charity
Get Connected. Jess was appointed to
the Board as a Non-Executive Director
of Quarto in 2014 and was appointed
Chairman of the Remuneration
Committee on 1 December 2016.
Jess is a member of the Nominations
and Audit Committees.
Mike was appointed to the Board
in August 2013 as Senior Independent
Director and Chair of the Audit
Committee from May 2014.
Mike brings considerable board and
international experience and a broad
knowledge of strategic management.
He formerly held a series of senior
executive positions in both retail
and manufacturing, serving latterly
as Chief Executive Officer of the
£800m turnover Viyella division of
Coats Viyella plc, retiring in 2003.
He has held a series of non-executive
roles, including Chairman of Dawson
International PLC from 2003 to 2009
and Senior Independent Director of
ITE Group plc from 2003 to 2014.
He is currently Chairman of US-
based Dawson Forte LLP.
Mike is a member of the Nominations
and Remuneration Committees.
Anne was appointed in January 2017
and is also Group Director of Legal
and Business Affairs.
Anne is responsible for managing and
safeguarding all our intellectual
property and contractual processes,
as well as assisting the Chief Financial
Officer in managing our risk across
the Group. She also advises the Board
and the Senior Leadership Team on
both regulatory and M&A matters,
and acts as Secretary to the Board and
various Board Committees.
Anne has 10 years of experience as a
lawyer in the creative industries. She
joins us from media and entertainment
group This Is Global Ltd, where she
had been Head of Legal since 2010.
She was previously a lawyer with the
law firm Harbottle & Lewis LLP, where
she trained.
41
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSQuarto Group, Inc. Annual Report 2016 NOMINATIONS
COMMITTEE REPORT
The members of the Nominations
Committee are the Group’s non-
executive Directors, Peter Read
(Committee Chairman), Michael
Hartley, and Jess Burley, and the
Chief Executive Officer, Marcus
Leaver. A copy of the Committee’s
formal terms of reference can be
found on the Company’s website.
(www.quarto.com)
The search for Board candidates is
conducted and appointments made,
on merit, against objective criteria
and with due regard to the benefits
of diversity on the Board, including
gender. External search consultants
are engaged, as appropriate, and a
formal and transparent process is
followed. When dealing with the
appointment of a successor to the
Chairman, the senior independent
non-executive Director will chair the
Committee instead of the Chairman,
though in 2016, the meetings held
regarding the appointment of the
successor to the Chairman were
chaired by Tim Chadwick with Michael
Hartley present.
All Directors are required to allocate
sufficient time to discharge their
responsibilities and new Directors
receive a tailored induction on
joining the Board. This includes
presentations on the business, current
strategy, shareholder expectations,
and familiarisation with the Group’s
operations worldwide. Guidance
is also given on the duties,
responsibilities and liabilities of a
Director of a listed company and
key Board policies and procedures.
The Committee met three times
during the year and was active,
under its previous chairman, in my
appointment as Quarto's new
Chairman on 24 May 2016. Other
activities included a review of the
balance of skills and experience on
the Board to consider if any changes
were necessary, a review of the output
from the annual Board evaluation
process, and a review of the
Company’s management structure
and succession plans.
The Chairman of the Committee
attends the Annual Meeting to
address any shareholder questions
relating to the Committee.
Following the announcement that
Michael Connole, CFO, has submitted
his resignation, the Nominations
Committee on behalf of the Board
has commenced an executive search
to identify a suitable replacement.
Michael continues to support the
business in the normal course of his
notice period. The Board thanks
Michael for the significant changes
made to the business since his
appointment and wish him and his
family the best in the future.
Peter Read
Chairman of the
Nominations Committee
19 April 2017
42
Governance AUDIT COMMITTEE REPORT
The members of the Audit Committee
who served throughout the year are
non-executive Directors Michael Hartley
(Chairman), Jess Burley. Christopher
Mills served until the AGM on 24 May
2016 and Marie Louise Windeler from
the AGM until 27 September 2016. The
Board considers Jess Burley, Michael
Hartley and Marie Louise Windeler to
be independent Directors. The Board
considers that Michael Hartley and
Christopher Mills have recent and
relevant financial experience and
together the Committee has a wide range
of financial and commercial experience
to fulfil the Committee’s duties.
– compliance with regulatory and
legal requirements;
– detecting fraud.
• To review the need for an internal
audit function at least annually.
Committee Meetings
The Committee meets throughout
the year to fulfil its responsibilities.
The Committee Chairman also meets
informally with the Chief Financial
Officer throughout the year and with
senior management. He also meets
with the external Audit Partner from
time to time to discuss issues and
be appraised of regulatory change.
Responsibilities
The Committee acts in accordance
with its terms of reference, and its
specific responsibilities include:
• To consider and recommend the
appointment of the Group’s auditor,
the audit fee, audit engagement
letter and questions of auditor
performance, partner rotation,
resignation and dismissal.
• To meet with the auditor to discuss
all aspects of the audit including
audit planning, scope, findings,
accounting policies, management
judgements and estimates.
• To review the Board’s
representation letter to the auditor.
• To review the auditor’s
management letter and
management’s response.
• To set policy and review the use of
any non-audit services and assess
the independence of the auditor.
• To review financial statements
released to the public including
interim and annual financial
statements.
• To review the Group’s accounting
policies, practices and use of
accounting standards especially
for decisions requiring major
elements of judgement, significant
adjustments, long term viability
and going concern.
• To review the Group’s internal
controls and risk management
including:
– the financial reporting process;
– identifying, managing and
monitoring financial, operational,
compliance and other risks;
By invitation the Company’s Chairman
of the Board, Chief Executive Officer,
CFO and representatives of the
Company’s auditor also attend
Committee meetings although part
of some meetings are exclusively
for Committee members without
executive management present.
The Chairman of the Committee
attends the Annual Meeting to
address any shareholder questions
relating to the Committee.
The Committee met four times
during 2016 and once in 2017.
The Committee, as part of full Board
meetings, was also involved in
approving announcements made to
the London Stock Exchange.
Activities of the Committee
During 2016 and 2017 to date the work
of the Committee included:
• Review of the plan and scope of the
external audit.
• Review of the external auditor’s
report on the 2016 year end audit
and approval of the preliminary
announcement and the annual
report.
• Recommend to the Board its support
for management’s recommendation
for the final and interim dividend.
• Consider the external auditor’s
comments in relation to internal
control and review the need and
potential scope of internal audit
functions.
• Review compliance of the policy
relating to use of the auditors for
non-audit work.
• Review and approval of the interim
report 2016 after discussion with
management and the external
auditor.
• Discussion of significant accounting
issues and judgements in the 2016
accounts as detailed below.
• Review of the Directors’ viability
statement.
• Review of the independence of the
external auditor.
Performance Evaluation
The Committee assessed its
performance, constitution and terms
of reference during 2016 (based
on a questionnaire completed
by its members). The Committee
was deemed by the Board to have
performed satisfactorily.
Significant Audit risks, key
findings and financial
judgements relating
to year end accounts 2016
The Committee concentrated on the
following in relation to the 2016 accounts.
Going Concern and Covenant
Compliance
The Committee considered the
underlying robustness of the Group’s
business model, products and
proposition, and the financial resources
available to it for the future to satisfy
itself of the going concern assumption
in preparing the financial statements.
On finalisation of the 2016 results,
management identified that the Group
had failed the Q4 2016 CFADS
covenant test. This does not imply a
breach of the bank covenants, providing
it does not recur. Rigorous analysis of
future cash flows and covenants was
performed, together with scenario
testing and mitigation options, which
showed forecast compliance. The
Auditor challenged key assumptions
in management’s model, performed
historical forecasting accuracy analysis,
applied sensitivities and evaluated
management’s sensitivities, and looked
at breakeven points on the covenants.
Management consulted with the lead
bank to ensure that they concurred
that it is appropriate to exclude
certain items as exceptional items
43
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSQuarto Group, Inc. Annual Report 2016 AUDIT COMMITTEE REPORT CONTINUED
when calculating covenant
compliance. This confirmation was
reviewed by the Auditor.
The Committee noted these matters,
including the significant control
observations on this area, and the
forecast compliance with the facility’s
covenants for the foreseeable future.
Accounting for the potential
Books & Gifts Direct ('BGD')
disposal
The Group has been seeking to dispose
of the Australia and New Zealand BGD
businesses. Heads of Terms were signed
post year end. The Australia business
sale contract exchanged on 27 March
and completed on 31 March. New
Zealand discussions remain on-going.
Management have disclosed additional
information on the income statement
to show separately the results of BGD
and the other businesses, as they
believe this supplementary information
was more useful for the reader.
They have also shown within exceptional
items $6.2m impairment of BGD
goodwill and intangible assets as well as
a write down of certain current assets
totalling $8.0m given the size and
non-recurring nature of these items.
The Audit Committee and Auditor
concluded this treatment and
presentation to be reasonable.
Inventory accounting and prior
year adjustment
During the year end processes and in
preparing due diligence for the intended
transaction, management identified an
error, as a result of control failings, in the
BGD Australia accounts for the stock in
transit of $3.5m relating to cut-off
errors and errors in accounting for
inventory returns which related to the
current year income statement and prior
years. After management analysis and
adjustment, the component audit team
performed extensive testing on this
balance and on the creditors and
purchase clearing accounts. The testing
identified further errors which
management corrected with the total
impact of adjustments identified and
recorded as per Note 1 in the accounts.
Acquisition accounting
During 2016, the Group acquired
becker&mayer and Harvard Common
Press, both in the US. Management
prepared opening fair value balance
sheets with both being treated as a
business combination within the scope
of IFRS3. Management also used
external valuation specialists to value
the acquired intangibles within the
acquisition.
in Note 11. No impairment provision
for the publishing businesses
was required.
The Committee noted the continued
sensitivity of the CGU to reasonably
possible changes in key assumptions
and confirmed the appropriateness of
the continued disclosure of this.
Goodwill relating to BGD was impaired
by $6.0m as detailed above.
The Auditor assessed the nature
of the transaction, reviewed the
purchase agreements, assessed the
acquisition accounting, engaged their
valuation experts to assess the work
of management’s external expert
and audited the acquired assets
and liabilities.
Failings in financial reporting controls
were identified across the two
acquisitions with material reclassification
adjustments identified to the opening
balance sheets. The identified errors
have been corrected by management
in the 2016 accounts.
The Committee reviewed the results
and management’s methodology and
discussed the testing performed by
the Auditor to provide comfort that
any estimates used in the preparation
of the balance sheets were reasonable.
Assessment of the carrying
value of Goodwill
Goodwill arising from acquisitions is
stated at cost less any accumulated
impairment losses. In accordance with
IAS 36 the Group tests the goodwill
on an annual basis for impairment.
Failings in financial reporting controls
arose as the Auditor identified errors
in the determination of the value in
use and headroom resulting in a
material reduction in the disclosed
headroom following corrections
made by management.
The Committee reviewed the final
methodology and assumptions used
in the testing process with focus on
both the discount rate and growth
rates used in the discounted cash
flow valuations and the sensitivity
to changes in the discount rate and
growth rate. Further detail is set out
Recoverability of
pre-publication costs
Amortisation of pre-publication costs
is charged to the income statement on
a straight line basis over the estimated
useful lives of the intangible assets.
Pre-publication costs are capitalised
in accordance with IAS 38 and the
Committee, with the external auditor,
discussed the assumptions behind
the amortisation profile including the
amortisation period of the publications.
Further detail is set out in Note 15.
In 2016, management amended their
estimate of the useful life of certain
assets to better reflect the expected
useful life of the assets. The changes
had the effect of increasing operating
profit by $2.1m following the
prospective application of the change
in lives from the start of the year. The
Committee noted the effect of this on
the Income Statement. The Auditor
reviewed the presentation and
concurred with management’s
treatment of these changes to the
estimates prospectively under IAS8.
Exceptional items
The Committee, in consultation with
the Auditor, considered the latest
regulatory guidelines issued by the
FRC in December 2013 and agreed
with the Executive Directors to restrict
exceptional items to significant items
outside the scope of normal business
that need to be disclosed by virtue
of their size or incidence. This has
been applied consistently from 2014.
For the 2016 accounts, there have
been significant exceptional items in
relation to BGD. These have included
items relating to impairment of
goodwill and intangibles of $6.2m
as well as $8.0m relating to the
44
Governance write-down of assets including
receivables and inventory. These have
been included within Exceptional items
due to their scale and one-off nature
rather than being non-trading items.
Further detail is set out in Note 5.
Revenue recognition and sales
returns
The Committee considered the risk
that revenue may not be captured in
the relevant period. Apart from the
usual risks relating to the timing of
revenue recognition, management are
required to provide for returns, which
may be made subsequent to the
period end. This requires a significant
degree of judgement as management
assesses sales returns through
quantifying the previous returns
experience and post year end returns.
The Committee reviewed
management’s methodology, and
discussed the procedures followed to
ensure that revenue was booked into
the correct period in line with the
stated accounting policies and that
returns provisions were reasonable.
Inventory provisioning
The economics of manufacturing and
wholesaling of books in the publishing
businesses inherently leads to
substantial inventories. Most of these
are not printed without guaranteed
sales so there is a degree of
judgement as to the provisions
required to hold this inventory at the
lower of cost or net realisable value.
The Committee reviewed
managements’ methodology and
discussed the testing performed by
the Auditor to provide comfort that
these estimates were reasonable.
For BGD, management booked
substantial inventory provisions within
exceptional items to best reflect the
estimated recoverable values from the
transaction and without a long term
trading future.
Receivables provisioning
Trade receivables is inherently a
critical accounting estimate in relation
to the risk of non recoverability of
trade receivables. The Committee has
discussed and challenged the overall
receivables position and considered
the reasonableness of the level
of provisioning. The Committee
noted the much-reduced level of
overdue receivables in the publishing
and printing businesses.
and substantial provisions were
booked within exceptional items,
also taking into account the
estimated recoverable values from
the transaction.
Non-Audit services
Deloitte provided agreed upon
procedures in respect of the interim
financial statements at a fee of £5,000
(2015: £5,000).
External Audit
The Committee assesses the
effectiveness of its external auditor
through on-going dialogue and
communication with the Auditor. The
audit cycle included formal meetings.
The audit planning meeting, which
happens prior to the audit, was when
the Committee discussed reporting
developments, significant accounting
risks, the new requirements in relation
to the viability statement and other
Corporate Governance Code changes,
improvement in relation to risk
management and internal control and
controls in the accounting process.
At the end of the audit process, the
Committee met with the auditors to
receive their report on the key findings
with focus on identified key audit risks,
any misstatements in management’s
initial accounts and to consider areas
of judgement and estimates.
The Auditor showed diligence and
openness with the Committee during
meetings and through written
communication and during intermediate
briefing sessions with the Chair of the
Audit Committee. The Auditor gave
the Committee forthright views on
judgement areas whilst recognising
that the decisions lay with the
Committee. The Committee also
received feedback from the Executive
Directors involved with the audit.
The Committee is satisfied with the
Auditor’s effectiveness in 2016.
Appointment and independence
Deloitte was appointed the Group’s
auditor in December 2014 and as
auditor to the UK and US subsidiaries.
Deloitte member firms were also
appointed auditor of the Australian,
Hong Kong and New Zealand
subsidiaries in 2015.
The Committee considers the
appointment of the external auditor
each year and considers the
performance of the lead audit partner
and the audit manager during the
audit process.
A tender process for the Company’s
audit was last completed in early
2014. There are no restrictions on the
Committee’s choice of external auditor.
Internal Audit
The Committee reviews the
appropriateness of having an internal
audit function. To date there has not
been a separate internal audit function,
given the size and scale of the Group’s
operations. However, in 2016, the
Committee started to implement
more formalisation of the internal
review using a set list of required
internal control tasks with reports on
these items coming to the Committee
for review.
This intermediate step towards an
internal audit function has proved to
be ineffective. Whilst senior members
of the financial management
performed internal audits, the reports
have not been published timeously,
and the remote locations coupled
with the additional pressures on
management time in the current year
resulted in insufficient follow up to the
problems identified.
The year-end audit identified a
number of errors. These were mostly
BGD trading accounting, acquisition
accounting and goodwill impairment
testing. The operations accounting
within the publishing businesses was
generally found to be adequate.
In view of the lack of real progress
on internal control and the issues
identified during the audit, the
Committee intends to install some
form of dedicated internal audit
resource, which will report internal
audit matters direct to the Committee.
The Committee notes that most of
the items identified in 2015 have been
adequately progressed, particularly
in the operational finance functions in
the US and the UK. However, the scale
of accounting errors in 2016 and the
need for another restatement of the
accounts highlights the need for much
improved financial management.
The Committee has highlighted
these concerns to the Board and in
conjunction with the CEO, action
is being taken to address identified
shortcomings.
In BGD, trading in the final months
of 2016 deteriorated sharply for
our master franchisee customers
For the 2016 audit of the Group and
the Company’s accounts, Deloitte was
paid £442,400 (2015: £266,600).
Michael Hartley
Chairman of the Audit Committee
19 April 2017
45
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSQuarto Group, Inc. Annual Report 2016 REMUNERATION
COMMITTEE REPORT
Annual Statement
Dear shareholder
I am pleased to present the Directors’ Remuneration Report for the year ended 31 December 2016, which has been
prepared by the Committee and approved by the Board.
For the year ended 31 December 2016, there were no substantial changes in Directors’ remuneration arrangements.
This is the Company’s fourth year of reporting in line with The Large and Medium-sized Companies and Groups
(Accounts and Reports) (Amendment) Regulations 2013.
The report is divided into two sections:
The first is Quarto’s Remuneration Policy recommended by the Board, which will apply from 16 May 2017 subject to
approval at the 2017 Annual Meeting. The proposed policy mirrors the existing policy first implemented on 23 May 2014,
save for the annual bonus threshold which is 2% growth in profit with stretch target of 10% (previously 3% threshold
with stretch target of 10%).
During the first quarter of 2017, the Committee has worked with Smith & Williamson LLP on remuneration
benchmarking and reviewing Committee procedures. Following this exercise the Committee and the Board will
consider appropriate amendments to the Remuneration Policy during 2017.
The second section is the Annual Report on Remuneration, which reviews how the existing policy has been
implemented.
Performance Evaluation
The Committee assessed its performance, constitution and terms of reference during 2016 (based on a questionnaire
completed by its members). The Committee was deemed by the Board to have performed satisfactorily.
In line with The Large and Medium-sized Companies and Group’s (Accounts and Reports) (Amendment) Regulations
2013 the following parts of the Annual Report on Remuneration are audited: the single total figure of remuneration for
each director, including annual bonus outcomes for the financial year ended 31 December 2016; pension entitlements;
and, directors’ shareholdings and share interests. All other parts of the Directors’ Remuneration Report are unaudited.
I would be happy to receive any comments you may have on this report. I hope you find the report clear and
comprehensive and that it helps demonstrate how remuneration is linked to the performance of the company,
and that you are able to support the resolutions on remuneration being presented at this year’s Annual Meeting.
Jess Burley
Chairman of the Remuneration Committee
19 April 2017
46
Governance Committee meeting attendance 2016
Committee membership
Jess Burley (Chair from 21 December 2016)
Mike Hartley (Chair until 21 December 2016)
Peter Read
Tim Chadwick (resigned 24 May 2016)
Christopher Mills (resigned 24 May 2016)
Number of meetings held during the year: 4
4 of 4
4 of 4
2 of 2
2 of 2
1 of 2
During 2016 the Remuneration Committee (‘the Committee’) held four meetings. During 2017 the Committee has held
3 meetings, and met for 1 presentation by appointed Remuneration Consultants, Smith & Williamson LLP.
Marie Louise Windeler was appointed to the Board and the Committee on 24 May 2016 and resigned on 27 September
2016 due to health reasons. She had been appointed as the Chair of the committee but no meetings were held during
her period of appointment.
The Chief Executive Officer, Chief Financial Officer and the Group Director of People have also been invited to attend
parts of some Committee meetings. No individual is permitted to participate in any matter concerning details of their
own remuneration.
Policy
This section sets out Quarto’s Remuneration Policy for Directors which is recommended by the Board for approval at
the 2017 Annual Meeting. The Group’s principal remuneration policy aim is to ensure that the Executive Directors’
remuneration is designed to promote the long-term success of the Company.
Performance related elements are designed to be transparent, stretching and are rigorously applied.
In formulating its policies the Committee had regard to and balanced the following factors:
a) the need to align the interests of the executive with those of the shareholders;
b) the performance of the individual executive and of the Group as a whole;
c) the remuneration practice in the markets in which the executive is principally based; and,
d) the remuneration packages offered to executives in companies competing in the same markets and industry as the
Group, but exercising caution, in view of the risk of an upward ratchet of remuneration levels with no corresponding
improvement in corporate and individual performance.
47
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSQuarto Group, Inc. Annual Report 2016
REMUNERATION COMMITTEE REPORT CONTINUED
Quarto’s remuneration policy summary
FIXED PAY
Element of
Remuneration
Purpose and
link to strategy
Base Salary/
Fees
Set at competitive
levels in the markets
in which Quarto
operates, in order
to attract and
retain executives.
Benefits
Designed to be
competitive in the
market in which the
individual is employed.
Operation
Opportunity
Performance metrics
Reviewed annually with
changes normally effective
from 1 January of each year.
Reviews take account of:
• scope of the role and the
markets in which Quarto
operates;
• performance and
experience of the
individual;
• pay levels at organisations
of a similar size and
complexity; and,
• pay and conditions
elsewhere in the Group.
Benefits include life insurance
and private medical
insurance. Where
appropriate, other benefits
may be offered including, but
not limited to, participation in
all- employee share schemes.
Benefits are non-pensionable.
Not applicable.
There is no prescribed
maximum to avoid setting
unhelpful expectations. Any
salary increases are applied in
line with the outcome of the
review and taking into account
wider factors, for example,
local market inflation.
Not applicable.
Benefits vary by role and
individual circumstance
and eligibility is reviewed
periodically.
Benefits are not anticipated
to exceed 5% of salary p.a.
over the period for which
this policy applies.
The Committee retains
the discretion to approve a
higher cost in exceptional
circumstances (e.g. relocation)
or in circumstances where
factors outside of the Group’s
control have materially
changed (e.g. increases
in medical premiums).
Pension
To provide cost
effective retirement
benefits.
Participation in defined
contribution plan or cash
allowance in lieu.
Up to 15% of base salary.
Not applicable.
48
Governance VARIABLE PAY
Element of
Remuneration
Purpose and
link to strategy
Annual
performance
bonus
Designed to
reinforce individual
performance and
contribution to the
achievement of profit
growth and strategic
objectives.
Medium-term
performance
bonus
Designed to reinforce
the achievement of
continuous profit
growth over a longer
time frame and aid
staff retention.
Operation
Opportunity
Performance metrics
Maximum potential opportunity
of up to 60% of base salary.
Typically, 10-15% of potential
is achieved for Threshold
performance of the financial
goals and 100% for Stretching
performance.
Maximum potential opportunity
of up to 120% of base salary for
the three year period.
Typically, 10% of potential is
achieved for achieving
Threshold performance and
100% for Stretching
performance.
At least half of the
annual bonus is based
on financial objectives
with the balance on
personal objectives.
The Committee will
vary the weightings
from year-to-year to
reflect the changing
strategic needs for the
business with a default
bias towards financial
objectives.
In exceptional
circumstances, the
Committee has the
ability to exercise
discretion to override
the formulaic bonus
outcome within
the limits of the Plan
where it believes
the outcome is not
truly reflective of
performance and to
ensure fairness to both
shareholders and
participants.
The medium-term
bonus is based entirely
on cumulative
increases in earnings
and is only paid at the
end of the three year
period based on the
cumulative result.
In exceptional
circumstances, the
Committee has the
ability to exercise
discretion to override
the formulaic bonus
outcome within the
limits of the Plan where
it believes the outcome
is not truly reflective
of performance and
to ensure fairness
to both shareholders
and participants.
Measures are reviewed prior
to the start of the financial
year to ensure they remain
appropriate and reinforce
the business strategy, and
performance targets are set
annually to ensure they are
appropriately stretching
and reflect those strategic
objectives. At the end of
the year the Committee
determines the extent to
which these were achieved.
Awards are payable in cash.
Payments made under the
annual bonus are subject to
claw-back for the later of
one year following the date
of award or the completion
of the next audit of the
Group’s accounts, in the
event of a fraud or material
misstatement of results being
identified in relation to the
year in which the bonus is
earned.
Measures are reviewed prior
to the start of each three year
period to ensure they remain
appropriate and to ensure
they are appropriately
stretching. At the end of the
three year period the
Committee determines the
extent to which these were
achieved.
Awards are payable in cash.
Payments made under the
medium-term bonus are
subject to claw-back for the
later of one year following
the date of award or the
completion of the next audit
of the Group’s accounts,
in the event of a fraud or
material misstatement of
results being identified in
relation to the year in which
the bonus is earned.
49
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSQuarto Group, Inc. Annual Report 2016 REMUNERATION COMMITTEE REPORT CONTINUED
VARIABLE PAY
Element of
Remuneration
Purpose and
link to strategy
Performance
Share Plan
(PSP)
Ensures that the
Executive’s interests
are aligned with those
of shareholders
through reward for
providing shareholders
with substantial
increases in
shareholder value and/
or for achievement of a
measure of sustained
growth in earnings
over the medium to
long term.
FIXED PAY
Non-executive
Directors’ fees
To reflect the time
commitment in
preparing for and
attending meetings,
the duties and
responsibilities of
the role and the
contribution expected
from the Non-
executive Directors.
Operation
Opportunity
Performance metrics
Award opportunities for
participants are up to 50%
of base salary.
Awards of up to 100% of
base salary may be provided
in exceptional circumstances
(e.g. recruitment).
20% of maximum vests for
Threshold, rising on a straight-
line basis to full vesting for
Stretch performance.
Awards to Executives
are subject to four
year cumulative
earnings per share
(EPS) and/or total
shareholder return
(TSR) performance.
In exceptional
circumstances, the
Committee has the
ability to exercise
discretion to override
the formulaic PSP
outcome within the
Plan limits to ensure
alignment of pay
with the underlying
performance of the
business during the
performance period.
Not applicable
There is no prescribed
maximum. Non-executive
Director fee increases are
applied in line with the outcome
of the review and taking into
account wider factors, for
example, inflation.
Awards of nominal-cost
(or nil-cost) options may
be granted annually as a
percentage of base salary.
Vesting is based on
performance measured over
four years. The performance
period normally starts at the
beginning of the financial
year in which the date of
grant falls.
Dividends accrue on PSP
awards and are paid on those
shares which vest. Award
levels and performance
conditions are reviewed
before each award cycle
to ensure they remain
appropriate.
Payments made under the
PSP are subject to claw-back,
for the later of one year
following date of vesting or
completion of the next audit
of the Group’s accounts,
in the event of a fraud or
material misstatement of
results being identified in
relation to the years in
which the PSP is earned.
Annual fee for Chair.
Annual base fee for
non-executive Directors.
Additional fees are paid
to the Senior Independent
Director and the Chair of
the Committees to reflect
additional responsibilities.
Fees are reviewed annually,
taking into account time
commitment, responsibilities
and fees paid by comparable
companies.
50
Governance Performance measure selection and approach to target setting
The measures used under the annual bonus plan are selected annually to reflect the Group’s key strategic priorities for
the year and reinforce financial performance and achievement of annual objectives as well as individual performance.
Financial measures include, but may not be limited to, profit before tax.
The Committee considers that profit before tax adjusted for any exceptional items is the most appropriate measure
of long-term performance of the Group. It is well-aligned with shareholder interests, provides clear visibility and the
scheme is simple.
Performance targets are set at such a level as to be stretching and achievable, with regard to the particular strategic
priorities and economic environment. The annual bonus threshold is based on a 2% growth in profits with Stretch target
being 10% growth. The same basis is used for the medium-term bonus where the targets compound annually.
The Committee reviews the performance targets applying to awards made to the proposed PSP scheme annually.
Awards made to participants will be based on either one or a combination of total shareholder return and cumulative
earnings per share over the measured period. These will be reported on each year in the Annual Report on Remuneration.
Differences in remuneration policy operated for other employees
Quarto’s approach to annual salary reviews is consistent across the Group. Key management personnel and senior
managers with substantial operational responsibilities are eligible to participate in an annual and, in certain cases, the
medium-term bonus scheme with similar metrics to those used for the Chief Executive Officer. Opportunities and specific
performance conditions vary by organisational level with business area-specific metrics incorporated where appropriate.
Key management personnel and senior managers are eligible to participate in the PSP. Performance conditions are
consistent for all these participants, while award opportunities may vary by organisational level but are typically limited
to 50% of base salary.
Shareholding guidelines
The Committee recognises the importance of aligning the interests of Executives with shareholders through the building
up of a significant shareholding in the Group. Save for the initial award made to Marcus Leaver in May 2014, Executive
Directors are required to retain shares of a value equal to 50% of the after-tax gain made on the vesting of awards under
the Plans, until they have built up a minimum shareholding of a value equivalent to at least 100% of annual base salary.
Remuneration policy for new directors
When hiring or appointing a new executive director, including by way of internal promotion, the Committee may make
use of all the existing components of remuneration as follows:
Component:
Base Salary
Benefits
Pension
Annual Bonus
Medium-Term
Bonus
PSP
Approach
Maximum
Value
Determined in line
with the stated
policy, and taking
into account their
previous salary.
Initial salaries may
be set below market
and consideration
given to phasing
any increases
over two or three
years subject to
development in
the role.
Not applicable
In line with
the stated
policy.
In line with
the stated
policy.
In line with stated
policy, with the
relevant maximum
pro-rated to reflect
the proportion of
the year served.
In line with stated
policy, with the
relevant maximum
pro-rated to reflect
the proportion of
the year served.
In line with the
stated policy.
Not
applicable
Not
applicable
60% of base salary
120% of base salary
over three years
100% of base
salary (200%
in exceptional
circumstances)
51
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSQuarto Group, Inc. Annual Report 2016 REMUNERATION COMMITTEE REPORT CONTINUED
In determining appropriate remuneration for a new executive, the Committee will take into consideration all relevant
factors (including quantum, nature of remuneration and the jurisdiction from which the candidate was recruited) to
ensure that arrangements are in the best interests of both The Quarto Group and its shareholders. The Committee
may consider it appropriate to grant an award under a structure not included in the policy, for example to ‘buy out’
incentive arrangements forfeited on leaving a previous employer, and will exercise the discretion available under Listing
Rule 9.4.2 R where necessary. In doing so, the Committee will consider relevant factors including the expected value
of all outstanding equity awards using a Monte Carlo, Black-Scholes, or other relevant equivalent valuation and, where
applicable, taking into account toughness of performance conditions attached to these awards and the likelihood of
those conditions being met.
In cases of appointing a new Executive Director by way of internal promotion, the Group will honour any contractual
commitments made prior to their promotion to Executive Director.
In cases of appointing a new non-executive Director, the approach will be consistent with the policy.
Service contracts and exit payments policy
Non-executive Directors are engaged on the basis of a letter of appointment. In line with the UK Corporate Governance
Code, all Directors are subject to re-election annually at the Annual Meeting.
The Chair, Peter Read, was appointed on 24 May 2016 with an initial one year contract, subject to review prior to 24 May
2017. The Chair, together with the other non-executive Directors, have a one month notice period, and are subject to
re-election each year.
The non-executive Director Letters of Appointment are available to view at the Group’s registered office and the
effective dates of their Letters of Appointment are as follows:
Director
Peter Read
Jess Burley
Mike Hartley
Date of Appointment
Notice period
24 May 2016 (coincident with the 2016 AGM)
1 month
22 May 2014
6 August 2013
1 month
1 month
Executive Director service contracts have no fixed term and have a notice period of not more than 12 months from
either the Executive or the Group. These notice periods meet best practice guidelines and give protection, mutually, to
the Group and the Executive. Executive Director service contracts are available to view at the Group’s registered office.
The dates of the Executive Director service contracts and the relevant notice period are as follows:
Director
Effective date of contract
Marcus Leaver
30 April 2012
Michael Connole
1 September 2015
Notice period
12 months
12 months (resignation submitted 30 March 2017)
52
Governance The Committee’s policy is to limit severance payments on termination to pre-established contractual arrangements and
the rules of the relevant incentive plans. In doing so, the Committee’s objective is to avoid rewarding poor performance.
Furthermore, the Committee will take account of the Executive Director’s duty to mitigate their loss.
Termination payments are limited to base salary and benefits during the unexpired notice period which cannot
be mitigated.
No payments to past Directors or payments for loss of office were made during the year ended 31 December 2016.
In addition to the contractual provisions regarding payment on termination set out above, the Group’s incentive plans
and share schemes contain provisions for termination of employment.
Component
Annual bonus
Medium-term bonus
PSP
Bad leaver
Good leaver
Change-of-control
No annual
bonus payable
Eligible for an award
to the extent that
performance
conditions have
been satisfied and
pro-rated for the
proportion of the
financial year served,
with Committee
discretion to treat
otherwise
Eligible for an award
to the extent that
performance
conditions have
been satisfied up to
the change of control
and pro-rated for the
proportion of the
financial year served,
with Committee
discretion to treat
otherwise
No annual bonus payable
Outstanding awards are forfeited
Eligible for an award to the extent that
performance conditions have been
satisfied and pro-rated for the proportion
of the three financial years served, with
Committee discretion to treat otherwise
Outstanding awards will normally continue
and be tested for performance over the full
period, and pro-rated for time based on
the proportion of the period served, with
Committee discretion to treat otherwise
Eligible for an award to the extent that
performance conditions have been
satisfied up to the change of control and
pro-rated for the proportion of the three
financial years served, with Committee
discretion to treat otherwise
Outstanding awards will normally vest and
be tested for performance over the period
to change-of-control, and pro-rated for
time based on the proportion of the period
served, with Committee discretion to treat
otherwise
Any commitment made prior to, but due to be fulfilled after the policy comes into force, will be honoured.
An individual would normally be considered a good leaver if they leave for reasons of death, injury, ill-health, disability,
redundancy, part of the business in which the individual is employed or engaged ceasing to be a member of the Group,
circumstances that are considered by the Committee to be retirement, or any other reason as the Committee decides.
Bad leaver provisions apply under other circumstances.
External appointments
The Executive Directors may accept external appointments with the prior approval of the Board and provided only that
such appointments do not prejudice the individual’s ability to fulfil their duties at the Group. Whether any related fees
are retained by the individual or remitted to the Group will be considered on a case-by-case basis.
Illustration of the application of the remuneration policy
The chart on page 54 shows the remuneration that the Executive Directors could be expected to obtain based on
varying performance scenarios. Illustrations are intended to provide further information to shareholders regarding the
relationship between pay and performance.
Potential reward opportunities illustrated are based on the remuneration policy presented for shareholder approval
at the Annual Meeting on 16 May 2017, applied to the latest known fixed pay of base salaries, pension, other benefits
and variable pay of annual bonus, medium term bonus and PSP. To better illustrate the annual potential remuneration,
the medium-term bonus potential and PSP Awards are pro-rated to an annual equivalent. All remuneration is contracted
in sterling.
No illustration is presented for Michael Connole due to his resignation submitted on 30 March 2017. An executive search
has commenced to identify a suitable replacement. Michael will step down as a director later in 2017, until that time he
will be eligible for his full salary, benefits and pension.
53
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSQuarto Group, Inc. Annual Report 2016 REMUNERATION COMMITTEE REPORT CONTINUED
EXECUTIVE DIRECTORS APPLICATION OF REMUNERATION POLICY
US$
16
1,400
1,200
1,000
800
600
400
200
0
583
100%
Min
Marcus Leaver
1,010
12%
12%
18%
58%
Performing in line
with expectations
1,294
16%
16%
23%
45%
Max
Fixed
Annual variable
MTIP
PSP
In illustrating the application of the remuneration policy the following assumptions have been made:
Minimum performance Basic salary, pension or cash in lieu of pension and benefits. No bonus and no vesting of the PSP.
In line with expectation Basic salary, pension or cash in lieu of pension and benefits. Bonus payout at 60% of the
maximum bonus. PSP vesting at 60% of maximum vesting.
Maximum
Basic salary, pension or cash in lieu of pension and benefits. Bonus payout at 100%.
Full vesting of the PSP.
Consideration of conditions elsewhere in the Group
When reviewing and setting executive remuneration, the Committee takes into account the pay and employment
conditions of all employees of the Group. The Group-wide pay review budget is one of the key factors when reviewing
the salaries of the Executive Directors.
The Group has not carried out a formal employee consultation regarding Board remuneration, though it does comply
with local regulations and practices regarding employee consultation more broadly.
Consideration of shareholder views
It is the Committee’s policy to consult with major shareholders or their chosen shareholder representative body prior
to any changes to its Executive Director remuneration structure.
Jess Burley
Chair of the Remuneration Committee
19 April 2017
54
Governance ANNUAL REPORT
ON REMUNERATION
The Remuneration Committee
The Committee’s Terms of Reference are available on the Group’s website.
The Committee is responsible for:
• Recommending to the Board the remuneration and terms and conditions of employment
of the Chair, Executive Directors and key members of senior management;
• Measuring subsequent performance as a prelude to determining the Executive Directors’
and key managers’ total remuneration on behalf of the whole Board;
• Determining the structure and quantum of short-term and medium-term bonus schemes; and,
• Granting awards under the PSP Share Award Scheme.
The main issues discussed and/or approved during the financial year under review:
• Approval of the prior year Directors’ Remuneration Report;
• Annual review of the Executive Directors’ salaries and benefits;
• Review of the Executive Directors’ and the senior managers’ performance under the prior year’s annual bonus
scheme, including a review of their performance against their personal objectives and approval of the bonus awards;
• Review of the design and targets for the forthcoming annual bonus scheme, including personal objectives;
• Approval of awards made in the year under the Performance Share Plan; and
• Approval of terms for new senior management appointments falling within the remit of the Committee.
Advisors
The Committee has not paid fees to any advisors during 2016. During 2017 the Committee has paid fees of £31,800 to
Smith & Williamson LLP.
Statement of shareholder voting at the 2016 annual meeting
The following table shows the results of the advisory vote on the 2015 Annual Remuneration Report at the
Annual Meeting on 24 May 2016.
For (including discretionary)
Against
Total votes cast
Withheld
Total
number of
votes
% of
votes cast
8,869,928
99.99%
1,000
8,870,928
8,000
0.01%
100%
–
The following table shows the results of the vote on the proposal to amend the performance conditions
relating to grants under the Performance Share Plan, at the Annual Meeting on 24 May 2016.
For (including discretionary)
Against
Total votes cast
Withheld
Total
number of
votes
% of
votes cast
8,673,524
97.81%
194,404
8,867,928
11,000
2.19%
100%
–
55
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSQuarto Group, Inc. Annual Report 2016 ANNUAL REPORT ON REMUNERATION CONTINUED
Single total figure of remuneration (audited)
The table below sets out a single figure for the total remuneration received by each Director for the year ended
31 December 2016 and the prior year. These amounts are shown in the reporting currency, although set in sterling.
The exchange rates used in 2016 and 2015 were 1.35 and 1.53, respectively.
Executive Directors
Marcus Leaver
Michael Connole
Bob Morley*
Base Salary
Benefits1
Pension
Annual Bonus2
Long-term
incentives3
Total
remuneration
2016
$’000
2015
$’000
2016
$’000
2015
$’000
2016
$’000
2015
$’000
2016
$’000
2015
$’000
2016
$’000
2015
$’000
2016
$’000
2015
$’000
488
324
17
536
122
258
6
5
–
8
2
21
73
49
–
80
18
–
34
305
2,651
–
–
59
–
–
–
–
–
–
3,252
378
17
929
201
279
Fees4
Benefits
Pension
Annual Bonus
Long-term
incentives3
Total
remuneration
Non-executive Directors
2016
$’000
2015
$’000
2016
$’000
2015
$’000
2016
$’000
2015
$’000
2016
$’000
2015
$’000
2016
$’000
2015
$’000
2016
$’000
2015
$’000
Peter Read*
Mike Hartley
Jess Burley
Tim Chadwick*
Christopher Mills*
Marie Louise Windeler*
57
60
48
54
19
19
–
69
54
153
54
0
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
57
60
48
54
19
19
–
69
54
153
54
–
* For period for which he/she was a Director/Non-executive Director.
1 Benefits comprise private medical insurance contributions.
2 Annual bonus for performance over the relevant financial year. Further details can be found on page 60.
3 On 31 March 2016, Marcus Leaver’s Performance Share Plan award of 666,666 shares vested and were capable to being exercised at any time
after 30 June 2016. On 9 August 2016 the options were exercised and the shares were transferred to Marcus Leaver out of treasury stock.
The closing mid-market price on that date was £2.64. Upon exercise of the options, he was also entitled to a dividend equivalent payment in
respect of dividends paid from 31 December 2012 and 9 August 2016, subject to withholdings tax and National Insurance contributions. The
dividend equivalent payment was £203,890.
4 Details of non-executive Directors’ fees can be found on page 60.
56
Governance Executive Directors
Marcus Leaver
Michael Connole
Non-executive Directors
Peter Read
Jess Burley2
Mike Hartley
Tim Chadwick
Christopher Mills
Marie-Louise Windeler
Directors’ shareholdings
The share interests of the Directors who held office at 31 December 2016 and of their connected persons in the share
capital of the Company are shown below:
Number of share
options of common stock
Number of US$0.10
shares of common stock
31 December
31 December
31 December
31 December
2016
241,214
108,980
2015
750,398
60,000
2016
393,500
15,423
2015
14,000
10,000
Number of US$0.10
shares of common stock
31 December
31 December
20161
10,000
3,300
10,000
–
–
–
20151
–
3,300
10,000
–
100,000
–
Price at
exercise
date
£2.64
n/a
n/a
n/a
n/a
n/a
1 Or date of appointment.
2 Jess Burley purchased 4,055 shares on 4 April 2017.
During the year the market price of the shares of common stock ranged between 221p and 310p.
The mid-market price at 31 December 2016 was 304p.
Directors’ Share Options
Shares: Common Stock of $0.10 each
Date of grant
As at
1 January
2016
Granted
Exercised
As at
31 December
2016
Face value
at date of
grant
(£’000)
Fair value
at date of
grant
(£’000)
Marcus Leaver
22/04/2014
666,666
24/09/2015
83,732
–
–
19/04/2016
4/08/2016
–
–
73,750
83,732
(666,666)
–
–
–
750,398
157,482
(666,666)
Michael Connole
24/09/2015
60,000
19/04/2016
–
60,000
–
48,980
48,980
–
–
–
–
83,732
73,750
83,732
241,214
60,000
48,980
108,980
1,133
175
181
175
125
120
153
239
187
239
171
124
All awards under the PSP schemes have a 4 year vesting period. For the option grant on 22 April 2014 to Marcus Leaver
shareholder approval was gained at the Annual Meeting held on 22 May 2014 to amend the vesting terms to 30 June 2016.
57
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSQuarto Group, Inc. Annual Report 2016 ANNUAL REPORT ON REMUNERATION CONTINUED
Executive director base salaries/fees
During the year, Marcus Leaver, the Chief Executive Officer, received £361,375 in salary. His salary was increased
by 3.25% for 2017. This was set in line with the typical increase across the good performing UK employee population.
The next salary review date will be 1 January 2018.
During the year, Michael Connole, the Chief Financial Officer, was paid £240,000 in salary in line with his contract
on appointment dated 1 September 2015.
During the year, Bob Morley, the Deputy Chair, received £12,500 in salary. Bob Morley resigned on 31 March 2016.
Pension and other benefits
The Group makes a contribution to the personal pension schemes of Marcus Leaver and Michael Connole equal to 15%
of their base salary which may, at their discretion, be taken as cash in line with the policy. Benefits are in line with the policy.
Annual performance bonus
2016 bonus framework
For the 2016 financial year, the maximum annual bonus opportunity was 60% of salary for Marcus Leaver and
50% for Michael Connole.
The annual bonus opportunity was split between targeted growth in adjusted profit before tax and other financial and
personal goals. 45% of total bonus potential for Marcus Leaver and 42.5% for Michael Connole is based on growth in
adjusted profit before tax. The balance is based on achievement of personal objectives.
The adjusted group profit before tax target was based on the 2015 actual result, adjusted upwards to reflect the
becker&mayer and Harvard Common Press acquisitions giving a Threshold of $15.65m and a Stretch of $16.72m.
The actual adjusted profit before tax for the year for bonus purposes was $14.5m and thus neither the Threshold nor
the Stretch targets were exceeded and no bonus is payable in respect of this element of the overall annual bonus for
both Marcus Leaver and Michael Connole.
Personal objectives for Marcus Leaver and Michael Connole were set by the Committee in discussion with the Chairman.
For both executive directors, personal objectives included both financial and non financial criteria with 15% of salary
potentially payable for Marcus Leaver and 7.5% of salary potentially payable for Michael Connole. Neither director
achieved the financial objective which was based on a reduction in net debt.
After taking account of their financial targets and personal goals, bonus awards were:
Marcus Leaver
Michael Connole
$’000
maximum
% of
34
–
12%
n/a
2017 annual bonus framework
Following the review of Smith & Williamson LLP, the Remuneration Committee plan to review the remuneration
structure in 2017 to be implemented in 2018 following approval at the Annual Meeting.
58
Governance Medium-term performance bonus
2014-2016 medium-term bonus framework
This is the third and final year of the current medium term bonus scheme which is designed to motivate management
to focus on continual profit improvement. The Committee recognises that profit development is not within an annual
financial cycle. Rather, the publications (which are a substantial part of the Group’s businesses) are substantially
created in the year before the sales are achieved. Thus within any one financial year, there is a limit to the influence of
management on profits. These in-year influences are the marketing of the publications and cost control. Emphasis on
a single year can motivate cost cutting of creative publishing resources to the detriment of the following year’s results.
Thus the Committee has developed a mix of annual and medium term performance goals.
To most align these goals with shareholders, the targets are based on improving profits from the prior year(s) as the
Committee believes that ultimate shareholder value is most driven by a continual improvement in profits from which
cash is generated for dividend growth.
The profit targets are based on a base year of 2013. The targets have been changed by the Committee to reflect the
preferred measure of adjusted profit before tax in line with the Annual Bonus Awards. Base is the achieved adjusted
profits before tax for 2013 adjusted upwards to account for a one-off gain in 2014 on interest charges from the effect
of terminating an interest rate swap, in 2013. There has been no adjustment for acquisitions. The target is based on
compound increases over three years over the Base of $12.46m giving Threshold for a 9.3% increase at $13.62m and
Stretch for a 33.1% increase at $16.6m.
The Adjusted Profit before Tax for the year ended 31 December 2016 for the purposes of the Medium Term performance
bonus was $12.42m, on the base figure for 2013 of $12.46m, therefore the target performance was missed and no
medium-term performance bonus is payable to Marcus Leaver.
Long-term incentives
PSP Awards
Marcus Leaver was granted an award of 666,666 shares on 22 May 2014 which did not vest until 30 June 2016, subject
to performance criteria of achieving an average share price of 250p per share over any consecutive 90 day period
occurring before the vesting period. On 31 March 2016, the Company confirmed that the performance criteria attaching
to the award had been achieved, and that the shares became capable of being exercised at any time after 30 June 2016.
On 9 August 2016, 666,666 shares were transferred to Marcus Leaver out of Treasury Stock. The mid-market closing
price on that date was 263.75p. Marcus Leaver informed the Company on 12 August 2016 that he had sold 313,333
shares at a price of 250p to settle the tax liability arising on the exercise of the award.
On 18 April 2016, Marcus Leaver was granted 73,750 PSP Awards and Michael Connole was awarded 48,980 PSP
Awards. The value of these awards was £180,688 and £120,000 respectively based on a closing price of 245p on the
day before. They represented 50% of salary respectively. On 24 May 2016, following approval at the Annual Meeting
held on that date, Marcus Leaver was issued with a further 83,732 PSP Awards. These awards which required
shareholder consent, are treated as though they were issued on 24 September 2015 and represented 50% of salary
at that time. The value of these awards was £175,000 based on the closing price of 2.09p on 23 September 2015.
Half of the awards set out above have a performance condition relating to cumulative Adjusted Diluted EPS
performance for the four financial years 2016 to 2019 inclusive. The other half of these awards have a performance
condition relating to total shareholder returns (‘TSR’) from a combination of dividends, capital returns and share
price growth (measured as an average over a 20 business day period leading up to grant and vesting as appropriate).
The TSR period runs from 18 April 2016 to 18 April 2020.
Targets for EPS are annual compounded growth of 5% for Threshold to 10% for Stretch. Targets for total shareholder
returns over the period are annual compounded growth of 7% for Threshold and 15% for Stretch.
The Committee believes the TSR directly measures shareholder returns and thereby aligns the goals of management
and shareholders. However, TSR can be affected by a variety of investment factors, which are far removed from those
which management can directly affect. The Committee believes that cumulative diluted EPS to be a good measure of
managements’ long-term impact on the business and which over time translates into shareholder value. Thus a
combination of TSR and EPS is believed to be suitable goals for the PSP Awards. Major shareholders have been
consulted about adding the TSR condition.
59
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSQuarto Group, Inc. Annual Report 2016 ANNUAL REPORT ON REMUNERATION CONTINUED
Chair and non-executive director fees
With effect from the date of the Annual Meeting in 2014, the non-executive Directors received an annual base fee
of £35,000, with an additional annual fee for Audit and Remuneration Committee Chairs of £3,500 and the Senior
Independent Director of £3,000. The Chair receives an annual fee of £70,000.
The non-executive Directors’ fees for 2017 are as follows: Jess Burley £38,500 and Mike Hartley £41,500. Following
a review of Peter Read’s appointment in accordance with his letter of appointment, it is proposed that he receives
a fee increase of £2,500, increasing his annual fee to £72,500, to take effect subsequent to the Annual Meeting
on 16 May 2017.
Relative importance of spend on pay
The graph below shows Quarto’s distributions to shareholders and total employee pay expenditure for the financial
years ended 31 December 2015 and 31 December 2016.
16
40
34.2
30.8
37.2
34.9
30
20
10
0
Total employee pay
Intellectual property spend
Total dividend
2016
2015
3.1
2.9
Total employee pay has been impacted by exchange rate movements.
Review of group performance
The chart on page 61 compares the value of £100 invested in Quarto shares, including re-invested dividends, on
31 December 2010 compared to the equivalent investment in the FTSE Small Cap Index, over the last eight financial
years. The FTSE Small Cap Index has been chosen as it comprises companies of a broadly similar size to Quarto.
The table below shows the single figure for the CEO over the same period.
CEO single figure of
remuneration including
bonus ($’000)
2009
2010
729
750
2011
996
2012
1,0201
2013
870
2014
842
2015
2016
929
3,252
Annual bonus awarded $ amount ($’000s)
% of maximum opportunity
PSP vesting
$ amount ($’000s)
% of maximum opportunity
–
–
–
–
392
572
1212
233
169
305
34
–
–
–
-
–
–
–
–
–
56.9%
33.5% 95.0%
12.0%
–
–
–
–
–
–
2,651
100%
1 The figure for 2012 is a combination of remuneration of Laurence Orbach, the previous CEO, and Marcus Leaver for the respective periods.
2 Discretionary
2015 annual performance bonus
The Committee considered, in light of the restatement of 2015 accounts, whether any clawback is activated on 2015
annual performance bonus awards and concluded no clawback is required.
60
Governance Performance graph
800
700
600
500
400
300
200
100
0
2008
2009
2010
2011
2012
2013
2014
2015
2016
■ Quarto ■ FTSE Small Cap
Change in CEO remuneration and for employees as a whole
The table below shows the change in CEO annual cash remuneration, defined as salary, taxable benefits and annual
bonus, compared to the average employees for 2015 to 2016.
$’000
Salary
Taxable benefits
Annual variable bonus
Total
2016
488
6
34
528
CEO
2015
536
8
305
849
Average
for other
employees
% change
% change
(9%)
(25%)
(88%)
(38%)
(2.4%)
(4%)
33%
(1.6%)
Salary, benefits and bonuses have been impacted by exchange rate movements.
Dilution limits
The Group has at all times complied with the dilution limits set out in the rules of its share plans (principally a limit
of 10% in 10 years). In the 10 year period to 31 December 2016, awards made under the Group’s share schemes
represented 6.8% (2015: 4%) of the Group’s issued share capital.
Directors’ shareholding guidelines and share scheme interests
Marcus Leaver’s award of 666,666 shares (granted May 2014) vested in June 2016 and he was not required to retain
any proportion of these shares.
Otherwise, to date, there has been no requirement for Executive Directors to retain shares as no other shares have
vested and they are compliant with the shareholding guidelines.
Jess Burley
Chair of the Remuneration Committee
19 April 2017
61
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSQuarto Group, Inc. Annual Report 2016 DIRECTORS’ REPORT
Group
The Directors present their report and the audited financial statements of The Quarto Group, Inc., for the year ended
December 31, 2016.
Results and dividends
The loss for the year is $5.3m (2015 restated: profit of $8.5m). The Directors propose a final ordinary dividend of
9.87c (7.96p) per share (2015: 9.41c (1.9p) per share), amounting to $2.0m (2015: $1.9m), subject to approval at the
Annual Meeting.
Details of significant events since the balance sheet date are included in Note 31 to the financial statements. An
indication of likely future developments in business of the Group and included in the Strategic Report on page 15.
Directors
Serving Directors during the year and subsequently, were as follows:
P. Read
M. E. Leaver
(Non-executive) Chairman Appointed 24 May 2016
M. D. Connole
Resignation submitted 30 March 2017
J. Burley
(Non-executive)
M. G. Hartley
(Non-executive)
T. J. M. Chadwick (Non-executive) Chairman, Resigned 24 May 2016
M. L. Windeler
(Non-executive) Appointed 24 May 2016, Resigned 27 September 2016
R. J. Morley
C. H. B. Mills
(Non-executive) Deputy Chairman, Resigned 31 March 2016
(Non-executive) Resigned 24 May 2016
None of the Directors have a service agreement of more than one year’s duration. All of the directors are subject
to annual re-election. The terms and conditions of appointment of non-executive directors are made available for
inspection at the company’s registered office.
No Director had a contract of significance with the company or its subsidiaries during the year.
Disclosure of information under Listing Rule 9.8.4
For the purpose of compliance with LR 9.8.4 R, the following information is included by reference within the
Director’s Report:
LR 9.8.4 R
Location
Directors’ remuneration
Directors’ Remuneration Report, pages 55 to 61
Details of Long-term Incentive Plans
Directors’ Remuneration Report, pages 55 to 61
62
Governance Employees
Applications for employment of
disabled persons are always fully
considered, bearing in mind the
aptitudes of the applicant concerned.
In the event of staff becoming
disabled, every effort is made to
ensure that their employment with the
Group continues and that appropriate
training is arranged. It is the policy of
the Group that the training, career
development and promotion of
disabled persons should, as far as
possible, be identical with that of
other employees.
The Group places considerable value
on the involvement of its employees
and has continued its practice of
keeping them informed on matters
affecting them as employees and
on the various factors affecting the
performance of the Group. This is
achieved through formal and informal
meetings. Employees are consulted
regularly on a wide range of matters.
The Board recognises the importance
of diversity amongst its employees
and is committed to ensuring that
employees are selected and promoted
on the basis of merit and ability,
regardless of age, gender, race,
religion, sexual orientation or
disability. The gender split across
the Group for the year ended
31 December 2016 is illustrated
in the table below.
Board
Senior Leadership
Team
Males Females
4
5
1
3
All employees
136
314
The Group’s Senior Leadership Team
comprises the Group’s CEO and CFO,
together with seven senior managers.
The gender split of the Senior
Leadership Team changed post
year-end to five males and four
females.
Substantial shareholders
The Directors have been advised of the following shareholders who have an
interest of 3% or more in the shares of the common stock of the Company at
31 December 2016 and 31 March 2017. 31 March 2017 is the latest practicable
date prior to the publication of this report.
As at
31 December 2016
As at
31 March 2017
Number
of
US$0.10
shares of
common
stock
% holding
of the
issued
capital
of the
Company
Number
of
US$0.10
shares of
common
stock
% holding
of the
issued
capital
of the
Company
Mr L F Orbach
2,934,185
14.35 2,934,185
Liontrust Asset Management
2,630,282
12.87 2,556,282
Herald Investment Management
Henderson Global Investors
Unicorn Asset Management
Gresham House Asset Management
Limited
1,812,045
1,160,233
1,081,582
8.86
1,812,045
5.68
1,160,233
5.29 1,150,000
898,837
4.40
898,837
River & Mercantile Asset Management
896,555
4.39
401,555
AXA Investment Managers UK
875,000
4.28
875,000
Lazard Freres Gestion
830,000
4.06
993,674
Cavendish Asset Management
JP Morgan Asset Management
791,000
769,969
3.87
685,000
3.77
769,969
14.35
12.50
8.86
5.68
5.63
4.40
1.96
4.28
4.86
3.35
3.77
Risk management strategy
The Group is exposed to a number
of principal risks and uncertainties.
The Group’s financial risk management
strategy is set out in Note 22.
Operational risks are set out on
page 22 of the Financial Review.
Corporate governance
The Company is committed to high
standards of corporate governance
and supports the principles laid down
in the UK Corporate Governance Code
issued by the Financial Reporting
Council in 2016 (the ‘Code’). The
Board considers that the Company
has been in compliance with the
principles and provisions of the Code,
with the exception of those outlined
below, throughout the year ended
31 December, 2016 and to the date
of this report.
The rights attaching to the Company’s
shares of common stock are set out
in the Company’s By-Laws, which can
be found on the Company’s website,
www.quarto.com. The rules for
appointment and replacement of the
Directors are set out in the Company’s
By-Laws. The powers of the Directors
are set out in the Company’s By-Laws.
The Company may purchase its own
shares through the market or by
tender at a price which will not exceed
the average prices at which business
was done for 10 business days before
the purchase is made or, in the case of
a purchase through the market, at the
market price, provided that it is not
more than 5% above such average.
The Company may amend its By-Laws
by special resolution approved by the
affirmative vote of the holders of
a majority of the voting power of
the shares. The Directors’ interests in
the shares of the Company are set out
on page 57. There are no restrictions
on the number of shares that Directors
can hold.
63
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSQuarto Group, Inc. Annual Report 2016 DIRECTORS’ REPORT CONTINUED
The principles of the Code have been
applied as follows:
a) The Board of Directors represents
the shareholders’ interests in
maintaining and growing a
successful business including
optimising consistent long-term
financial returns.
b) As at 31 December 2016, the Board
comprised two Executive Directors
and three Non-executive Directors.
The Chairman is responsible for
the leadership of the Board and
ensuring its effectiveness. The
different roles of the Chairman
and Chief Executive Officer are
acknowledged. The senior
independent Non-executive
Director is Michael Hartley who is
available to shareholders, if they
have concerns which are not able
to be resolved through normal
channels. Three Non-executive
Directors, Peter Read, Michael
Hartley and Jess Burley are
considered by the Board to be
independent. During the year.
Timothy Chadwick (resigned
24 May 2016) and Christopher Mills
(resigned 24 May 2016) were not
deemed to be independent
because of their relationship with
Harwood Capital LLP, which was
a major shareholder. Bob Morley,
(resigned 31 March 2016), who co-
founded the Group and previously
served as a Director until May 2012,
was also not deemed independent.
There are a number of standing
Committees of the Board to which
various matters are delegated. They
all have formal terms of reference
approved by the Board which are
available on the Company’s website
(www.quarto.com).
Attendance by Directors at Board and Committee meetings in 2016
Board
Audit
Committee
Nominations
Committee
Remuneration
Committee
Jess Burley
Timothy Chadwick1
Michael Hartley
Marcus Leaver6
Michael Connole6
Christopher Mills2
Robert Morley3
Peter Read4
Marie-Louise Windeler5
Total number of meetings
5
2
7
7
8
–
1
5
3
8
3
–
4
4
4
–
–
4
2
4
3
1
3
3
–
1
–
2
–
3
4
2
4
2
2
1
–
2
–
4
1 Timothy Chadwick resigned on 24 May 2016
2 Christopher Mills resigned on 24 May 2016
3 Robert Morley resigned on 31 March 2016
4 Peter Read appointed on 24 May 2016
5 Marie-Louise Windeler appointed on 24 May 2016 and resigned on 27 September 2016
6 These Directors are not members of the Audit or Remuneration Committees and attend
by invitation only.
c) The Board met eight times in
2016. Attendance details are
set out above. A formal agenda
is prepared for each meeting and
all board papers and information
are circulated to the Board at
least a week before the meetings.
d) All of the Directors are subject to
re-election by the shareholders at
the Annual Meeting. The Board is
satisfied to support the re-election
of Peter Read, Mike Hartley and
Jess Burley as non-executive
Directors as they have individually
produced excellent performance in
their duties and have shown a high
level of commitment to their roles.
e) The remuneration of the Executive
Directors is recommended by
the Remuneration Committee,
comprising Jess Burley, who is the
Committee Chairman, Michael
Hartley and Peter Read. A separate
report with respect to Directors’
remuneration is included on pages
55 to 61. The Committee meets
at least three times a year. At year
end 31 December 2016 the
Committee had met four times.
f) The Audit Committee is comprised
of Michael Hartley, who is Committee
Chairman, and Jess Burley. The
Board is satisfied that Michael
Hartley, together with Jess Burley,
has appropriate financial experience
to fulfil their role. Further details of
the Committee’s work can be found
on pages 43 to 45.
64
Governance g) The Nominations Committee is
comprised of Peter Read, who is
Committee Chairman, Michael
Hartley, Jess Burley and Marcus
Leaver. Details of the work of the
Nominations Committee during the
year are set out in its report on
page 42.
j) The Board has a procedure for
Directors to take independent
professional advice at the
Company’s expense, if required.
k) All Directors have access to
the advice and services of the
Company Secretary.
l) Quarto has arranged appropriate
insurance cover in respect of legal
action against the Directors.
m) The Company has an established
whistle-blowing policy.
The provisions of the Code not
complied with are as follows:
A.3.1. – As noted above, Timothy
Chadwick, the Chairman of the Board
until 24 May 2016, was not independent.
The Board will continue to review its
corporate governance arrangements,
in the light of the Code, as the Group
develops and grows, and in particular
will review those provisions that are
not currently complied with.
The Directors consider that the annual
report and accounts, taken as a whole,
are fair, balanced and understandable
and provide the information necessary
for shareholders to assess the Group’s
performance, business model
and strategy.
h) A formal review of the performance
of the Board, its Committees and
the Directors was carried out
before the year end, led by the
Chairman and assisted by the
Company Secretary. A questionnaire
was used as part of the process and
individual performance was
reviewed by the Chairman. The
Chairman’s own performance
was subject to a review led by the
Senior Independent Director. The
output from the appraisal confirmed
that the Board and its Committees
were operating effectively.
i) The Chief Executive Officer
and Chief Financial Officer are
responsible for investor relations.
They meet with major shareholders
during the course of the year to
ensure that they develop an
understanding of their views,which
are communicated to the rest of the
Board at Board meetings. The
Non-executive Chairman and
Senior Independent Director meet
with major shareholders from time
to time. Shareholders are invited to
attend the Annual Meeting at least
twenty-one days in advance of the
meeting. All Directors attend the
meeting which is used to
communicate with shareholders.
Greenhouse gas emissions
reporting
During the year, the Group worked
with Energy Management LLP, an
energy procurement and carbon
consultancy, to develop GHG reporting
protocol based on DEFRA and World
Resource Institute guidelines.
The Group has chosen to use
Operational Control in their approach
to reporting utility data, electricity and
natural gas from UK and International
operations. This includes sites that
have been disposed of during the
reporting period. Scope 1 (Natural
Gas) and Scope 2 (Electricity) are
reported on below, but the Group are
not reporting on Scope 3 emissions
covering emissions from transport and
emissions from fully serviced offices
where only a service charge is applied.
The Group has identified GHG
(Greenhouse Gas) emissions per
employee as the most appropriate
available KPI (referred to as the
intensity ratio) and has chosen 2014
as our Base Year, following the
disposal of our silk screen printing
business in 2013.
Global GHG emissions
2016
2015
Tonnes of CO2e
13
258
271
17
268
285
499
321*
0.54
0.89
Scope 1
Scope 2
Total GHG
emissions (CO2e)
Average number
of staff
Emissions per staff
member
* Excluding staff at fully serviced offices.
65
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSQuarto Group, Inc. Annual Report 2016 significant failings in respect of
financial reporting controls during
the year, which together with remedial
action is discussed in the Audit
Committee Report on pages 43 to 45.
We will continue to develop our risk
management framework during 2017.
Anne Crompton
Secretary
19 April 2017
Company Registration Number:
FC0 13814
DIRECTORS’ REPORT CONTINUED
Risk management and
internal controls
The Board is responsible for the
Group’s system of internal control
and for reviewing its effectiveness.
As stated previously, the Directors
have carried out a robust assessment
of the principal businesses and
considered the controls in place to
eliminate or mitigate the impact of
key risks. The Board has in place risk
management systems in relation to
the Company’s financial reporting
process and the Group’s process for
the preparation of the consolidated
financial statements. However, such
systems are designed to manage
rather than eliminate the risk of failure
to achieve business objectives and
can provide only reasonable and not
absolute assurance against material
misstatement or loss.
Established procedures are in place
to identify and consolidate reporting
entities. Our control activities include
policies and practices covering
appropriate authorisation and approval
of transactions, the application of
financial reporting standards and
reviews of significant judgements
and financial performance.
The main elements of the internal
control and financial reporting
systems are:
a) The results of individual operating
segments are reported and
reviewed by the Board at its
meetings during the year.
b) The management reports of each
operating segment are tailored to
suit the business and management
needs of local management. Each
operating segment has its own key
performance indicators and these
are regularly reviewed and assessed.
c) In addition to monthly reporting,
individual operating units report
certain management information
more frequently, where it is
considered appropriate.
d) All operating units report their
bank balances weekly and a report
is produced summarising the
Group position.
e) The Chief Executive Officer and
the Chief Financial Officer make
frequent visits to all operating
segments. These visits include
reviews of the internal control
and financial reporting systems.
In 2017, dedicated internal audit
resource will assume responsibility
for internal audit reviews, reporting
directly to the Audit Committee.
f) All operating units prepare annual
budgets and cash flow forecasts
which are reviewed by the Board.
The UK Corporate Governance
Code introduced a requirement that
the Directors perform on-going
monitoring and review of the
effectiveness of the Group’s system of
internal controls, to cover all controls
including financial, operational,
compliance, and risk management.
The Board confirms that there are
ongoing processes covering the
identification, evaluation and
management of the significant risks
faced by the Group and covers all
material controls. The processes are
carried out through Group Board
meetings, quarterly subsidiary
management meetings, discussion
and review by the Executive Board
and the finance department during
the several visits per year to individual
operating units, and discussions
with professional advisers where
appropriate. The Board identified
66
Governance STATEMENT OF DIRECTORS’ RESPONSIBILITIES
IN RESPECT OF THE DIRECTORS’ REPORT AND
THE FINANCIAL STATEMENTS
The Directors are responsible for
preparing the Directors’ Report,
the Directors’ Remuneration Report
and the financial statements in
accordance with applicable law
and regulations. The Company is
incorporated in the State of Delaware,
United States and is subject to
the law of that state which places
no requirement for annual reporting
to shareholders upon the Directors.
However, since the Company has a
listing on the London Stock Exchange
and a place of business in the UK,
the Directors are required to prepare
financial statements which comply
with certain provisions which are
contained within the Listing Rules of
the UK Financial Conduct Authority
(the Listing Rules) and UK company
law for overseas companies.
The Company is an ‘overseas’
company within the meaning of
the Companies Act 2006.
The Directors have elected to prepare
the Group financial statements in
accordance with IFRSs as adopted
by the EU, and the parent Company
financial statements in accordance
with applicable law and UK GAAP,
including FRS102 ‘The Financial
Reporting Standard applicable in
the UK and Republic of Ireland’.
The Directors have accepted
responsibility for preparing Group
financial statements as required by
IFRSs as adopted by the EU which
present fairly the financial position
and the performance of the group.
The Companies Act 2006 provides in
relation to such financial statements
that references in the relevant part of
that Act to financial statements giving
a true and fair view are references to
their achieving a fair presentation.
The Directors have accepted
responsibility for preparing parent
Company financial statements which
give a true and fair view of the state
of affairs and profit or loss of the
parent company.
In preparing the parent Company
financial statements, the Directors
are required to:
• select suitable accounting policies
and then apply them consistently;
• make judgements and accounting
estimates that are reasonable
and prudent;
• state whether Financial Reporting
Standard 102 ‘The Financial
Reporting Standard applicable
in the UK and Republic of Ireland’
has been followed, subject to any
material departures disclosed and
explained in the financial
statements; and
• prepare the financial statements on
the going concern basis unless it is
inappropriate to presume that the
company will continue in business.
In preparing the Group financial
statements, International Accounting
Standard 1 requires that Directors:
• properly select and apply
accounting policies;
• present information, including
accounting policies, in a manner
that provides relevant, reliable,
comparable and understandable
information;
• provide additional disclosures
when compliance with the
specific requirements in IFRSs
are insufficient to enable users to
understand the impact of particular
transactions, other events and
conditions on the entity’s
financial position and financial
performance; and
• make an assessment of the
company’s ability to continue
as a going concern.
The Directors are responsible for
keeping adequate accounting
records that are sufficient to show and
explain the Company’s transactions
and disclose with reasonable accuracy
at any time the financial position of
the Company and enable them to
ensure that the financial statements
and the Remuneration report comply
with the Companies Act 2006 and
Article 4 of the IAS Regulation. They
are also responsible for safeguarding
the assets of the Company and hence
for taking reasonable steps for the
prevention and detection of fraud
and other irregularities.
67
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSQuarto Group, Inc. Annual Report 2016 STATEMENT OF DIRECTORS’ RESPONSIBILITIES IN RESPECT OF THE
DIRECTORS’ REPORT AND THE FINANCIAL STATEMENTS CONTINUED
The Directors confirm that:
• so far as each director is aware,
there is no relevant audit
information of which the
Company’s auditor is unaware; and
• the Directors have taken all the
steps that they ought to have taken
as Directors in order to make
themselves aware of any relevant
audit information and to establish
that the auditor is aware of that
information.
The Directors are responsible for
preparing the annual report in
accordance with applicable law and
regulations. Having taken advice from
the Audit Committee, the Directors
consider the annual report and the
financial statements, taken as a whole,
provides the information necessary to
assess the Company’s performance,
business model and strategy and is
fair, balanced and understandable.
The Directors are responsible for
the maintenance and integrity of the
corporate and financial information
included on the Company’s website.
Legislation in the United Kingdom
governing the preparation and
dissemination of financial statements
may differ from legislation in other
jurisdictions.
We confirm to the best of
our knowledge:
• the Group financial statements,
prepared in accordance with IFRSs
as adopted by the European Union,
give a true and fair view of the
assets, liabilities, financial position
and profit or loss of the Group and
the undertakings included in the
consolidation taken as a whole;
• the Strategic Report includes a fair
review of the development and
performance of the business and
the position of the Company and
the undertakings included in the
consolidation taken as a whole,
together with a description of the
principal risks and uncertainties
that they face; and
• the annual report and financial
statements, taken as a whole, are fair,
balanced and understandable, and
provide the information necessary
for shareholders to assess the
Company’s position, performance,
business model and strategy.
Anne Crompton
Secretary
19 April 2017
68
Governance INDEPENDENT AUDITOR’S REPORT
TO THE SHAREHOLDERS
OF THE QUARTO GROUP, INC.
Opinion on financial statements of The Quarto Group, Inc.
In our opinion:
• the financial statements give a true and fair view of the state of the group’s and of the parent company’s affairs
as at 31 December 2016 and of the group’s loss for the year then ended;
• the group financial statements have been properly prepared in accordance with International Financial
Reporting Standards (IFRSs) as adopted by the European Union;
• the parent company financial statements have been properly prepared in accordance with United Kingdom Generally
Accepted Accounting Practice, including FRS 102 ‘The Financial Reporting Standard applicable in the UK and
Republic of Ireland’; and
• the financial statements have been prepared in accordance with the requirements of the Companies Act 2006
which would have applied were the company incorporated in the United Kingdom.
The financial statements that we have audited comprise:
• the consolidated income statement;
• the consolidated statement of comprehensive income;
• the consolidated balance sheet;
• the consolidated statement of changes in equity;
• the consolidated cash flow statement;
• the related notes to the consolidated financial statements 1 to 32;
• the parent company balance sheet;
• the parent company statement of changes in equity; and
• the related notes to the parent company financial statements 1 to 9.
The financial reporting framework that has been applied in the preparation of the group financial statements is
applicable law and IFRSs as adopted by the European Union. The financial reporting framework that has been applied
in the preparation of the parent company financial statements is applicable law and United Kingdom Accounting
Standards (United Kingdom Generally Accepted Accounting Practice), including FRS 102 ‘The Financial Reporting
Standard applicable in the UK and Republic of Ireland’.
Summary of our audit approach
Key risks
The key risks that we identified in the current year were:
Materiality
Scoping
Significant changes
in our approach
• Accounting for the potential Books & Gifts Direct (‘BGD’) disposal transactions;
• BGD Australia Stock in transit accounting and prior year adjustment;
• Going concern and covenant compliance;
• Acquisition accounting for becker&mayer;
• Assessment of the carrying value of goodwill of Quarto US ‘QUS’;
• Assessment of the carrying value of pre-publication costs; and
• Assessing the level of sales returns against revenue recognised.
Within this report, any new risks are identified with
prior year identified with .
and any risks which are the same as the
The materiality that we used in the current year was $745,000 (2015: $697,000) which was
determined on the basis of 5.7% of adjusted profit before tax (although our adjusted profit
before tax does not add back amortisation of intangibles).
We complete full scope audits of Quarto US and Quarto UK components. We also include
Australia, New Zealand and Hong Kong as full scope audits.
These locations represent the principal business units and account for 98% of the Group’s
revenue (2015: 99%), 94% of the Group’s adjusted profit before tax (2015: 97%) and 99% of the
Group’s net assets (2015: 98%).
• Following management announcing their intention to divest the BGD business and given the
estimated proceeds were significantly below the carrying value of the goodwill and net
assets, we therefore identified this as a key audit risk.
• As a result of Group management’s identification of material errors in the stock in transit ‘SIT’
balance in Australia we identified this as a new key risk.
• As a result of management identifying that the Q4 2016 Cashflow after debt service (‘CFADS’)
covenant test had failed, we identified going concern and covenant compliance as a key risk.
• We included the acquisition of becker&mayer as a key risk given that this was a significant
acquisition in the year.
69
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSQuarto Group, Inc. Annual Report 2016 INDEPENDENT AUDITOR’S REPORT CONTINUED
Going concern and the directors’ assessment of the principal risks that would threaten
the solvency or liquidity of the group
We confirm that we have nothing material to add or
draw attention to in respect of these matters.
We agreed with the directors’ adoption of the going
concern basis of accounting and we did not identify any
such material uncertainties. However, because not all
future events or conditions can be predicted, this
statement is not a guarantee as to the group’s ability
to continue as a going concern.
As required by the Listing Rules we have reviewed the
directors’ statement regarding the appropriateness of the
going concern basis of accounting contained within Note 1
to the financial statements and the directors’ statement on
the longer-term viability of the group contained within the
financial review on page 29.
We are required to state whether we have anything material
to add or draw attention to in relation to:
• the directors' confirmation on page 22 that they have
carried out a robust assessment of the principal risks
facing the group, including those that would threaten
its business model, future performance, solvency or
liquidity;
• the disclosures on pages 22 and 23 that describe
those risks and explain how they are being managed
or mitigated;
• the directors’ statement in Note 1 to the financial
statements about whether they considered it appropriate
to adopt the going concern basis of accounting in
preparing them and their identification of any material
uncertainties to the group’s ability to continue to do so
over a period of at least twelve months from the date of
approval of the financial statements; and
• the directors’ explanation on page 29 as to how they
have assessed the prospects of the group, over what
period they have done so and why they consider that
period to be appropriate, and their statement as to
whether they have a reasonable expectation that the
group will be able to continue in operation and meet its
liabilities as they fall due over the period of their
assessment, including any related disclosures drawing
attention to any necessary qualifications or assumptions.
Independence
We are required to comply with the Financial Reporting
Council’s Ethical Standards for Auditors and confirm that
we are independent of the group and we have fulfilled
our other ethical responsibilities in accordance with
those standards.
We confirm that we are independent of the group and
we have fulfilled our other ethical responsibilities in
accordance with those standards. We also confirm we
have not provided any of the prohibited non-audit
services referred to in those standards.
70
Governance
Our assessment of risks of material misstatement
The assessed risks of material misstatement described below are those that had the greatest effect on our audit
strategy, the allocation of resources in the audit and directing the efforts of the engagement team.
Accounting for the potential BGD disposal transactions
Risk description
How the scope of our audit
responded to the risk
The Group has been seeking to dispose of its BGD Australia and New Zealand businesses.
Heads of terms were signed in January 2017 and further negotiations followed. A disposal
in Australia was agreed on 25 March 2017 and completed on 31 March 2017 for
consideration of A$1 together with the assignment of A$1.9m of certain debts owed by
the master franchisees acquiring the business to BGD Australia. New Zealand disposal
discussions remain ongoing. These transactions gave rise to management judgements in
particular in relation to the impact on the valuation of the business given the actual and
potential proceeds were significantly below the carrying value of the goodwill and net
assets, resulting in an exceptional impairment of $14.2m.
Management have also set out supplementary information on the face of the income
statement to show the results of the BGD segment separately, as the transactions did not
meet the assets held for sale criteria at the balance sheet date, and management thought
this additional disclosure would be beneficial to the readers. This was discussed by the
Audit Committee (see page 44). Note 5 to the accounts sets out the material impairments
recognised as exceptional items and subsequent events Note 31 sets out the status of
the transactions.
• We obtained and reviewed the signed sale and purchase agreement for the Australia
disposal.
• We obtained the broker information in relation to the New Zealand discussions.
• We reviewed a report from management’s external advisors relating to potential Australia
and New Zealand disposal options and valuation impacts and considered the evidence
contained in the report.
• We reviewed the Group’s board minutes to confirm the board’s conclusions on potential
transactions in 2017.
• We considered the component auditor reporting in particular on receivables confirmations
received.
Key observations
• We concluded, consistent with management, that the BGD transaction completed post year
end and did not represent an asset held for sale at the balance sheet date.
• Our audit identified adjustments to the local reported results which were corrected by
Group management. At a Group level these adjustments were offset against the Group’s
impairment charge arising from the estimated transaction proceeds with no overall impact
on the segment results.
• Management’s estimated proceeds based on the concluded transaction, existing
discussions and other available information appeared reasonable.
BGD Australia Stock in transit accounting and prior year adjustment
Risk description
Group management’s identification of material errors in the stock in transit ‘SIT’ inventory
balance, increasing cost of sales by $0.7m on the 2015 results and reducing 2014 and earlier
period retained earnings by $1.0m in Australia, required assessment of the nature and timing
of the errors to determine the appropriate corrections and whether there was a prior period
impact which may result in a prior year restatement.
A high level assessment was performed by a third party adviser of the business. UK
management then undertook a detailed assessment with local management to establish the
corrections required noting that the prior period errors related to cut off procedures in relation
to stock in transit and errors in relation to the accounting for certain inventory returns.
The resulting prior year restatement has been detailed in Note 1 of the accounts. The audit
committee report on page 44 discusses the control failures identified which resulted in
the errors.
71
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSQuarto Group, Inc. Annual Report 2016 INDEPENDENT AUDITOR’S REPORT CONTINUED
How the scope of our audit
responded to the risk
• We reviewed the reports from the third party adviser to understand their consideration of
the underlying cause of the errors and their preliminary quantification and assessment of
the errors.
• We reviewed management’s paper and held regular meetings with management to
understand the nature of the errors identified and evaluate the adequacy of the work
performed during the audit process.
• We assessed the prior period errors in light of IAS 8 ‘Accounting policies, changes in
accounting estimates and errors’.
Key observations
• We reported control deficiencies relating to the financial reporting processes and
reconciliations relating to the Australian and New Zealand businesses. These are discussed
in the Audit Committee report on pages 44 and 45.
• We concur that it is appropriate to account for the prior year errors as a prior year
restatement, and we consider that the disclosures recorded by management are
appropriate.
Going concern and covenant compliance
Risk description
How the scope of our audit
responded to the risk
Key observations
Management identified post year end that the Q4 2016 CFADS covenant test had failed
although this did not constitute a breach as the current agreement allows for a covenant test
to fail once. Additional sensitivities were identified for the Q1 CFADS 2017 covenant headroom
and subsequent periods due to the seasonality of the business. The exclusion of the
exceptional impairments from the future covenant tests was also a key factor for forecast
compliance. In light of this we elevated going concern to a significant risk.
Page 84 and Note 1 to the accounts sets out management’s disclosure and page 43 of the
Audit Committee report highlights the control failures identified in this area.
• We analysed the going concern model and additional sensitivities applied by management
in light of the Q4 CFADS fail, together with the impact of available and committed
mitigating actions.
• We reviewed the bank’s confirmation for the permitted exclusion of the exceptional
impairment charges from the covenant calculations.
We consider that meeting the Q1 covenant test, the forecast covenant compliance and the
mitigating actions available to management reasonably support the Board’s assessment that
there is not a material uncertainty in relation to going concern. As noted in the Audit
Committee report on page 43 we also highlighted control deficiencies in relation to this risk.
Acquisition accounting for becker&mayer
Risk description
How the scope of our audit
responded to the risk
The Group acquired b&m on 31 July 2016 for consideration of $11.3m. Management judgement
is involved in acquisition accounting in relation to: the identification and valuation of acquired
intangibles (being pre-publication costs and backlists) and estimation of useful economic lives;
the fair value of consideration; the fair value of the assets and liabilities acquired; and the
alignment of accounting policies. The purchase price allocation and fair value of assets
acquired is set out in Note 30. This is also discussed in the Audit Committee report on page 44.
• We have assessed the nature of the transaction with reference to IFRS3 ‘Business
Combinations’.
• We reviewed the purchase agreements.
• We engaged our valuation specialists to assess the appropriateness of the valuation model
and certain key assumptions within of intangibles valuation prepared by management’s
external expert.
• We assessed the forecasts and discount rates used in estimating contingent consideration
for consistency with the impairment review and going concern analysis.
• We audited the acquired assets and liabilities to supporting documentation, agreements, as
well as post acquisition receipts and payments, and inventory count procedures rolled back
to acquisition date.
72
Governance Key observations
We concur with management’s view that the b&m acquisition is a business combination within
the scope of IFRS3 ‘Business Combinations’.
We identified reclassification adjustments between other assets and liabilities, and goodwill
which were corrected by management as referenced in the Audit Committee report on
page 44 and identified a deficiency in the controls around acquisition accounting, as
referenced in the Audit Committee report on page 44.
Assessment of the carrying value of QUS goodwill
Risk description
How the scope of our audit
responded to the risk
The Group holds $36.1m of goodwill on its balance sheet following the recognition of $3.1m
of goodwill on acquisitions, $6.0m of impairment relating to BGD (see earlier section) and
exchange movements. The largest balance relates to QUS ($30.0m) as shown in Note 11 to
the accounts and the Group’s impairment policies for this balance are disclosed in Note 1
to the accounts.
We identify the carrying value of QUS goodwill as a key risk due to the continuing sensitivity
of this CGU to reasonable possible changes in key assumptions around discount rates, cash
flow forecasts and growth rates and the inclusion of these disclosures in the 2016 annual
report. This is also discussed in the Audit Committee report on page 44.
• We challenged management on the appropriateness of including the acquisition goodwill
as part of the QUS CGU through evidencing the level of integration of businesses and the
internal reporting of the Group and reviewed the acquisition board papers and the due
diligence reports where available.
• We critically challenged the key judgements made by management around cash flow
forecasts, growth rates and discount rates through:
– testing the integrity of management’s model;
– engaging our valuation specialists to independently establish an appropriate
discount rate;
– performing historical forecasting accuracy analysis and assessing key changes
in forecasts;
– performing benchmarking of competitors and industry data;
– considering post year end trading performance; and
– performing sensitivity analysis to assess breakeven points and scenario combinations.
Key observations
• We identified certain process deficiencies in this area, which are discussed in the Audit
Committee report on page 44.
• QUS goodwill remains sensitive to changes in key assumptions. It is appropriate to disclose
reasonably possible change scenarios.
Assessment of the carrying value of pre-publication costs
Risk description
The Group’s net book value of capitalised pre-publication costs at 31 December 2016 was
$61.1m (2015: $59.4m) as detailed in Note 15. The Group capitalises third party costs incurred
and directly attributable costs in developing book titles prior to their publication. The Group
amortises its pre-publication costs over a period of up to three years on a straight line basis
which is considered to reflect the life of its imprints on a portfolio basis.
The nature of the asset involves judgement in respect of the life of an imprint and ultimately
its recoverability.
Management also undertook an exercise to review the useful economic lives of its imprints and
increased the lives of certain imprints to 3 years following this exercise. The $2.1m reduction in
2016 amortisation charge (if applying legacy UELs) has been disclosed as a change in
accounting estimate with the effect being applied prospectively, in accordance with IAS8
‘Accounting Policies, Changes in Accounting Estimates and Errors’.
This is also discussed in the Audit Committee report on page 44.
73
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSQuarto Group, Inc. Annual Report 2016 INDEPENDENT AUDITOR’S REPORT CONTINUED
How the scope of our audit
responded to the risk
• We analysed the Group’s historical revenue profile by looking at the profile of revenue
earned from 2013 and 2014 additions in the UK and US.
• We performed testing of third party costs and directly attributable internal costs capitalised
in accordance with the requirements of IAS 38 ‘Intangible Assets’ by sample testing them to
supporting invoices as well as assessing the validity and allocation of payroll costs to titles
through review of timesheets.
• We performed benchmarking of the amortisation policy and profile against a number of
industry peers.
• We assessed the recoverability based on a CGU basis as well as a on a sample basis of
current year contribution per title.
Key observations
• The results of our procedures were satisfactory and we agree that management’s change in
accounting estimate and disclosure appears reasonable and consistent with the
requirements of IAS 8, ‘Accounting Policies, Changes in Accounting Estimates and Errors’.
Assessment of sales returns against revenue recognition
Risk description
How the scope of our audit
responded to the risk
The Group primarily generates revenue from publishing new titles and sales of back catalogue
(see revenue recognition policy in Note 1). In certain business units customers have a right of
return for a limited period and revenue is recorded net of a provision for these returns based
on historical data. Management judgement is required when assessing the level of sales
returns subsequent to the year-end to be provided for at the year-end. Key assumptions
principally surround historical return experience when estimating future sale return levels
against revenue recognised in the year. This is also discussed in the Audit Committee report
on page 45.
The audit procedures we performed in respect of this risk included:
• Testing a sample of underlying returns data used to develop the sales return estimate for
completeness and accuracy and challenging the appropriateness of the rate by reference
to current and post year end sales returns levels.
Independently recalculated the returns provision and reviewed the level of sales post year
end for relative consistency with year-end assumptions with no significant issues arising.
•
• Using analytical techniques to assess monthly returns by reference to historical trends.
• Considering forecasting accuracy by comparing actual returns against accrual estimates.
Key observations
We concur with management’s view that the adjustment for sales returns against revenue
appears reasonable.
These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our
opinion thereon, and we do not provide a separate opinion on these matters.
74
Governance Our application of materiality
We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the
economic decisions of a reasonably knowledgeable person would be changed or influenced. We use materiality both in
planning the scope of our audit work and in evaluating the results of our work.
Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:
Group materiality
$745,000 (2015: $697,000)
Basis for determining
materiality
Our materiality is 5.7% of adjusted profit before tax (2015: 5.0% of adjusted profit before tax).
Adjusted profit before tax is derived from the loss before tax with exceptional items added
back. The exceptional items per Note 5 have been added back to the reported loss before tax.
Rationale for the benchmark
applied
Management’s adjusted profit before tax measure also adds back the amortisation of acquired
intangibles.
We have determined a profit based measure is appropriate in line with prior year. The adjusted
profit before tax measure excludes those items identified as exceptional in the annual report
(Note 5) and is consistent with the measures used by the Group for internal and external
reporting requirements. This measure has been used to facilitate a better understanding
of the trading performance of the Group, it is consistent with our approach adopted in
previous years.
We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of $37,250
(2015: $13,900), as well as differences below that threshold that, in our view, warranted reporting on qualitative
grounds. We also report to the Audit Committee on disclosure matters that we identified when assessing the overall
presentation of the financial statements.
An overview of the scope of our audit
Our Group audit was scoped by obtaining an understanding of the Group, its environment and assessing the risks of
material misstatement at the Group level.
Based on that assessment we include Quarto Publishing Plc, Quarto Publishing USA Inc., (including the businesses
acquired during the year), and The Quarto Group Inc. as full scope audit (Scope A) procedures to statutory or
component materiality completed by Deloitte London.
We include Australia, New Zealand and Hong Kong as full scope audits (scope B) where the audit work is performed by
overseas component auditors under our direction and supervision to component materiality or local statutory materiality.
These locations which were subject to full scope audit procedures and represent the principal business units and
account for 98% of the Group’s revenue (2015: 99%), 94% of the Group’s adjusted profit before tax (2015: 97%) and 99%
of the Group’s net assets (2015: 98%).
We completed analytical procedures for operations in Switzerland and for other holding companies on an entity only
basis to confirm there are no significant risks of material misstatements within these entities.
At the parent entity level we also test the Group consolidation process.
In the current year given the errors identified in the BGD Australia business we performed an increased level of
supervision of our component audit team as they performed their audit procedures. We held regular conference calls to
discuss the issues identified and the progress of the procedures. We performed a detailed file review of their 2016 audit
working papers.
75
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSQuarto Group, Inc. Annual Report 2016 INDEPENDENT AUDITOR’S REPORT CONTINUED
Opinion on other matters prescribed by our engagement letter
In our opinion, based on the work undertaken in the course of the audit:
• the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the
Companies Act 2006 were the requirements of the Act to apply to The Quarto Group Inc.;
• the information given in the Strategic Report and the Directors’ Report for the financial year for which the financial
statements are prepared is consistent with the financial statements; and
• the Strategic Report and the Directors’ Report have been prepared in accordance with applicable legal requirements.
In the light of the knowledge and understanding of the company and its environment obtained in the course of the
audit, we have not identified any material misstatements in the Strategic Report and the Directors’ Report.
We have nothing to report in respect of these matters.
We have nothing to report arising from these matters.
We have nothing to report arising from our review.
We confirm that we have not identified any such
inconsistencies or misleading statements.
Matters on which we are required to report by exception
Adequacy of explanations received and accounting records
Under our engagement letter we are required to report to you
if, in our opinion:
• we have not received all the information and explanations
we require for our audit; or
• adequate accounting records have not been kept by the
parent company, or returns adequate for our audit have not
been received from branches not visited by us; or
• the parent company financial statements are not in
agreement with the accounting records and returns.
Directors’ remuneration
Under our engagement letter we are also required to report if
in our opinion certain disclosures of directors’ remuneration
have not been made or the part of the Directors’
Remuneration Report to be audited is not in agreement with
the accounting records and returns.
Corporate Governance Statement
Under the Listing Rules we are also required to review part
of the Corporate Governance Statement relating to the
company’s compliance with certain provisions of the UK
Corporate Governance Code.
Our duty to read other information in the Annual Report
Under International Standards on Auditing (UK and Ireland),
we are required to report to you if, in our opinion, information
in the annual report is:
• materially inconsistent with the information in the audited
financial statements; or
• apparently materially incorrect based on, or materially
inconsistent with, our knowledge of the group acquired in
the course of performing our audit; or
• otherwise misleading.
In particular, we are required to consider whether we have
identified any inconsistencies between our knowledge
acquired during the audit and the directors’ statement that
they consider the annual report is fair, balanced and
understandable and whether the annual report appropriately
discloses those matters that we communicated to the audit
committee which we consider should have been disclosed.
76
Governance Respective responsibilities of directors and auditor
As explained more fully in the Directors’ Responsibilities Statement, the directors are responsible for the preparation
of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and
express an opinion on the financial statements in accordance with applicable law and International Standards on
Auditing (UK and Ireland). We also comply with International Standard on Quality Control 1 (UK and Ireland). Our audit
methodology and tools aim to ensure that our quality control procedures are effective, understood and applied. Our
quality controls and systems include our dedicated professional standards review team and independent partner reviews.
This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the
Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those
matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted
by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as
a body, for our audit work, for this report, or for the opinions we have formed.
Scope of the audit of the financial statements
An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to
give reasonable assurance that the financial statements are free from material misstatement, whether caused by
fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Group’s and the
parent company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of
significant accounting estimates made by the directors; and the overall presentation of the financial statements. In
addition, we read all the financial and non-financial information in the annual report to identify material inconsistencies
with the audited financial statements and to identify any information that is apparently materially incorrect based
on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become
aware of any apparent material misstatements or inconsistencies we consider the implications for our report.
Deloitte LLP
Chartered Accountants and Statutory Auditor
London
19 April 2017
77
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSQuarto Group, Inc. Annual Report 2016 CONSOLIDATED INCOME STATEMENT
FOR THE YEAR ENDED 31 DECEMBER 2016
Year ended 31 December 2016
Year ended 31 December 2015
Group
excluding
Books &
Gifts
Direct
$’000
Notes
Books &
Gifts
Direct
$’000
Group
$’000
Group
excluding
Books &
Gifts
Direct
$’000
Restated
(Note 1)
Books &
Gifts
Direct
$’000
Restated
(Note 1)
Group
$’000
2
169,076
19,358
188,434
160,105
22,060
182,165
(114,095)
(17,070)
(131,165)
(105,956)
(17,578)
(123,534)
54,981
2,288
57,269
54,149
4,482
58,631
–
–
–
–
(6,870)
(388)
(7,258)
(6,548)
(648)
(7,196)
(29,533)
(3,720)
(33,253)
(32,008)
(2,952)
(34,960)
–
(7,997)
(7,997)
–
–
–
18,578
(9,817)
8,761
15,593
882
16,475
(654)
(51)
(705)
(191)
(6,206)
(6,397)
(672)
(445)
(52)
–
(724)
(445)
17,733
(16,074)
1,659
14,476
830
15,306
153
(3,109)
11
–
164
116
(3,109)
(3,240)
26
–
142
(3,240)
14,777
(16,063)
(1,286)
11,352
856
12,208
(4,031)
40
(3,991)
(2,849)
(836)
(3,685)
10,746
(16,023)
(5,277)
8,503
20
8,523
5
3
5
4
7
8
9
10,326
(16,023)
(5,697)
420
–
420
8,115
388
10,746
(16,023)
(5,277)
8,503
20
–
20
8,135
388
8,523
10
10
10
10
51.7
50.5
54.7
53.5
(28.5)
(28.5)
5.7
5.6
41.2
41.1
46.0
45.9
41.3
41.2
46.2
46.1
Continuing operations
Revenue
Cost of sales
Gross profit
Other operating income
Distribution costs
Administrative expenses
Exceptional impairment of BGD operating assets
Operating profit/(loss) before amortisation
of acquired intangibles and other
exceptional items
Amortisation of acquired intangibles
Other exceptional items
Operating profit/(loss)
Finance income
Finance costs
(Loss)/profit before tax
Tax
(Loss)/profit for the year
(Loss)/profit for the year attributable to:
Owners of the parent
Non-controlling interests
(Loss)/earnings per share (cents)
Basic
Diluted
Adjusted basic
Adjusted diluted
78
Financial Statements CONSOLIDATED STATEMENT
OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 2016
(Loss)/profit for the year
Items that may be reclassified to profit or loss
Foreign exchange translation differences
Cash flow hedge: gains/(losses) arising during the year
Cash flow hedge: reclassification adjustment for net income recognised directly in equity
Tax relating to items that may be reclassified to profit or loss
Restated
(Note 1)
2015
$’000
8,523
2016
$’000
(5,277)
706
(2,340)
150
–
(1,609)
(64)
68
(14)
Total comprehensive (expense)/income for the year
(6,030)
6,173
Total comprehensive (expense)/income for the year attributable to:
Owners of the parent
Non-controlling interests
(6,450)
420
(6,030)
5,799
374
6,173
79
STRATEGIC REPORTFINANCIAL STATEMENTSGOVERNANCEQuarto Group, Inc. Annual Report 2016 CONSOLIDATED BALANCE SHEET
AS AT 31 DECEMBER 2016
Non-current assets
Goodwill
Other intangible assets
Property, plant and equipment
Intangible assets: Pre-publication costs
Deferred tax assets
Total non-current assets
Current assets
Inventories
Trade and other receivables
Derivative financial instruments
Cash and cash equivalents
Total current assets
Total assets
Current liabilities
Short term borrowings
Derivative financial instruments
Trade and other payables
Tax payable
Total current liabilities
Non-current liabilities
Medium and long term borrowings
Deferred tax liabilities
Other payables
Total non-current liabilities
Total liabilities
Net assets
Equity
Share capital
Paid in surplus
Retained earnings and other reserves
Equity attributable to owners of the parent
Non-controlling interests
Total equity
Notes
2016
$’000
Restated
(Note 1)
2015
$’000
Restated
(Note 1)
2014
$’000
11
12
13
15
20
16
17
19
21
19
20
24
36,144
4,351
1,857
61,133
2,022
40,112
1,510
3,368
41,069
956
2,731
59,443
57,534
–
126
105,507
104,433
102,416
24,006
54,162
141
18,824
97,133
202,640
25,191
57,145
18
25,059
107,413
211,846
23,859
51,740
–
23,110
98,709
201,125
(5,000)
(5,000)
(89,150)
(94)
(59,718)
(4,060)
(10)
(63,716)
(2,549)
(67)
(53,271)
(2,430)
(68,872)
(71,275)
(144,918)
(75,748)
(79,562)
–
(10,502)
(3,407)
(7,466)
(5,927)
(99)
(537)
(89,657)
(87,127)
(6,464)
(158,529)
(158,402)
(151,382)
44,111
53,444
49,743
2,045
33,764
3,410
39,219
4,892
44,111
2,045
33,764
12,476
48,285
5,159
53,444
2,045
33,764
8,993
44,802
4,941
49,743
The financial statements were approved by the Board of Directors and authorised for issue on 19 April 2017.
They were signed on its behalf by:
Marcus E. Leaver, Director
80
Financial Statements CONSOLIDATED STATEMENT
OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 2016
Share
capital
$’000
Paid in
surplus
$’000
Hedging
reserve
$’000
Translation
reserve
$’000
Treasury
shares
$’000
Retained
earnings
$’000
Equity
attributable
to owners
of the
parent
$’000
Non-
controlling
interests
$’000
Total
$’000
(5,611)
(634)
16,230
45,794
4,941
50,735
–
–
(992)
(992)
–
(992)
(5,611)
(634)
15,238
44,802
4,941
49,743
Balance at 1 January 2015
(as previously stated)
2,045 33,764
Prior year adjustment (Note 1)
–
–
Balance at 1 January 2015
2,045 33,764
Profit for the period
Other comprehensive
income/(expense)
Foreign exchange translation
differences
Cash flow hedge: losses
arising during the period
Cash flow hedge:
reclassification adjustment
for gain included in profit
Tax relating to items that may
be reclassified to profit or loss
Total comprehensive
income for the period
Dividends paid to shareholders
Dividends paid to
non-controlling interests
Share based payments charge
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(64)
68
(14)
–
(2,326)
–
–
–
(10)
(2,326)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
8,135
8,135
388
8,523
–
–
–
–
(2,326)
(14)
(2,340)
(64)
68
(14)
–
–
–
(64)
68
(14)
8,135
5,799
374
6,173
(2,502)
(2,502)
–
(2,502)
–
186
–
(156)
(156)
186
–
186
Balance at 31 December 2015
2,045 33,764
(10)
(7,937)
(634)
21,057
48,285
5,159 53,444
(Loss)/profit for the period
Other comprehensive
income/expense
Foreign exchange translation
differences
Cash flow hedge: losses
arising during the period
Tax relating to items that may
be reclassified to profit or loss
Total comprehensive income/
(expense) for the period
Dividends paid to shareholders
Dividends paid to non-
controlling interests
Share based payments charge
Shares released/sold from
treasury shares
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
150
–
696
–
–
(1,609)
150
(913)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(5,697)
(5,697)
420
(5,277)
–
–
–
696
150
(1,609)
10
706
–
–
150
(1,609)
(5,697)
(6,460)
430 (6,030)
(2,902)
(2,902)
–
(2,902)
–
256
634
(594)
–
(697)
(697)
256
40
–
–
256
40
Balance at 31 December 2016
2,045 33,764
140
(8,850)
–
12,120
39,219
4,892
44,111
81
STRATEGIC REPORTFINANCIAL STATEMENTSGOVERNANCEQuarto Group, Inc. Annual Report 2016 CONSOLIDATED CASH FLOW STATEMENT
FOR THE YEAR ENDED 31 DECEMBER 2016
(Loss)/profit for the year
Adjustments for:
Net finance costs
Depreciation of property, plant and equipment and software intangible assets
Tax charge
Exceptional impairment of BGD assets
Share-based payment charges
Amortisation of acquired intangibles
Amortisation of and amount written off pre-publication costs
Movement in fair value of derivatives
Operating cash flows before movements in working capital
Decrease/(increase) in inventories
Decrease/(increase) in receivables
(Decrease)/increase in payables
Cash generated by operations
Income taxes paid
Net cash from operating activities
Investing activities
Interest received
Investment in pre-publication costs
Purchases of property, plant and equipment and software intangible assets
Acquisition of subsidiaries and business combinations
Net cash used in investing activities
Financing activities
Dividends paid
Interest payments
Drawdown/(repayment) of revolving credit facility
Repayment of term loan
Dividends paid to non-controlling interests
Net cash used in financing activities
Net (decrease)/increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Foreign currency exchange differences on cash and cash equivalents
Restated
(Note 1)
2015
$’000
8,523
3,098
1,189
3,685
–
186
724
2016
$’000
(5,277)
2,945
1,080
3,991
14,203
256
705
30,540
33,258
120
(85)
48,563
50,578
1,270
1,628
(7,715)
43,746
(1,436)
42,310
(1,198)
(6,156)
8,724
51,948
(1,981)
49,967
164
142
(37,165)
(34,872)
(1,562)
(3,718)
(2,010)
(1,614)
(42,281)
(38,354)
(2,902)
(2,725)
5,583
(5,000)
(697)
(5,741)
(5,712)
25,059
(523)
(2,502)
(2,891)
(3,283)
–
(156)
(8,832)
2,781
23,110
(832)
Cash and cash equivalents at end of year
18,824
25,059
82
Financial Statements NOTES TO THE
FINANCIAL STATEMENTS
1 General information and significant accounting policies
The Quarto Group, Inc. is a company incorporated in the State of Delaware, United States. The address of the registered
office is given on page 123. The nature of the Group’s operations and its principal activities are set out in Note 3 and in
the Chief Executive Officer’s Statement on page 12.
The accounting policies adopted, are consistent with those of the annual financial statements for the year ended
31 December 2015, as described in those financial statements, except as described below.
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. The presentational currency of the Group is US dollars.
Change in estimate
During the year, the Group undertook a review of useful lives of the pre-publications costs incurred in the development
of book titles prior to publication. The review resulted in the change in useful life of certain imprints to a three-year
useful life in accordance with IAS 8 – Accounting Polices, Changes in Accounting Estimates and Errors, the revisions
were accounted for prospectively as a change in accounting estimate and as a result, the amortisation charge
of the Group for the current financial year has been reduced by $2.1m.
Restatement of prior year results
In the process of finalising the results of the Books and Gifts Direct business for the year ended 31 December 2016,
errors were uncovered in the cut-off procedures and accounting for returns in relation to stock in transit and the related
liability accounts at BGD Australia. The errors related to the value attributed to stock in transit at each of the three
years ended 31 December 2016, 31 December 2015 and 31 December 2014 where detailed examination has shown that
supplier invoices for stock in transit were not processed in the correct accounting period, nor was the correct accrual
or return provision recorded in the financial statements. The impact of these errors has resulted in the lower operating
margins for the year ended 31 December 2015.
The error was caused by a failure in controls relating to cut-off and reconciliation procedures in respect of stock in
transit and the related purchase clearing accounts, and accounting for returns on certain products.
The error has now been corrected and impacts the Consolidated Income Statement as follows:
• Cost of sales for the year ended 31 December 2015 increased by $0.7m from $122.8m to $123.5m which is included
in the restated operating results for the year; and
• Opening retained earnings as at 1 January 2015 have been restated and decreased by $1.0m.
Expected tax losses of $0.5m have not been recognised as there is insufficient evidence that future profits are available
against which the losses could be applied.
The impact on the Consolidated Balance Sheet as at 31 December 2015 and as at 31 December 2014 is:
Inventories
Trade payables
Impact on net assets
Impact on total equity
Earnings per share (cents)
Basic
Diluted
As reported
2015
$’000
Adjustment
$’000
Restated
2015
$’000
As reported
2014
$’000
Adjustment
$’000
26,147
(63,076)
55,040
(956)
(640)
(1,596)
25,191
(63,716)
53,444
24,851
(53,271)
50,735
(992)
–
(992)
Restated
2014
$’000
23,859
(53,271)
49,743
55,040
(1,596)
53,444
50,735
(992)
49,743
45.0
44.9
3.7
3.7
41.3
41.2
Statement of compliance
The Group financial statements consolidate those of the Company and its subsidiaries (together referred to as the
‘Group’). The parent company financial statements present information about the Company as a separate entity and not
about its Group.
The Group financial statements have been prepared and approved by the Directors in accordance with International
Financial Reporting Standards as adopted by the EU (‘IFRS’). The Company has elected to prepare its parent company
financial statements in accordance with UK GAAP, including The Financial Reporting Standard applicable in the UK and
Republic of Ireland (‘FRS 102’); these are presented on pages 116 to 121.
83
STRATEGIC REPORTFINANCIAL STATEMENTSGOVERNANCEQuarto Group, Inc. Annual Report 2016 NOTES TO THE FINANCIAL STATEMENTS CONTINUED
1 General information and significant accounting policies continued
Basis of accounting
The financial statements are prepared on the historical cost basis, except that derivative financial instruments are stated
at fair value.
Significant accounting estimates and judgements
The preparation of financial statements in conformity with IFRS requires management to make judgements, estimates
and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and
expenses. The estimates and associated assumptions are based on historical experience and various other factors that
are believed to be reasonable under the circumstances. Actual results may differ from these estimates. The estimates
and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the
year in which the estimate is revised if the revision affects only that year or in the year of the revision and future years
if the revision affects both current and future years. Key estimates at the balance sheet date are:
Note 1:
The revenue recognition policy details our judgement in respect of sales returns and the method of
estimating the related sales returns allowance
Note 5: Assessment of the recoverable value of the net assets of the BGD business
Note 11: Key assumptions in making the assessment of carrying value of goodwill and acquired intangible assets
Note 15: Recoverability of pre-publication costs and the assessment of their useful life
Note 17: Assessment of the impairment of trade receivables
Note 20: Calculation of temporary differences in the assessment of deferred tax liabilities
There are no critical judgements that have a significant impact on the financial statements, apart from those involving
estimates which are detailed above.
Going concern basis
After making enquiries, the Directors have formed a judgement, at the time of approving the financial statements, that
there is a reasonable expectation that the Group has adequate resources to continue in operational existence for the
foreseeable future. For this reason, the Directors continue to adopt the going concern basis in preparing the financial
statements. See also the Group going concern and viability statement on pages 28 and 29.
The Group’s business activities, together with the factors likely to affect its future development, performance and
position are set out in the Chief Executive Officer’s Statement on pages 12 to 15.
The financial position of the Group, its cash flows, liquidity position and borrowing facilities are described in the
Financial Review on pages 24 to 29 and in Notes 18 and 19 to the financial statements.
The Group has considerable financial resources together with a number of customers and suppliers across different
geographies. As a consequence, the Directors believe that the Group is well placed to manage its business risks
successfully despite the current economic outlook.
The Group has significant banking facilities including committed facilities comprising a US$90m multi-currency
revolving credit and term loan facility. These facilities were agreed with the Group’s bankers on 6 February 2015 and
expire on 30 April 2019. The Group has prepared a three-year financial plan comprising a budget for the year ending
31 December 2017 together with projections for the two years ending 31 December 2019. These show that the Group
is forecasting to have sufficient headroom within that period. The Group did not pass the CFADS covenant test at
31 December 2016. This does not constitute a breach of the Group’s banking facilities as it was the first permitted time
we have not passed the test and we are forecasting to pass the test at the next quarter testing date. The covenants will
be monitored closely by the Board and we have identified mitigating actions that would maintain compliance with all
covenants for the foreseeable future.
Basis of consolidation
The Group financial statements include the results of the Company and all of its subsidiary undertakings. A subsidiary
is an entity controlled, directly or indirectly, by the Group. Control is the power to govern the financial and operating
policies of the entity so as to obtain benefits from its activities. The financial statements of subsidiaries are included in
the consolidated financial statements from the date that control commences until the date that control ceases.
Intragroup balances and any unrealised gains and losses or income and expenses arising from intra-group transactions
are eliminated in preparing the consolidated financial statements.
84
Financial Statements 1 General information and significant accounting policies continued
The interest of non-controlling interests on an acquisition is initially measured at the minority’s proportion of the net fair
value of the assets, liabilities and contingent liabilities recognised.
Business combinations, intangible assets and goodwill
All business combinations are accounted for by applying the acquisition method. Goodwill represents the excess of the
consideration transferred over the fair value of the net assets and any contingent liabilities acquired. Acquisition costs are
expensed as incurred.
Goodwill arising on acquisitions is stated at cost less any accumulated impairment losses. Goodwill is allocated to
cash-generating units and is tested annually for impairment.
Other intangible assets, such as backlists, that are acquired by the Group are stated at cost less accumulated
amortisation and impairment losses.
Amortisation of intangible assets is charged to profit or loss on a straight-line basis over the estimated useful lives of
intangible assets. The amortisation period for non-contractual relationships is 2.5 years, for backlists is 5 years and software
is 4 years.
Volume rebates
In the ordinary course of business, the Group receives volume rebates from its printers. This is accounted for in
accordance with contractual terms and is credited in full to cost of sales.
Impairment of property, plant and equipment and intangible assets including goodwill
The carrying amount of the Group’s assets is reviewed at each balance sheet date to determine whether there is any
indication of impairment. If any such indication exists, the asset’s recoverable amount is estimated. The recoverable
amount is the higher of fair value, reflecting market conditions less costs to sell, and value in use based on an internal
discounted cash flow valuation.
For goodwill, the recoverable amount is estimated at each balance sheet date. An impairment loss is recognised
whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Impairment
losses are recognised in profit or loss.
Revenue recognition
Revenue comprises the fair value of the consideration received or receivable for the sale of goods and services, net
of sales taxes, rebates and discounts, and after eliminating sales within the Group. For each of the Group’s operating
segments, revenues are recognised on the despatch of goods and when the significant risks and rewards of ownership
have been passed to the buyer. The following specific criteria also apply:
• The Group’s publishing revenues are stated net of an estimated allowance for sales returns, which is based on a
review of the historical return patterns associated with the various sales outlets, as well as current market trends
in the business in which the Group operates.
• Revenue from e-books is recognised when the content is delivered.
Leasing
Where assets are acquired under finance leases (including hire purchase contracts), which confer risks and rewards
similar to those attached to owned assets, the amount representing the outright purchase price of such assets is
included in property, plant and equipment. All other leases are classified as operating leases. Depreciation is provided
in accordance with the accounting policy below. The capital element of future finance lease payments is included in
liabilities and the interest element is charged to the income statement over the period of the lease in proportion to
the capital element outstanding. Expenditure on operating leases is charged to the income statement on a straight
line basis.
Foreign currencies
Transactions in foreign currencies are translated at the foreign exchange rate ruling at the date of the transaction.
Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the
exchange rate ruling at that date with any exchange differences arising on retranslation being recognised in the
income statement.
85
STRATEGIC REPORTFINANCIAL STATEMENTSGOVERNANCEQuarto Group, Inc. Annual Report 2016 NOTES TO THE FINANCIAL STATEMENTS CONTINUED
1 General information and significant accounting policies continued
The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on consolidation,
are translated into US Dollars at exchange rates ruling at the balance sheet date. The revenues and expenses of foreign
operations are translated into US Dollars at average annual exchange rates. Foreign exchange differences arising on
retranslation are charged or credited to other comprehensive income and are recognised in the currency translation
reserve in equity. On disposal of a foreign operation, the related cumulative translation differences recognised in equity
are reclassified to profit or loss and are recognised as part of the gain or loss on disposal.
Exceptional items
Exceptional items are those which the Group defines as significant 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.
Retirement benefit costs
The Group’s pension costs relate to individual pension plans and are charged to profit or loss as they fall due.
Taxation
Tax on the profit or loss for the year comprises both current and deferred tax. Current tax is the expected tax payable
on the taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date, and
any adjustments to tax payable in respect of previous years. Tax provisions are based on Management’s interpretation
of country specific tax law and recognised when it is considered probable that there will be a future outflow of funds to
a tax authority. Provisions are made annually based on the specific information available at that time and therefore there
is limited risk of change in the estimates in the short term. Deferred tax is provided using the balance sheet liability
method, providing for temporary differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for taxation purposes. However, deferred tax is not provided on the initial
recognition of goodwill, nor on the initial recognition of an asset or a liability unless the related transaction is a business
combination or effects tax or accounting profit. Not all temporary differences give rise to deferred tax assets/liabilities.
A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available
against which the asset can be utilised. Changes in deferred tax assets or liabilities are recognised as a component of
tax expense in the income statement, except where they relate to items that are charged or credited directly to other
comprehensive income or equity, in which case the related deferred tax is also charged or credited directly to other
comprehensive income or equity, respectively.
Property, plant and equipment
Property, plant and equipment are stated at deemed cost less accumulated depreciation and any provision for
impairments in value.
The Group recognises in the carrying amount of property, plant and equipment the subsequent costs of replacing part
of such items when there are future economic benefits. All other costs are recognised in profit or loss as an expense
as they are incurred.
Depreciation is provided on a straight-line basis to write off the cost, less the estimated residual value, of property,
plant and equipment over their estimated useful lives, which are reviewed annually. Where parts of an item of plant
and equipment have separate lives, they are accounted for and depreciated as separate items. Residual values are
reassessed on an annual basis. Land is not depreciated.
Estimated useful lives are as follows:
Freehold property and long leasehold property improvements
50 years
Short leasehold property improvements
Over the period of the lease
Plant, equipment and motor vehicles
Fixtures and fittings
4 to 10 years
5 to 7 years
Assets held under finance leases are depreciated over their expected useful lives on the same basis as owned assets
or, where shorter, over the term of the relevant lease.
The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sales
proceeds and the carrying amount of the asset and is recognised in income.
86
Financial Statements 1 General information and significant accounting policies continued
Pre-publication costs
Pre-publication costs represent directly attributable costs and attributable overheads incurred in the development
of book titles prior to their publication. Attributable overheads are allocated on a title by title basis. These costs are
carried forward in current intangible assets where the book title will generate future economic benefits and costs
can be measured reliably. These costs are amortised on a straight line basis upon publication of the book title over
estimated economic lives of three years or less, being an estimate of the expected useful economic life of a book title.
The investment in pre-publication costs has been disclosed as part of the investing activities in the cash flow statement.
Inventories
Inventory is valued at the lower of cost, including an appropriate portion of overheads, and net realisable value, on a
first in, first out basis. Net realisable value is the estimated selling price in the ordinary course of business, less estimated
costs of completion and selling expenses.
Financial instruments
Financial assets and financial liabilities are recognised on the Group’s balance sheet when the group becomes a party
to the contractual provisions of the instrument.
Financial assets
Financial assets other than hedging instruments are divided into the following categories:
• loans and receivables; and
• financial assets at fair value through profit or loss
Financial assets are assigned to the different categories on initial recognition, depending on the characteristics of the
instrument and its purpose. A financial instrument’s category is relevant for the way it is measured and whether any
resulting income and expenses is recognised in profit or loss or directly in equity. See Note 22 for a summary of the
Group’s financial assets by category.
Generally, the Group recognises all financial assets using trade date accounting. An assessment of whether a financial
asset is impaired is made at least at each reporting date. All income and expense relating to financial assets are
recognised in the income statement line item ‘finance costs’ or ‘finance income’, respectively, with the exception
of trade and other receivables which are recorded in revenue and administrative expenses.
Loans and receivables, including trade receivables, are non-derivative financial assets with fixed or determinable
payments that are not quoted in an active market. After initial recognition, at fair value, these are measured at
amortised cost using the effective interest method, less provision for impairment. Any change in their value is
recognised in profit or loss. The Group’s trade and most other receivables fall into this category of financial
instruments. Discounting, however, is omitted where the effect of discounting is immaterial.
Significant receivables are considered for impairment on a case-by-case basis when they are past due at the balance
sheet date or when objective evidence is received that a specific counterparty will default. All other receivables are
reviewed for impairment in groups, which are determined by reference to the industry and region of a counterparty
and other available features of shared credit risk characteristics, if any. The percentage of the write-down is then based
on recent historical counterparty default rates for each identified group.
Derivative financial instruments are initially recognised at fair value, and subsequently classified as financial assets at
fair value through profit and loss. Any gain or loss arising from derivative financial instruments is based on changes in
fair value, which is determined by direct reference to active market transactions or using a valuation technique where
no active market exists.
Financial liabilities
The Group’s financial liabilities include borrowings, trade and other payables (including finance lease liabilities).
After initial recognition at fair value, all financial liabilities, with the exception of derivative financial instruments, are
measured at amortised cost using the effective interest rate method. A summary of the Group’s financial liabilities by
category is given in Note 22.
All of the Group’s derivative financial instruments that are not designated as hedging instruments in accordance with
the strict conditions explained under the heading ‘Derivative financial instruments and hedge accounting’, are
accounted for at fair value through profit or loss by definition.
87
STRATEGIC REPORTFINANCIAL STATEMENTSGOVERNANCEQuarto Group, Inc. Annual Report 2016 NOTES TO THE FINANCIAL STATEMENTS CONTINUED
1 General information and significant accounting policies continued
Financial liabilities and equity instruments
Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements
entered into. An equity instrument is any contract that evidences a residual interest in the assets of the Group after
deducting all of financial liabilities.
Finance costs
Finance costs comprise interest payable on borrowings calculated using the effective interest method together with
the amortisation of debt issuance costs.
Finance income
Finance income comprises interest receivable, which is recognised in profit or loss as it accrues using the effective
interest method.
Cash and cash equivalents
For the purposes of the statement of cash flows, cash and cash equivalents comprise cash balances, call deposits and
bank overdrafts that form an integral part of the Group’s cash management processes.
Derivative financial instruments and hedge accounting
The Group’s activities expose it primarily to the financial risks of changes in foreign currency exchange rates and
interest rates. The Group uses interest rate swap contracts to hedge these exposures. The Group does not use
derivative financial instruments for speculative purposes.
The use of financial derivatives is governed by the Group’s policies approved by the Board of Directors, which provide
written principles on the use of financial derivatives.
Where a derivative financial instrument is designated as a hedge of the variability in cash flows of a recognised asset
or liability, or a highly probable forecast transaction, the effective part of any gain or loss on the derivative financial
instrument is recognised directly in other comprehensive income. If the cash flow of a firm commitment or forecast
transaction results in the recognition of an asset or a liability, then, at the time the asset or liability is recognised, the
associated gains or losses on the derivative that had previously been recognised in equity are included in initial
recognition of that asset or liability. Amounts previously recognised in other comprehensive income are recognised in
the profits and loss in the same period in which the hedged item affects net profit or loss. Changes in the fair value of
derivative financial instruments that do not qualify for hedge accounting are recognised in profit or loss as they arise.
The Group’s derivatives are split between level 1 and level 2 financial instruments under IFRS 7. The foreign currency
exchange rate derivatives are level 1 and they are valued based on a quoted price in an active market. The interest rate
swaps are level 2 financial instruments and they are valued using techniques based significantly on observable market
data such as yield curves as at the balance sheet date.
Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated, or exercised, or no longer
qualifies for hedge accounting. At that time, any cumulative gain or loss on the hedging instrument recognised in equity
is retained in other comprehensive income until the forecast transaction occurs. If a hedged transaction is no longer
expected to occur, the net cumulative gain or loss recognised in other comprehensive income is transferred to net
profit or loss for the period.
Treasury shares
Treasury shares represent holdings of the Company’s own equity instruments. No gain or loss is recognised in profit or
loss on the purchase, issue or cancellation of these equity instruments. Consideration paid or received is recognised
directly in equity.
Share-based payments
The Group issues equity settled share-based payments to certain employees. Equity settled share-based payments are
measured at fair value at the date of grant. The fair value, determined at the grant date, of equity settled share-based
payments is expensed on a straight line basis over the vesting period, based on the Group’s estimate of shares that will
eventually vest.
The fair value of employee share option grants is calculated using a Monte Carlo model, taking into account the terms
and conditions upon which the options were granted. The value of the charge is adjusted to reflect expected and actual
levels of options vesting.
88
Financial Statements 1 General information and significant accounting policies continued
Borrowing costs
All borrowing costs are recognised in the income statement in the period in which they are incurred. Debt issuance
costs comprising arrangement fees and legal costs are capitalised and amortised on a straight line basis over the period
of the borrowing facility or included within the amortised cost calculation as appropriate. The annual amortisation
charge is included within finance costs in the Consolidated Statement of Comprehensive Income.
The Group does not incur any borrowing costs which are directly attributable to the acquisition, construction or
production of qualifying assets.
Financial risk management
The principal risk factors faced by the Group are disclosed in Note 22 and on page 104.
New standards and interpretations not applied
The International Accounting Standards Board and the International Reporting Interpretations Committee (IFRIC)
have issued the following standards and interpretations for annual periods beginning on or after the effective dates
noted below.
IAS/IFRS Standard
Effective for years starting on or after
IFRS 9
IFRS 15
IFRS 16
IAS 7
IAS 12
Financial Instruments
Revenue from contracts with customers
Leases
1 January 2018
1 January 2018
1 January 2019
Amendments to IAS 7 Statement of Cash Flows
1 January 2017
Amendments to Recognition of Deferred Tax Assets for
Unrealised Losses
1 January 2017
The potential impact of the future adoption of IFRS 15 and IFRS 16 on the Group’s accounts is ongoing and it is not
practical to provide a reasonable estimate of the impact until this review is completed. Apart from these standards, the
Directors do not consider that the adoption of the other standards listed above will have a material impact on the
Group’s accounts in the period of initial application.
2 Revenue
Sales of goods
Finance income
Total
2016
$’000
2015
$’000
188,434
182,165
164
142
188,598
182,307
89
STRATEGIC REPORTFINANCIAL STATEMENTSGOVERNANCEQuarto Group, Inc. Annual Report 2016 NOTES TO THE FINANCIAL STATEMENTS CONTINUED
3 Operating segments
The analysis by segment is presented below. This is based upon the operating results as reviewed by the Chief
Executive Officer.
Quarto
International
Co-Editions
Group
$’000
Quarto
Publishing
Group USA
$’000
Quarto
Publishing
Group UK
$’000
51,915
9,372
81,189
9,589
21,506
2,777
Total
Publishing
$’000
154,610
21,738
Books &
Gifts Direct,
ANZ
$’000
Quarto HK
$’000
19,358
(9,817)*
14,466
1,589
Total
$’000
188,434
13,510
(253)
(356)
(45)
(654)
(51)
–
(705)
9,119
–
9,119
–
9,233
(191)
2,732
21,084
–
(191)
(9,868)
(6,206)
9,042
2,732
20,893
(16,074)
–
–
–
–
1,589
–
1,589
–
2016
Revenue
Operating profit/(loss)
before amortisation of
acquired intangibles and
exceptional items
Amortisation of acquired
intangibles
Segment result
Other exceptional items
(Note 5)
Unallocated corporate
expenses
Operating profit/(loss)
9,119
9,042
2,732
20,893
(16,074)
1,589
Finance income
Finance costs
(Loss)/profit before tax
Tax
(Loss)/profit after tax
Capital expenditure
Depreciation
Investment in pre-
publication costs
Amortisation of pre-
publication costs
(662)
406
(739)
320
(20)
159
15,506
17,363
4,296
(1,421)
885
37,165
14,580
13,017
2,943
30,540
(134)
147
–
–
(8)
48
–
–
*
Includes exceptional impairment charge of $8.0m. Further detail is included in Note 5.
90
12,805
(6,397)
6,408
(4,749)
1,659
164
(3,109)
(1,286)
(3,991)
(5,277)
(1,563)
1,080
37,165
30,540
Financial Statements 3 Operating segments continued
Quarto
International
Co-Editions
Group
$’000
Quarto
Publishing
Group USA
$’000
Quarto
Publishing
Group UK
$’000
50,147
6,351
72,441
8,884
22,765
3,302
Total
Publishing
$’000
145,353
18,537
Books &
Gifts Direct,
ANZ
$’000
22,060
882
Quarto HK
$’000
14,752
1,487
Total
$’000
182,165
20,906
(240)
(346)
(86)
(672)
(52)
–
(724)
6,111
8,538
3,216
17,865
830
1,487
529
539
773
329
38
181
1,340
1,049
15,724
14,888
4,260
34,872
16,246
13,014
3,998
33,258
546
86
–
–
124
54
–
–
20,182
(445)
(4,431)
15,306
142
(3,240)
12,208
(3,685)
8,523
2,010
1,189
34,872
33,258
2015 (restated)
Revenue
Operating profit before
amortisation of acquired
intangibles and exceptional
items
Amortisation of acquired
intangibles
Segment result
Other exceptional items
Unallocated corporate
expenses
Operating (loss)/profit
Finance income
Finance costs
(Loss)/profit before tax
Tax
(Loss)/profit after tax
Capital expenditure
Depreciation
Investment in pre-
publication costs
Amortisation of pre-
publication costs
91
STRATEGIC REPORTFINANCIAL STATEMENTSGOVERNANCEQuarto Group, Inc. Annual Report 2016 NOTES TO THE FINANCIAL STATEMENTS CONTINUED
3 Operating segments continued
Balance sheet
Quarto Publishing Group USA
Quarto Publishing Group UK
Quarto International Co-Editions Group
Books & Gifts Direct, ANZ
Quarto HK
Unallocated (Deferred tax and cash)
Total assets
Quarto Publishing Group USA
Quarto Publishing Group UK
Quarto International Co-Editions Group
Books & Gifts Direct, ANZ
Quarto HK
Unallocated (Deferred tax and cash)
Total liabilities
Geographical areas
The Group operates in the following main geographic areas:
United States of America
Australasia and Far East
United Kingdom
Europe
Rest of the World
2016
$’000
110,010
17,277
46,055
1,720
6,591
20,987
202,640
29,569
5,851
18,668
5,141
3,895
95,405
158,529
Restated
(Note 1)
2015
$’000
92,154
20,562
49,957
16,285
7,811
25,077
211,846
22,567
7,848
23,246
5,829
4,325
94,587
158,402
Revenue
Non-current assets
2016
$’000
2015
$’000
2016
$’000
Restated
(Note 1)
2015
$’000
104,109
92,758
68,586
55,507
25,172
20,900
26,303
11,950
188,434
28,556
24,150
24,453
12,248
182,165
98
36,823
–
–
8,066
39,304
1,556
–
105,507
104,433
92
Financial Statements 4 Operating profit
Operating profit has been arrived at after charging/(crediting):
Depreciation of property, plant and equipment
Foreign currency exchange differences
Amortisation of acquired intangibles
Amortisation of pre-publication costs
Staff costs (Note 6)
Auditor’s remuneration (see below)
Cost of inventory recognised as an expense
Share based payment charges
Loss/(gain) on derivative financial instruments recognised at fair value through profit and loss
Exceptional items (Note 5)
Auditor’s remuneration
Fees payable to the Company’s auditor for the audit of the Company’s annual accounts
Fees payable to the Company’s auditor and its associates for the audit of subsidiary companies
Fees payable to the Company’s auditor for other assurance services
5 Exceptional items
Impairment of BGD assets
Write-off of BGD goodwill
Write-off of BGD intangible assets
Acquisition costs
Aborted corporate transaction costs
Other exceptional items
Total
2016
$’000
1,080
241
705
30,540
34,274
604
41,474
256
120
14,394
30
567
7
604
2016
$’000
7,997
6,000
206
191
–
6,397
14,394
Restated
2015
$’000
1,189
(118)
724
33,258
30,843
408
43,413
186
(85)
445
30
370
8
408
2015
$’000
–
–
–
257
188
445
445
The impairment of assets comprises principally inventory of $1.9m, trade receivables of $4.3m and property, plant
and equipment of $1.1m. This impairment and the write-off of goodwill and intangible assets reflect the changes to
reduce the carrying value of the assets of BGD to their recoverable value. There are no tax credits associated with
these impairments.
Acquisition costs relate to the purchase of the assets of becker&mayer and Harvard Common Press with a related tax
credit of $65,000 (2015: purchase of the Ivy Press Limited).
93
STRATEGIC REPORTFINANCIAL STATEMENTSGOVERNANCEQuarto Group, Inc. Annual Report 2016 NOTES TO THE FINANCIAL STATEMENTS CONTINUED
6 Staff costs
Average monthly number of employees (excluding Executive Directors)
Wages and salaries
Social security costs
Other pension costs
2016
Number
2015
Number
499
434
$’000
30,869
2,296
1,109
$’000
27,560
2,119
1,164
34,274
30,843
Directors’ remuneration is disclosed in the Remuneration Committee Report on page 46.
The remuneration of Directors and the Executive Committee, who are the key management personnel of the Group,
is set out below in aggregate for each of the categories specified in IAS 24 Related Party Disclosures.
Short term employee benefits
Long term employee benefits
Post-employment benefits
7 Finance income
Interest income on financial assets carried at amortised cost
8 Finance costs
Interest expense on borrowings
Amortisation of debt issuance costs
2016
$’000
2,735
2,650
256
5,641
2016
$’000
164
2016
$’000
2,728
381
3,109
2015
$’000
3,424
–
317
3,741
2015
$’000
142
2015
$’000
2,837
403
3,240
94
Financial Statements 9 Taxation
Current tax
Corporation tax
Total current tax
Deferred tax (Note 20)
Origination and reversal of temporary differences
Total tax expense
2016
$’000
2015
$’000
2,344
2,344
1,647
1,647
3,991
2,277
2,277
1,408
1,408
3,685
Corporation tax on UK profits is calculated at 20%, based on the UK standard rate of corporation tax, (2015: 20.25%)
of the estimated assessable profit for the year. Taxation for other jurisdictions is calculated at the rates prevailing in the
respective jurisdictions. The table below explains the difference between the expected expense at the UK statutory rate
of 20% and the Group’s total tax expense for the year.
(Loss)/profit before tax
Tax at the UK corporation tax rate of 20% (2015: 20.25%)
Effect of different tax rates of subsidiaries operating in other
jurisdictions
Tax effect of items that are not deductible in determining taxable profit
Other
Tax expense
Effective tax rate for the year
Group
excluding
Books &
Gifts Direct
$’000
Books &
Gifts Direct
$’000
14,777
2,956
1,095
64
(84)
4,031
27.3%
(16,063)
(3,213)
–
3,173
–
(40)
2016
Group
$’000
(1,286)
(257)
1,095
3,237
(84)
3,991
Restated
(Note 1)
2015
Group
$’000
12,208
2,472
1,163
50
–
3,685
30.2%
The effective tax rate for the year excluding BGD is 27.3% (2015: 25.1%).
95
STRATEGIC REPORTFINANCIAL STATEMENTSGOVERNANCEQuarto Group, Inc. Annual Report 2016 NOTES TO THE FINANCIAL STATEMENTS CONTINUED
10 Earnings per share
(Loss)/profit attributable to owners
of the parent
Amortisation of acquired intangibles
(net of tax)
Exceptional items (net of tax)
Adjusted profit/(loss) attributable
to owners of the parent
Number of shares
Weighted average number
of ordinary shares
Group
excluding
Books &
Gifts Direct
$’000
Books &
Gifts Direct
$’000
2016
Group
$’000
Group
excluding
Books &
Gifts Direct
$’000
Restated
(Note 1)
Books &
Gifts Direct
$’000
10,326
(16,023)
(5,697)
473
126
10,925
36
509
6,206
(9,781)
6,332
1,144
8,115
508
441
9,064
20
18
–
38
Number
19,984,824
Number
Number
19,984,824
19,696,729
Effect of potentially dilutive share options
452,031
452,031
38,591
Diluted weighted average number
of ordinary shares
(Loss)/earnings per share (cents)
Basic
Diluted
Adjusted earnings per share (cents)
Basic
Diluted
20,436,855
20,436,855
19,735,320
51.7
50.5
54.7
53.5
(28.5)
(28.5)
5.7
5.6
41.2
41.1
46.0
45.9
2015
Restated
(Note 1)
Group
$’000
8,135
526
441
9,102
Number
19,696,729
38,591
19,735,320
41.3
41.2
46.2
46.1
96
Financial Statements 11 Goodwill
Cost
At 1 January
Exchange differences
Recognised on acquisitions (Note 30)
At 31 December
Accumulated impairment losses
At 1 January
Impairment
Exchange differences
At 31 December
Carrying value
At 31 December
Impairment tests for cash generating units containing goodwill
The following units have significant carrying amounts of goodwill:
Quarto Publishing Group USA (QUS)
Quarto Publishing Group UK (QUK)
Quarto International Co-Editions Group (QIC)
Books & Gifts Direct, ANZ (BGD)
2016
$’000
2015
$’000
2014
$’000
40,448
(1,128)
3,105
41,423
(1,244)
269
41,744
(971)
650
42,425
40,448
41,423
(336)
(6,000)
55
(354)
(377)
–
18
–
23
(6,281)
(336)
(354)
36,144
40,112
41,069
2016
$’000
2015
$’000
2014
$’000
29,982
26,878
26,878
1,816
4,346
–
2,176
5,145
5,913
2,293
5,171
6,727
36,144
40,112
41,069
The recoverable amount of each cash generating unit (‘CGU’) is based on the value in use basis. In determining value
in use, management prepare a detailed bottom up budget, with reviews conducted at each business unit. Cash flows
beyond the budget period of twelve months are extrapolated into perpetuity, by applying the growth and rates
applicable to each unit discounted to present value. The key assumptions used in the value in use calculations were:
• Discount rate: 14.57% (2015: 11.58%) pre-tax for QUS, 11.66% (2015: 12.17%) for QUK and QIC and 15.60% (2015: 11.58%)
for BGD which reflects current assessments of the time value of money. The discount rate has been calculated using
Weighted Average Cost of Capital analysis adjusted to derive the pre-tax discount rate.
• Cash flow growth rates: based on a short term forecast growth rate of 2% (2015: 3%) for the next three years,
and reverting to 3% (2015:3%)into perpetuity, to reflect the long term expected growth in each of the key markets.
Changes in selling prices and direct costs are based on past experience and expectations of future changes in
the market.
Determining whether goodwill, specific to the US, is impaired requires an estimation of the value of use of each
CGU based on the key assumptions above. The headroom of the US CGU as at 31 December 2015 was $5.0m
(2015: $12.7m). Neither a 0.9% decrease in the long term growth rate or a 0.6% increase in the discount rate would
have led to an impairment.
97
STRATEGIC REPORTFINANCIAL STATEMENTSGOVERNANCEQuarto Group, Inc. Annual Report 2016 NOTES TO THE FINANCIAL STATEMENTS CONTINUED
12 Other intangible assets
Cost
At 1 January 2015
Exchange differences
Recognised on acquisitions (Note 30)
Disposals
At 1 January 2016
Transfer
Exchange differences
Recognised on acquisitions (Note 30)
Impairment charge for the year
Transfer from property, plant & equipment
At 31 December 2016
Amortisation and impairment
At 1 January 2015
Exchange differences
Charge for the year
Disposals
At 1 January 2016
Transfer
Exchange differences
Charge for the year
Impairment charge for the year
Transfer from Property, plant & equipment
At 31 December 2016
Carrying amount
At 31 December 2016
At 31 December 2015
At 31 December 2014
Non-
contractual
relationships
$’000
Backlists
$’000
Software
$’000
Total
$’000
1,080
18,493
(55)
–
(1,025)
–
1,033
28
–
(1,061)
–
–
(223)
1,365
–
19,635
(1,033)
(458)
2,980
–
–
21,124
1,080
17,537
(55)
–
(1,025)
–
782
22
51
(855)
–
–
–
–
–
(136)
724
–
18,125
(782)
(296)
654
–
–
17,701
3,423
1,510
956
–
–
–
–
–
–
–
–
–
2,312
2,312
–
–
–
–
–
–
–
–
–
1,384
1,384
928
–
–
19,573
(278)
1,365
(1,025)
19,635
–
(430)
2,980
(1,061)
2,312
23,436
18,617
(191)
724
(1,025)
18,125
–
(274)
705
(855)
1,384
19,085
4,351
1,510
956
98
Financial Statements 13 Property, Plant and Equipment
Leasehold
Property
Improvements
$’000
Plant,
Equipment &
Motor
Vehicles
$’000
Fixtures &
Fittings
$’000
Cost
At 1 January 2015
Exchange difference
Recognised on acquisitions
Additions
Disposals
At 1 January 2016
Exchange difference
Recognised on acquisitions (Note 30)
Additions
Impairment charge for the year
Disposals
Transfer to intangible assets
At 31 December 2016
Depreciation
At 1 January 2015
Exchange differences
Charge for the year
Disposals
At 1 January 2016
Exchange differences
Charge for the year
Impairment charge for the year
Disposals
Transfer to intangible assets
At 31 December 2016
Net book value
At 31 December 2016
At 31 December 2015
At 31 December 2014
857
(46)
–
253
(2)
1,062
(105)
–
425
(54)
(78)
–
1,250
498
(25)
193
–
666
(76)
188
(48)
(77)
–
653
597
396
359
4,527
(335)
2
1,525
(177)
5,542
(266)
175
1,115
(2,134)
(1,070)
(2,312)
1,050
2,718
(206)
825
(177)
3,160
(158)
682
(1,020)
(1,070)
(1,384)
210
840
2,382
1,809
984
(38)
–
232
(58)
1,120
(86)
85
22
(56)
(89)
–
996
421
(8)
171
(54)
530
(48)
210
(32)
(84)
–
576
420
590
563
99
Total
$’000
6,368
(419)
2
2,010
(237)
7,724
(457)
260
1,562
(2,244)
(1,237)
(2,312)
3,296
3,637
(239)
1,189
(231)
4,356
(282)
1,080
(1,100)
(1,231)
(1,384)
1,439
1,857
3,368
2,731
STRATEGIC REPORTFINANCIAL STATEMENTSGOVERNANCEQuarto Group, Inc. Annual Report 2016 NOTES TO THE FINANCIAL STATEMENTS CONTINUED
14 Subsidiaries
A list of the significant investments in subsidiaries, including the name, country of incorporation and proportion of
ownership interest is given in Note 5 to the Company’s balance sheet. All of these subsidiaries are included in the
consolidated results.
15 Intangible Assets – Pre-publication costs
Cost
At 1 January
Exchange differences
Transfer from inventories
Recognised on acquisitions (Note 30)
Additions
At 31 December
Amortisation
At 1 January
Exchange differences
Charge for the year
At 31 December
Carrying Amount
2016
$’000
2015
$’000
2014
$’000
151,733
117,077
102,701
(7,671)
(2,217)
(2,774)
–
564
37,165
181,791
–
2,001
34,872
151,733
660
102
33,525
134,214
92,290
59,543
46,480
(2,172)
(511)
(733)
30,540
120,658
61,133
33,258
92,290
59,443
30,933
76,680
57,534
The amortisation charge is included in cost of sales in the Consolidated Income Statement. The assessment of the
useful life of pre-publication costs and amortisation involves a significant amount of judgement based on historical
trends. A review of useful lives took place during the year. Details are included in Note 1.
16 Inventories
Finished goods
Work in progress
Raw materials
Restated
(Note 1)
2015
$’000
Restated
(Note 1)
2014
$’000
2016
$’000
23,655
24,933
23,533
153
198
151
107
114
212
24,006
25,191
23,859
All of the Group’s inventories have been reviewed for indicators of impairment. Certain inventories were found to be
impaired and a provision of $4,360,000 (2015: $1,649,000) has been recorded accordingly. This includes an exceptional
impairment charge of $1,630,000 in respect of Books & Gifts Direct.
100
Financial Statements 17 Trade and other receivables
Trade receivables
Other receivables and prepayments
2016
$’000
42,259
11,903
54,162
2015
$’000
45,475
11,670
57,145
2014
$’000
40,225
11,515
51,740
The average credit period on sales of goods is 70 days (2015: 65 days).
The Group’s trade and other receivables have been reviewed for indicators of impairment. Certain trade receivables,
including certain trade receivables not yet due, were not considered to be recoverable and a provision of $670,000
(2015: $908,000) has been recorded accordingly. The trade receivables considered irrecoverable relate to customers
which are experiencing trading difficulties. In addition, some of the recoverable trade receivables are past due as at the
reporting date. The extent of financial assets past due but not impaired is as follows:
Less than one month
More than one month but less than two months
More than two months but less than three months
More than three months but less than six months
More than six months
2016
$’000
3,869
765
270
92
82
5,078
2015
$’000
3,338
1,182
339
599
73
5,531
2014
$’000
3,018
783
342
823
444
5,410
The Group has not provided against these receivables as there has not been a significant change in credit quality and
the Group believes they are still recoverable. No collateral is held over these balances.
Movement in allowance for doubtful debts:
Balance at beginning of year
On acquisition of subsidiaries
Amounts written off in the year
Amounts recovered during the year
Exchange difference
Increase in allowance recognised in profit or loss
Balance at end of the year
2016
$’000
2015
$’000
2014
$’000
908
–
(682)
11
(66)
499
670
1,509
46
(1,571)
150
(26)
800
908
1,185
–
(434)
337
(16)
437
1,509
The Directors consider that the carrying amount of trade and other receivables approximates to their fair value. Trade
receivables are disclosed after deducting a reserve for sales returns. The reserve is calculated based on a time lag
between sales and returns and historical return patterns.
18 Cash and cash equivalents
Bank balances
Short term deposits
Cash and cash equivalents
2016
$’000
12,824
6,000
18,824
2015
$’000
18,274
6,785
25,059
2014
$’000
13,375
9,735
23,110
The carrying amount of these assets approximates to their fair value.
The effective interest rates on bank balances and short term deposits was 0.2% (2015: 0.4%).
101
STRATEGIC REPORTFINANCIAL STATEMENTSGOVERNANCEQuarto Group, Inc. Annual Report 2016 NOTES TO THE FINANCIAL STATEMENTS CONTINUED
19 Borrowings
Bank loans
On demand or within one year
In the second year
In the third to fifth years inclusive
2016
$’000
2015
$’000
80,748
5,000
5,000
70,748
80,748
84,562
5,000
5,000
74,562
84,562
2014
$’000
89,150
89,150
–
–
89,150
Less: Amount due for settlement within 12 months (shown under current liabilities)
(5,000)
(5,000)
(89,150)
Amount due for settlement after 12 months
75,748
79,562
–
US dollar borrowings
Other currency borrowings
As at 31 December 2016
US dollar borrowings
Other currency borrowings
As at 31 December 2015
US dollar borrowings
Other currency borrowings
As at 31 December 2014
Total
$’000
Fixed rate
borrowings
$’000
Variable rate
borrowings
$’000
56,500
30,000
24,248
80,748
57,000
27,562
84,562
60,000
29,150
89,150
–
30,000
30,000
–
30,000
–
–
–
26,500
24,248
50,748
27,000
27,562
54,562
60,000
29,150
89,150
Weighted
average
interest rate
for fixed rate
borrowings
%
Average
time over
which
interest rate
is fixed
Months
3.6
–
3.6
3.5
–
3.5
–
–
–
19.5
–
19.5
19.5
–
19.5
–
–
–
The variable rate borrowings bear interest by reference to LIBOR plus a margin. At 31 December 2016, undrawn
borrowing facilities totalled $8,320,000 (2015: $16,540,000).
The Directors estimate the fair value of the Group’s borrowings to be equal to book value, by reference to market rates.
The above borrowings carry interest based on LIBOR plus a margin of between 2.1% and 2.8%, depending on the
leverage ratio and are secured on the assets of the Group.
At 31 December 2016 the Group had a US$90m (2015: US$95m) multi-currency syndicated bank facility which is due
to expire on 30 April 2019.
These facilities are subject to three principal covenants.
Consolidated net debt shall not exceed three times EBITDA
2016
2015
1.76 times
1.63 times
Consolidated adjusted operating profit shall exceed three times net interest payable
6.15 times
5.55 times
Cash flow shall exceed 1.2 times Debt Service
0.74 times
3.89 times
The cashflow cover covenant test was not passed at 31 December 2016; this does not constitute a breach of the Group’s
banking facilities. The agreement states that if on a quarter end test date the cashflow covenant test is not complied
with due to an adverse movement in working capital, then it shall not constitute a breach provided that it is the first
time that such non-compliance has occurred, and on the following test date, the covenant is complied with. The
seasonality of the industry means there is always a degree of sensitivity around the Group’s working capital movements.
Having identified mitigating actions which would maintain working capital headroom in such situations, the Directors
are confident that the Group will comply with all financial covenants for the foreseeable future.
102
Financial Statements 20 Deferred tax
Deferred tax liabilities
Excess of capital allowances over depreciation – UK
Other temporary differences – UK
Other temporary differences – US
Other overseas temporary differences
Deferred tax assets
Other temporary differences – US
Net deferred taxation liability
The movement on the net provision for deferred taxation is as follows:
Net provision at 1 January
Acquisitions
Exchange difference through other comprehensive income
Charge/(credit) to profit and loss
Net provision at 31 December
2016
$’000
2015
$’000
2014
$’000
48
5,369
5,417
4,909
176
10,502
(2,022)
8,480
2016
$’000
7,466
–
56
1,647
8,480
59
4,190
4,249
2,924
293
7,466
–
7,466
2015
$’000
5,801
394
(137)
1,408
7,466
25
4,493
4,518
1,545
(136)
5,927
(126)
5,801
2014
$’000
5,452
145
(305)
509
5,801
At the balance sheet date, the group had no tax losses (2015: $2.9m) available for offset against future profits.
At the balance sheet date, the aggregate amount of temporary differences associated with undistributed earnings
of subsidiaries for which deferred tax has not been recognised was $22.7m (2015: $20.2m). The Group has not
recognised the amount as it is able to control the timing of the reversal of these temporary differences and it is
probable that they will not reverse in the foreseeable future.
21 Trade and other payables
Trade payables
Other payables
Total
Restated
(Note 1)
2015
$’000
Restated
(Note 1)
2014
$’000
49,856
13,860
63,716
44,047
9,224
53,271
2016
$’000
43,423
16,295
59,718
Other payables includes contingent consideration payments and loan notes of $5.8m in respect of current year
acquisitions. The Directors consider that the carrying amount of trade payables approximates to their fair value.
103
STRATEGIC REPORTFINANCIAL STATEMENTSGOVERNANCEQuarto Group, Inc. Annual Report 2016 NOTES TO THE FINANCIAL STATEMENTS CONTINUED
22 Risk management objectives and policies
The Group is exposed to market risk through its use of financial instruments and specifically to currency risk, interest
rate risk, credit risk, liquidity risk and certain other price risks, which result from both its operating and investing
activities. The Group’s risk management is coordinated at its headquarters, in close co-operation with the Board of
Directors, and focuses on actively securing the Group’s short to medium-term cash flows by minimising the exposure
to financial markets.
The Group does not actively engage in the trading of financial assets for speculative purposes nor does it write options.
The most significant financial risks to which the Group is exposed and a summary of financial assets and liabilities by
category are described below.
Foreign currency sensitivity
Exposures to currency exchange rates arise from the Group’s overseas sales and costs, which are primarily denominated
in Sterling.
Foreign currency denominated financial assets and liabilities, translated into US Dollars at the closing rate, are
as follows:
Financial assets
Financial liabilities
Short-term exposure
Financial liabilities
Long-term exposure
At 31 December
$’000
Sterling
6,691
2016
$’000
Other
7,103
(2,880)
(6,599)
3,811
504
(21,082)
(17,271)
(3,168)
(2,664)
$’000
Sterling
44
(123)
(79)
–
(79)
2015
$’000
Other
5,423
(4,497)
926
(3,265)
(2,339)
The following table illustrates the sensitivity of the net result for the year and equity in regards to the Group’s financial
assets and financial liabilities and the US Dollar – Sterling exchange rate.
It assumes a +/– 5% change of the US-Dollar/Sterling exchange rate.
The sensitivity analysis is based on the Group’s foreign currency financial instruments held at each balance sheet date.
If Sterling had strengthened against the US Dollar by 5% (2015: 5%) then this would have had the following impact:
(Loss)/profit after tax for the year
Equity
2016
$’000
(661)
151
If Sterling had weakened against the US Dollar by 5% (2015: 5%) then this would have had the following impact:
(Loss)/profit after tax for the year
Equity
2016
$’000
661
(151)
Exposures to foreign exchange rates vary during the year depending on the volume of overseas transactions.
Nonetheless, the analysis above is considered to be representative of the Group’s exposure to currency risk.
2015
$’000
(3)
(101)
2015
$’000
3
101
104
Financial Statements 22 Risk management objectives and policies continued
Interest rate sensitivity
The Group’s policy is to minimise interest rate cash flow risk exposures on long-term financing, through interest rate
swaps. A large part of longer-term borrowings are, therefore, usually at fixed rates.
At 31 December 2016, the Group is exposed to changes in market interest rates through its bank borrowings, which
are subject to variable interest rates – see Note 19 for further information.
The following table illustrates the sensitivity of the profit after tax for the year and equity to a reasonably possible
change in interest rates of +/–0.25%, with effect from the beginning of the year. These changes are considered to be
reasonably possible based on observation of current market conditions. The calculations are based on the Group’s
financial instruments held at each balance sheet date. All other variables are held constant.
A 0.25% increase in interest rates would have the following impact:
Profit after tax for the year
Equity
A 0.25% decrease in interest rates would have the following impact:
Profit after tax for the year
Equity
2016
$’000
(78)
(78)
2015
$’000
(108)
(108)
2016
$’000
2015
$’000
78
78
108
108
Credit risk analysis
The Group’s maximum exposure to credit risk is limited to the carrying amount of financial assets recognised at the
balance sheet date, as summarised below:
Cash and cash equivalents
Trade receivables
Other receivables
Derivative financial instruments
2016
$’000
18,824
42,259
3,249
141
2015
$’000
25,059
45,475
3,250
18
64,473
73,802
The Group’s credit risk is primarily attributable to its trade receivables. The amounts presented in the balance sheet are
net of allowances for doubtful receivables, estimated by the Group’s management based on prior experience and their
assessment of the current economic environment.
The Group continuously monitors defaults of customers and other counterparties, identified either individually or by
group, and incorporates this information into its credit risk controls. Where available at reasonable cost, external credit
ratings and/or reports on customers and other counterparties are obtained and used. The Group’s policy is to deal only
with creditworthy counterparties.
The Group’s management considers that all the above financial assets that are not impaired for each of the reporting
dates under review are of good credit quality, including those that are past due.
None of the Group’s financial assets are secured by collateral or other credit enhancements.
In respect of trade and other receivables, the Group is not exposed to any significant credit risk exposure to any
single counterparty or any group of counterparties having similar characteristics. The credit risk for liquid funds and
other short-term financial assets is limited, since the counterparties are reputable banks with high quality external
credit ratings.
105
STRATEGIC REPORTFINANCIAL STATEMENTSGOVERNANCEQuarto Group, Inc. Annual Report 2016 NOTES TO THE FINANCIAL STATEMENTS CONTINUED
22 Risk management objectives and policies continued
Liquidity risk analysis
The Group manages its liquidity needs by carefully monitoring scheduled debt servicing payments for long-term
financial liabilities as well as cash-outflows due in day-to-day business. Liquidity needs are monitored in various time
bands, on a day-to-day and week-to-week basis.
The Group maintains cash and marketable securities to meet its liquidity requirements. Funding for long-term liquidity
needs is additionally secured by an adequate amount of committed credit facilities.
The Group’s liabilities have contractual maturities which are summarised below:
31 December 2016
Bank loans
Trade payables
Other short term financial liabilities
Derivative financial instruments
Other payables
31 December 2015 (restated)
Bank loans
Trade payables
Other short term financial liabilities
Derivative financial instruments
Other payables
Within 6
months
$’000
6,294
43,423
16,295
94
–
Current
6 to 12
months
$’000
1,316
–
–
–
–
66,106
1,316
Within 6
months
$’000
5,016
49,856
13,860
10
–
68,742
Current
6 to 12
months
$’000
–
–
–
–
–
–
Non-Current
Over 5
years
$’000
–
–
–
–
–
–
Non-Current
Over 5
years
$’000
–
–
–
–
–
–
1 to 5
years
$’000
80,148
–
–
–
3,407
83,555
1 to 5
years
$’000
87,696
–
–
–
99
87,795
106
Financial Statements 22 Risk management objectives and policies continued
Summary of financial assets and liabilities by category
The carrying amounts of the Group’s financial assets and liabilities as recognised at the balance sheet date of the
reporting periods under review may also be categorised as follows. See Note 1, significant accounting policies, covering
financial assets, financial liabilities and derivative financial instruments and hedge accounting for explanations about
how the category of instruments affects their subsequent measurement.
Current assets
Derivative financial instruments carried at fair value through profit and loss:
– Forward exchange contract
Derivative financial instruments designated as hedging instruments:
– Interest rate swap
Loans and receivables:
– Trade receivables
Other receivables
– Cash and cash equivalents
Non-current liabilities
Financial liabilities measured at amortised cost:
– Borrowings
Other payables
Current liabilities
Derivative financial instruments carried at fair value through profit and loss:
– Forward exchange contract
Derivative financial instruments designated as hedging instruments:
– Interest rate swap
Financial liabilities measured at amortised cost:
– Borrowings
– Trade payables
Other payables
Restated
(Note 1)
2015
$’000
2016
$’000
–
141
42,259
3,249
18,824
64,473
18
–
45,475
3,250
25,059
73,802
75,748
79,562
3,407
79,155
99
79,661
94
–
5,000
43,423
16,295
64,812
–
10
5,000
49,856
13,860
68,726
Capital risk management
The Group manages its capital to ensure that entities in the Group will be able to continue as going concerns while
maximising the return to shareholders through an optimal balance of debt and equity. The capital structure of the Group
consists of debt, which includes the borrowings (Note 19), cash and cash equivalents (Note 18) and equity attributable
to equity holders of the parent (Notes 24 and 25), comprising share capital and reserves as disclosed in the
consolidated statement of changes in equity on page 81.
The Board reviews the capital structure, including the level of indebtedness and interest cover, as required. The Board’s
objective is to maintain the optimal level of indebtedness and manage interest cover to comply with the covenant
requirements set out in Note 19. As part of this review, the Board considers the cost of capital and the risks associated
with each class of capital. Details of the level of indebtedness, in the form of net debt to EBITDA, and interest cover are
given in Note 19, including a comparison with the covenants under the Group’s financing facilities.
107
STRATEGIC REPORTFINANCIAL STATEMENTSGOVERNANCEQuarto Group, Inc. Annual Report 2016 NOTES TO THE FINANCIAL STATEMENTS CONTINUED
23 Other Financial Assets/Liabilities
In the reporting periods under review, other financial assets/liabilities comprise derivative financial instruments as follows:
Current financial assets
Derivative financial assets – forward exchange contracts
Derivative financial instruments – interest rate swaps
Total
Current financial liabilities
Derivative financial liabilities – forward exchange contracts
Derivative financial instruments – interest rate swaps
Total
2016
$’000
2015
$’000
2014
$’000
–
141
141
(94)
–
(94)
18
–
18
–
(10)
(10)
–
–
–
(67)
–
(67)
The Group’s activities expose it primarily to the financial risks of changes in foreign currency exchange rates and interest rates.
The Group uses exchange rate swaps to hedge exchange rate exposures and interest rate swap contracts to hedge the interest
rate exposures. The Group does not use derivative financial instruments for speculative purposes. All interest rate swaps have
been designated as hedging instruments in cash flow hedges in accordance with IAS 39.
The Group’s interest rate swaps have been designated to match the corresponding loan terms to maximise the effectiveness of
the hedging instrument. There was no ineffectiveness during the year and all movements were recorded in other comprehensive
income, with amounts reclassified to finance costs within profit or loss. Exchange rate swaps are not treated as hedging
instruments for hedge accounting purposes.
The following table details the principal amounts and the remaining terms of interest rate swap contracts outstanding at the
reporting date:
2016
%
2015
%
2014
%
2016
$’000
2015
$’000
2014
$’000
2016
$’000
2015
$’000
2014
$’000
Within one year
Within one to two years
Within two to five years
2.8
3.1
2.7
3.1
3.5
3.8
–
–
–
10,000
10,000
10,000
10,000
10,000
10,000
30,000
30,000
–
–
–
–
(175)
(505)
(714)
(134)
(384)
(674)
(317)
–
–
(1,394)
(1,192)
(317)
24 Share Capital
Authorised
2016
$’000
2015
$’000
2014
$’000
28 million shares (2015: 28 million shares) of common stock of par value
of US$0.10 each
2,800
2,800
2,800
Allotted, called up and fully paid:
20,444,550 (2014: 20,444,550) shares of common stock of par value
of US$0.10 each
2,045
2,045
2,045
The Company has one class of common stock which carries no right to fixed income.
108
Financial Statements 25 Retained earnings and other reserves
Hedging reserve
The hedging reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedging
instruments related to hedged transactions.
Translation reserve
The translation reserve comprises all foreign exchange differences arising from the translation of the closing balance
sheets of foreign operations of the Group and the results of foreign operations of the Group since 1 January 2004.
Treasury stock
Treasury stock represents the Group’s purchase of its own shares. During the year, 666,666 of the treasury stock was
used to settle the obligations under the 2014 PSP plan and the remainder was sold. At 31 December 2015, the Group
owned 747,821 shares, representing 3.7% of its shares of common stock.
26 Dividends
Amounts recognised as distributions to equity holders in the period: Interim
dividend for the year ended 31 December 2016 of 5.13c/3.35p (2015: 5.13c/3.35p)
per share
Final dividend for the year ended 31 December 2015 of 8.17c/4.95p (2014:
8.17c/4.95p) per share
Proposed final dividend for the year ended 31 December 2016 of 9.87c/7.95p
(2015: 9.41c/6.15p) per share
2016
$’000
1,049
2015
$’000
1,010
2014
$’000
1,089
1,853
1,492
1,478
2,902
2,018
2,502
1,853
2,567
1,521
The Quarto Group, Inc., as a US incorporated company, is required to collect US dividend withholding taxes on dividend
distributions made to its non-US shareholders. The US dividend withholding tax is generally 30% of any dividends paid
to Quarto’s non-US shareholders, but this amount can potentially be reduced pursuant to an applicable income tax
treaty between the US and the country of residence of the non-US shareholder.
For example, under the US/UK income tax treaty, the US dividend withholding tax rate can range from nil (applicable
to certain UK resident pension trusts and tax exempt entities) to 15% (applicable to UK resident individual shareholders
and certain UK corporate shareholders). For US shareholders, no US dividend withholding tax is generally applicable.
It should be noted that certain documentation requirements must be met by all shareholders prior to the payment of
any dividends to certify their status as a US or non-US shareholder, and, if a non-US shareholder to claim any applicable
benefits under the US/ UK or other applicable income tax treaty. Each shareholder should consult their own tax adviser
to determine whether and to what extent they may be entitled to claim a reduced amount of US dividend withholding
taxes under a US income tax treaty.
27 Notes to the cash flow statement
Cash comprises cash on hand and demand deposits. Cash equivalents are short-term highly liquid investments that
are readily convertible to known amounts of cash and which are subject to insignificant changes in value.
109
STRATEGIC REPORTFINANCIAL STATEMENTSGOVERNANCEQuarto Group, Inc. Annual Report 2016 NOTES TO THE FINANCIAL STATEMENTS CONTINUED
28 Share based payments
Performance Share Plan (‘PSP’)
The Company operates a PSP scheme that awards free shares.
2014 award
The awards under this scheme were granted on 22 May 2014 and vest on 30 June 2016. Vesting is conditional on
the average share price being equal to or greater than £2.50 over any consecutive period of 90 days during the
performance period, adjusted for dividends and other cash distributions paid, where the minimum value of such
dividends and other cash distributions paid is no less than £2.25p per share. Participants are entitled to receive
dividend equivalents over the vesting period of the awards, which are payable on vesting.
For the year ended 31 December 2014 the awards under this scheme were valued at $nil as the performance criteria
were not expected to be met.
During the year ended 31 December 2015 the performance criteria was amended such that vesting is only conditional
on the average share price being equal to or greater than £2.50 over any consecutive period of 90 days during the
performance period. Following this change, the fair value of the award was reassessed at $226,000.
This award was exercised on 9 August 2016 by the Chief Executive Officer Marcus Leaver. Full details are set out in the
Remuneration Report on page 55. The share price on 9 August 2016 was £2.64.
Outstanding at beginning of the year
Exercised during the period
Outstanding at the end of the year
Share price at date of grant
Expected life (years)
Fair value per award
Weighted average remaining contractual life
Dividend yield
Expected volatility of share price (%)
Model used
2016
Number
2015
Number
666,666
666,666
(666,666)
–
–
666,666
£1.70
2.1
£0.23
0.50
n/a
16.6
Monte-Carlo
2015 award
The awards under this scheme were granted on 24 September 2015. The vesting period is four years from the date
of grant. The award vests in the following proportion:
• 50% is conditional on the cumulative growth in Adjusted Diluted EPS being between 5% and 10% over the
performance period, resulting in the awards vesting on a sliding scale of 20% to 100%; and
• 50% is conditional on Total Shareholder Return being between 7% and 15%, resulting in vesting on a sliding scale
of 20% to 100%.
Participants are not entitled to receive dividends until awards have vested.
Details of the share options outstanding during the year are as follows.
Outstanding at beginning of the year
Granted during the year
Outstanding at the end of the year
2016
Number
143,732
83,732
227,464
2015
Number
–
143,732
143,732
110
Financial Statements 28 Share based payments continued
The key inputs used to value the options are:
Share price at date of grant
Expected life (years)
Fair value per award
Weighted average remaining contractual life (years)
Dividend yield (%)
Expected volatility of share price (%)
Model used
EPS Portion TSR Portion
£2.09
4.0
£1.78
3.0
3.97
n/a
£2.09
4.0
£1.07
3.0
3.97
19
Dividend discount Monte-Carlo
2016 award
The awards under this scheme were granted on 19 April 2016. The vesting period is four years from the date of grant.
The award vests in the following proportion:
• 50% is conditional on the cumulative growth in Adjusted Diluted EPS being between 5% and 10% over the
performance period, resulting in the awards vesting on a sliding scale of 20% to 100%; and
• 50% is conditional on Total Shareholder Return being between 7% and 15%, resulting in vesting on a sliding scale
of 20% to 100%.
Participants are not entitled to receive dividends until awards have vested.
Details of the share options outstanding during the year are as follows.
Outstanding at beginning of the year
Granted during the year
Outstanding at the end of the year
The key inputs used to value the options are:
Share price at date of grant
Expected life (years)
Fair value per award
Weighted average remaining contractual life (years)
Dividend yield (%)
Expected volatility of share price (%)
Model used
2016
Number
–
366,728
366,728
EPS Portion TSR Portion
£2.45
4.0
£2.10
3.3
3.88
n/a
£2.45
4.0
£0.44
3.3
3.88
19.1
Dividend discount Monte-Carlo
111
STRATEGIC REPORTFINANCIAL STATEMENTSGOVERNANCEQuarto Group, Inc. Annual Report 2016 NOTES TO THE FINANCIAL STATEMENTS CONTINUED
29 Operating lease commitments
Lease payments under operating leases recognised in income for the year
2016
$’000
2,264
2015
$’000
2,153
At the balance sheet date, the Group had outstanding commitments for future minimum lease payments under non-
cancellable operating leases, which fall due as follows:
Minimum lease payments under operating leases within one year
In the second to fifth years inclusive
After more than five years
2016
$’000
1,679
4,805
4,427
10,911
2015
$’000
1,915
3,836
2,399
8,150
Operating lease payments represent rentals payable by the Group, primarily for its office properties. There were no
capital commitments amounting at the year end (2015: $nil).
30 Acquisitions
becker&mayer
On 8 August 2016, the Group acquired the publishing business and net assets of becker&mayer LLC (‘becker&mayer’)
through its US subsidiary Quarto Publishing Group USA Inc, for a consideration of $9.8m, together with a working
capital adjustment payment capped at $1.0m and further deferred contingent consideration of up to $1.0m.
Consideration of $2.3m was paid on completion. A further $2.5m was paid in January 2017 and the remaining balance
is payable in separate tranches over the next three years. The fair value of the deferred contingent consideration was
estimated based on the Group’s expectation of the future performance of the business, discounted to reflect the timing
of the expected payments.
If the acquisition had been completed on the first day of the financial year, Group revenue for the year would have
been $197.9m and Group loss for the year would have been $6.1m. The revenue and operating profit of becker&mayer
since the date of acquisition included in the consolidated statement of comprehensive income are $11.4m and $1.9m
respectively.
Harvard Common Press
On 1 February 2016, the Group acquired selected assets of the publishing business of The Harvard Common Press
through its US subsidiary Quarto Publishing Group USA Inc, for a consideration of $1.0m. Of the consideration $0.1m
was paid during the year ended 31 December 2015, a further $0.1m was paid on completion of the acquisition and
$0.4m was paid in July 2016. The final payment of $0.4m was made in January 2017.
The revenue and operating profit of The Harvard Common Press since the date of acquisition included the consolidated
statement of comprehensive income is $1.3m and $0.4m respectively. There would be no difference in these results had
the acquisition completed on the first day of the financial year.
These companies were acquired because of their strategic fit within the Group. The transaction costs of $191,000 were
incurred in relation to the acquisition. The transactions have been accounted for under the acquisition method. The
goodwill arising on these acquisitions is largely attributable to the anticipated incremental sales and cost synergies
achievable as part of The Quarto Group and is expected to be deductible for tax purposes.
Burgess Lea Press
On 25 May 2016, the Group acquired the publishing business of Burgess Lea Press and recognised intangible backlist
assets of $128,000.
112
Financial Statements 30 Acquisitions continued
The fair value of acquired assets and liabilities is summarised below.
Intangible assets – pre-publication costs
Other intangible assets – backlists
Property, plant and equipment
Inventories
Trade and other receivables
Trade and other payables
Net assets acquired
Goodwill
Total consideration paid (including deferred consideration)
Net cash outflow arising on acquisition
Satisfied by:
Cash
Loan notes
Contingent consideration arrangements
Total
Net cash outflow arising on acquisition
Cash consideration
becker&mayer
Harvard
Common Press
Fair values
$’000
Fair values
$’000
564
2,415
259
2,461
6,340
(3,225)
8,814
2,332
11,146
2,300
7,319
1,527
11,146
–
436
–
297
79
(551)
261
773
1,034
230
804
–
1,034
2,300
502
The goodwill for becker&mayer is provisional using an estimate of fair value and will be reviewed and adjusted in the
next eight months as necessary.
31 Subsequent events
On 30 March 2017, the Group completed the disposal of its 75% interest in Regent Publishing Services Ltd, its Hong
Kong based publishing services business. The consideration for the disposal was $7.0m including a payment of $2.5m
(HK$19.5m) for the group’s share of the excess cash in the business, payable in cash on completion. The business was
sold to 1010 Printing Group Ltd, a Hong Kong based printing business listed on the Hong Kong Stock Exchange. The
consideration will be used to reduce the Group’s net debt. For the 12 months ended 31 December 2016, Regent
Publishing Services Ltd recorded a profit before tax of $1.6m and had net assets of $6.6m.
On 3 April 2017, the Group completed the disposal of BGD Australia which has been acquired by Zooom Pty Limited (as
trustee for the Zooom Investment Trust), a company incorporated in Australia and formed for the purposes of acquiring
the business by a group comprising certain of the master franchisees and former employees of the business in Australia.
The consideration for the sale of the company was A$1 and Quarto will also take an assignment of certain debts owed
by the master franchisees to BGD Australia of A$1.9m (US$1.4m) which are repayable in monthly instalments over two
years and are interest bearing. The repayments will be used to reduce the Group’s bank debt as they are received.
Quarto is entitled to receive 10% of the profit before interest and tax of Zooom Pty Limited for the next five years.
113
STRATEGIC REPORTFINANCIAL STATEMENTSGOVERNANCEQuarto Group, Inc. Annual Report 2016 NOTES TO THE FINANCIAL STATEMENTS CONTINUED
32 Alternative performance measures
The Group uses alternative performance measures to explain and judge its performance.
Adjusted operating profit is operating profit excluding amortisation of acquired intangibles and exceptional items. The
Directors consider this to be a useful measure of the Group operating performance as it approximates the underlying operating
cash flow.
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.
Backlist % of sales 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 15).
Inventory % of revenue is the book value of inventory divided by total revenue for the year. Inventory turn is cost of sales
divided by book value of inventory and measures the number of times inventory is sold through the business in a year.
Product efficiency is the ratio of new title revenue to intellectual property spend in the previous year and is an indicator
of the reliability of our back list sales.
Return on net operating assets is the ratio of adjusted operating profit to net operating assets and is used to evaluate
the long term financial performance of the Group,
114
Financial Statements 32 Alternative performance measures continued
Adjusted Operating Profit
Operating profit
Add back: – Amortisation of acquired intangibles
– Other exceptional items (Note 5)
Adjusted operating profit
Add/(deduct): Books & Gifts Direct operating (loss)/profit
Adjusted operating profit (excluding Books & Gifts Direct)
EBITDA
Adjusted profit before tax (before amortisation of acquired intangibles and exceptional items)
Net interest
Depreciation
EBITDA, before exceptional items
Amortisation of pre-publication costs
Restated
(Note 1)
2015
$’000
2016
$’000
1,659
705
6,397
8,761
9,817
18,578
13,813
2,945
1,080
17,838
17,244
15,306
724
445
16,475
(882)
15,593
13,377
3,098
1,189
17,664
18,184
EBITDA (as defined in the committed facility agreement)
35,082
35,848
Net debt
Short term borrowings
Medium and long term borrowings
Cash and cash equivalents
Net operating assets
Net assets
Unallocated segment assets
Unallocated segment liabilities
Return on net operating assets
Adjusted dividend cover (excluding BGD)
Adjusted basic earnings per share (cents)
Total dividend for the year (cents)
Dividend cover (times)
115
5,000
75,748
5,000
79,562
(18,824)
(25,059)
61,924
59,503
44,111
53,444
(20,987)
(25,077)
95,405
118,529
7.4%
94,587
122,954
13.4%
54.7
15.0
3.6
46.0
14.5
3.2
STRATEGIC REPORTFINANCIAL STATEMENTSGOVERNANCEQuarto Group, Inc. Annual Report 2016 COMPANY BALANCE SHEET
AS AT 31 DECEMBER 2016
Fixed Assets
Investments
Current liabilities
Creditors: Amounts falling due within one year
Net liabilities
Equity
Called up share capital
Treasury stock
Reserves – Paid in surplus
– Profit and loss
Total equity
Notes
2016
$’000
2015
$’000
4
6
7
4,080
4,080
8,444
8,444
(21,962)
(20,992)
(21,962)
(20,992)
(17,882)
(12,548)
2,045
–
2,045
(634)
33,764
33,764
(53,691)
(47,723)
(17,882)
(12,548)
The Company reported a loss for the year of $4.4m (2015: $3.8m).
The financial statements were approved by the Board of Directors and authorised for issue on 19 April 2017.
They were signed on its behalf by:
Marcus E. Leaver
Director
116
Financial Statements COMPANY STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 2016
Balance at 1 January 2015
Loss for the year
Other comprehensive income
Foreign exchange translation differences
Total comprehensive income for the year
Transactions with owners
Dividends to shareholders
Share based payments charges
Balance at 31 December 2015
Loss for the year
Other comprehensive income
Foreign exchange translation differences
Total comprehensive income for the year
Transactions with owners
Dividends to shareholders
Share based payments charges
Shares released/sold from treasury
Balance at 31 December 2016
Share capital
$’000
2,045
Paid in
surplus
$’000
33,764
Treasury
stock
$’000
Retained
earnings
$’000
(634)
(42,680)
Equity
attributable
to owners
$’000
(7,505)
(3,802)
1,075
1,075
(3,802)
1,075
1,075
(2,502)
(2,502)
186
186
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
2,045
33,764
(634)
(47,723)
(12,548)
–
–
–
–
–
–
–
–
–
–
–
–
2,045
33,764
–
–
–
–
–
634
–
(4,428)
(4,428)
2,265
2,265
2,265
2,265
(2,902)
(2,902)
256
(1,159)
256
(525)
(53,692)
(17,882)
117
STRATEGIC REPORTFINANCIAL STATEMENTSGOVERNANCEQuarto Group, Inc. Annual Report 2016 NOTES TO THE COMPANY BALANCE SHEET
AT 31 DECEMBER 2016
1 Basis of preparation
The separate financial statements of the Company are presented and have been prepared in accordance with Financial
Reporting Standard 102 (FRS 102) issued by the Financial Reporting Council. These financial statements present
information for the Company, not about its Group, which is presented on pages 78 to 115.
The financial statements have been prepared in accordance with applicable accounting standards and under the
historical cost accounting rules modified to include certain items as fair value and in accordance with FRS 102. The
financial statements have been prepared using the going concern basis, as discussed in the Group going concern
disclosure on page 84.
2 Accounting policies
The following accounting policies have been applied consistently in dealing with items which are considered material
in relation to the financial statements. The functional currency of the company is Pounds Sterling, with the parent
company accounts presented in US Dollars.
Investments
Investments in subsidiaries are stated at cost less, where appropriate, provisions for impairment.
Creditors
Amounts owed to subsidiary undertakings are initially recognised at fair value, and subsequently measured at
amortised cost using the effective interest method.
Share-based payments
The Group issues equity settled share-based payments to certain employees. Equity settled share-based payments are
measured at fair value at the date of grant. The fair value, determined at the grant date, of equity settled share–based
payments is expensed on a straight line basis over the vesting period, based on the Group’s estimate of shares that will
eventually vest. The fair value of employee share option grants is calculated using a Monte Carlo model, taking into
account the terms and conditions upon which the options were granted. The value of the charge is adjusted to reflect
expected and actual levels of options vesting. Further detail is set out in Note 28.
Cash and cash equivalents
There were no cash transactions during the year and accordingly no cash flow statement has been presented.
Foreign currencies
Transactions in foreign currencies are translated at the foreign exchange rate ruling at the date of the transaction.
Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the
exchange rate ruling at that date with any exchange differences arising on retranslation being recognised in the income
statement. The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on
consolidation, are translated into US Dollars at exchange rates ruling at the balance sheet date. The revenues and
expenses of foreign operations are translated into US Dollars at average annual exchange rates. Foreign exchange
differences arising on retranslation are charged or credited to other comprehensive income and are recognised in the
currency translation reserve in equity. On disposal of a foreign operation, the related cumulative translation differences
recognised in equity are reclassified to profit or loss and are recognised as part of the gain or loss on disposal.
Financial guarantee contracts
Where the Company enters into financial guarantee contracts to guarantee the indebtedness of other companies within
its group, the Company considers these to be insurance arrangements, and accounts for them as such. In this respect,
the Company treats the guarantee contract as a contingent liability until such time as it becomes probable that the
Company will be required to make a payment under the guarantee.
3 Loss attributable to the Company
The loss for the financial year dealt with in the financial statements of the parent company was $4.4m (2015: $3.8m).
No separate profit and loss account is presented in respect of the parent company as permitted by section 408 of the
Companies Act 2006.
118
Financial Statements 4 Investments
At 1 January
Amounts written off during year
At 31 December
2016
$’000
8,444
(4,364)
4,080
2015
$’000
12,060
(3,616)
8,444
The write-off in the year relates to the Company’s investment in Books & Gifts Directly Limited, a New Zealand company.
5 Subsidiaries
a) Trading companies
Incorporation
Name
Place
Date
Registered
address key†
Issued and fully paid
up share capital
% held Segment
Books & Gifts
Direct (Pty) Limited
Books & Gifts
Direct Limited
Quarto Publishing
plc
Australia
3 December 1990
D
New Zealand
27 September 1996 C
United Kingdom
1 April 1976
Quarto, Inc.
Delaware, USA
16 October 1986
RotoVision S.A.
Switzerland
18 July 1977
Global Book
Publishing Pty.
Limited
Apple Press
Limited
Small World
Creations Limited
Lewes Holdings
Limited
Aurum Press
Limited
Australia
4 November 1999
United Kingdom 5 June 1984
United Kingdom 20 September 1997 A
United Kingdom 21 July 2005
United Kingdom 31 May 1977
Quarto (JS) LLP
United Kingdom 6 November 1998
Frances Lincoln
Limited
Quarto Australia
(Pty) Limited
Quarto Publishing
Group USA Inc.
Regent Publishing
Services Limited
United Kingdom
15 December 1980
Australia
14 September 1981
Delaware, USA
28 June 2004
Hong Kong
23 October 1985
A
B
F
D
A
A
A
A
A
D
B
E
100,004 shares
of A$1 each
400,000 shares
of NZ$1 each
100,000 shares
of £1 each
86 shares
of no par value
1,500 shares
of SFr500 each
1,000 shares
of A$1 each
100 shares
of £1 each
1,536 share
of £1 each
20,840 shares
of £0.01 each
382,502 shares
of £1 each
100 units
565,000 shares
of 10p each
110 shares
of A$1 each
380 shares
of US$0.01 each
1,000 shares
of HK$10 each
100
100*#
100*
100*
100*
100*
100
100
100
100
100
100
100
100
Books & Gifts Direct,
ANZ
Books & Gifts Direct,
ANZ
Quarto International
Co-Editions Group
Quarto International
Co-Editions Group
Quarto International
Co-Editions Group
Quarto International
Co-Editions Group
Quarto International
Co-Editions Group
Quarto International
Co-Editions Group
Quarto International
Co-Editions Group
Quarto Publishing
Group UK
Quarto Publishing
Group UK
Quarto Publishing
Group UK
Quarto International
Co-Editions Group
Quarto Publishing
Group USA
75#
Quarto HK
† See Note 5c on page 120.
* Directly held by The Quarto Group, Inc.
# The shares held in this company were sold after the year end. See Note 30 for further details.
119
STRATEGIC REPORTFINANCIAL STATEMENTSGOVERNANCEQuarto Group, Inc. Annual Report 2016 NOTES TO THE COMPANY BALANCE SHEET AT 31 DECEMBER 2016 CONTINUED
5 Subsidiaries continued
b) Dormant companies
Incorporation
Name
Place
Date
Registered
address key† Issued share capital
% held
AP Screen Printers Limited
United Kingdom 30 September 1980 A
1,000 shares of £1 each
Cartographica Press Limited
United Kingdom 27 July 1981
Design Eye Holdings Limited
United Kingdom 22 June 1992
Design Eye Limited
United Kingdom 18 March 1988
Design Eye Publishing Limited
United Kingdom 17 June 1992
Fine Wine Editions Limited
United Kingdom 23 June 1949
Frances Lincoln Publishers Limited United Kingdom 11 March 1987
Great American Trading Company
Limited (THE)
United Kingdom 24 February 1982
Global Book Publishing Pty Limited United Kingdom 7 July 1986
IQON Editions Limited
United Kingdom 5 December 1972
A
A
A
A
A
A
A
A
A
1,000 shares of £1 each
200 shares of £1 each
100 shares of £1 each
2 shares of £1 each
9,020 shares of £1 each
100 shares of £1 each
100 shares of £1 each
1,000 shares of £1 each
300 shares of £1 each
iqu-digital.com Limited
United Kingdom 30 November 1978 A
100 shares of £1 each
100
100
100
100
100
100
100
100
100
100
100
JR Books Limited
United Kingdom 9 September 1986
Marshall Editions Limited
United Kingdom 7 February 2002
Marshall Publishing Limited
United Kingdom 7 February 2002
Quarto Magazines Limited
United Kingdom 20 May 1986
Quarto Children’s Books Limited
United Kingdom 6 January 1976
QED Publishing Limited
United Kingdom 12 November 1974
Quantum Books Limited
United Kingdom 7 February 1983
Quarto Multi-Media Limited
United Kingdom 14 December 1984
A
A
A
A
A
A
A
A
43,004 shares of £1 each 100
1 shares of £1 each
1 shares of £1 each
1,000 shares of £1 each
2 shares of £1 each
400 shares of £1 each
100 shares of £1 each
1,000 shares of £1 each
QU:ID Publishing Limited
United Kingdom 30 September 1980 A
100 shares of £1 each
Quill Publishing Limited
United Kingdom 14 May 1979
Quintessence Editions Limited
United Kingdom 7 February 2002
Quintet Publishing Limited
United Kingdom 14 May 1979
QEB Publishing Limited
Delaware, USA
27 April 2004
Quarto Media Inc
Delaware, USA
10 December 2010
Quarto Marketing Inc
Delaware, USA
26 April 1995
A
A
A
B
B
B
EYE Quarto Inc
Delaware, USA
19 December 2002
B
1,000 shares of £1 each
1 shares of £1 each
100 shares of £1 each
1,500 shares
of no par value
1,000 shares of $1 each
3,000 shares
of no par value
1,000 shares
of no par value
† See Note 5c below.
c) List of registered offices
A The Old Brewery, 6 Blundell Street, London, N7 9BH, United Kingdom
B 400 First Avenue North, Minneapolis, MN 55401, USA
C
D c/o ZM Partners, Suite 10 Ground Floor, 123 Clarence Street, Sydney, NSW 2000, Australia
E Unit B & C, 7th Floor, Genisi, No. 33-35 Wong Chuk Hand Road, Hong Kong
F Passage Perdonet 1, 1005 Lausanne, Switzerland
135b Morrin Road, Saint Johns, Auckland, 1072, New Zealand
120
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
Financial Statements 6 Creditors: Amounts falling due within one year
Amounts owed to subsidiary undertakings
2016
$’000
21,962
2015
$’000
20,992
7 Called up share capital and treasury stock
Details of called up share capital and treasury stock are set out in Notes 24 to 25 of the consolidated
financial statements.
8 Contingent liabilities
The Quarto Group, Inc. has issued guarantees in respect of bank loans of subsidiaries of $80,748,000 (2015:
$84,562,000). Refer to Note 19 of the consolidated financial statements.
9 Related parties
The company borrowed an amount of $3,236,000 from its wholly owned subsidiary, Quarto Publishing plc, during
the year (2015: $2,511,000 borrowed in the year). The balance on the loan at 31 December 2016 was $15,471,000
(2015: $14,995,000). These balances are non-interest bearing and repayable on demand.
121
STRATEGIC REPORTFINANCIAL STATEMENTSGOVERNANCEQuarto Group, Inc. Annual Report 2016 FIVE YEAR SUMMARY
Results
Revenue
Operating profit before amortisation of acquired
intangibles and exceptional items
Operating profit
Profit before tax, amortisation of acquired intangible
assets and exceptional items
(Loss)/profit before tax
(Loss)/profit after tax
Assets employed
Non-current assets
Current assets
Current liabilities
Non-current liabilities
Net assets
Financed by
Equity
Non-controlling interests
Earnings per share (cents)
Basic
Diluted
Adjusted basic
Adjusted diluted
2016
$’000
2015*
$’000
2014#
$’000
2013#
$’000
2012#
$’000
188,434
8,761
1,659
5,816
(1,286)
(5,277)
182,165
16,475
15,306
13,377
12,208
8,523
171,339
14,927
14,990
10,950
11,013
8,091
175,481
14,565
10,726
9,294
5,455
3,761
180,632
14,986
12,962
9,034
7,010
5,124
105,507
104,433
97,133
107,413
102,416
98,709
102,364
97,907
106,537
106,157
(68,872)
(89,657)
(71,275)
(144,918)
(70,485)
(67,002)
(87,127)
(6,464)
(83,776)
(98,019)
44,111
53,444
49,743
46,010
47,673
39,219
4,892
44,111
(28.5)
(28.5)
5.7
5.6
48,285
5,159
53,444
44,802
4,941
49,743
41,201
4,809
46,010
41.3
41.2
46.2
46.1
39.5
39.5
39.1
39.1
17.0
17.0
36.1
36.1
40,726
6,947
47,673
23.9
23.9
41.6
41.6
* Restated as per Note 1.
# The 2014 closing balance sheet restatement was all corrected through the 2014 results as it was impractical to determine the impact on
these earlier individual financial years and it is not expected to result in a material change to these years.
122
Financial Statements OFFICERS & PROFESSIONAL ADVISERS
Directors
Peter Read*, Chairman
Marcus Leaver, Chief Executive
Michael Connole, FCA, Chief Financial Officer
Michael Hartley*
Jess Burley*
Registrars and transfer office
Capita Asset Services
The Registry
34 Beckenham Road
Beckenham
Kent BR3 4TU
Principal banks
Bank of America Corporation
100 Federal Street
Boston MA 02110 USA
Fifth Third Bank
38 Fountain Square Plaza
MD 109055 Cincinatti
OH 45263 USA
Santander UK plc
4th Floor Santander House
100 Ludgate Hill
London EC4M 7RE
The Royal Bank of Scotland plc
280 Bishopsgate
London EC2M 4RB
Company Registration Number
FC0 13814
* Non-executive
Secretary
Anne Crompton
Principal office
The Old Brewery
6 Blundell Street
London N7 9BH
Tel: +44 (0) 7700 6700
Stockbrokers
Stockdale Securities Limited
Beaufort House
15 St Botolph Street
London EC3A 7BB
Liberum Capital Limited
Ropemaker Place, Level 12
25 Ropemaker Street
London EC2Y 9LY
Auditor
Deloitte LLP
2 New Street Square
London EC4A 3BZ
Solicitor
Olswang LLP
90 High Holborn
London WC1V 6XX
123
STRATEGIC REPORTFINANCIAL STATEMENTSGOVERNANCEQuarto Group, Inc. Annual Report 2016 The Old Brewery
6 Blundell Street
London N7 9BH
United Kingdom
Tel: +44 (0)20 7700 6700
Fax: +44 (0)20 7700 8066
Email: info@quarto.com
ATLAS
ATLAS
FÖR
ÄVENTYRARE
ÄVENTYRARE
DJUREN I VÄRLDEN
En samling av naturens mest
SPEKTAKULÄRA HÄNDELSER, MÄKTIGA
MIGRATIONER och SÄLLSAMMA
BETEENDEN
Illustrerad av Lucy Letherland
Text av Rachel Williams
och Emily Hawkins
Möt några av naturens
mest äventyrliga djur på
denna upptäcktsfärd
i naturens värld.
Utforska SJU VÄRLDSDELSKARTOR och lär känna djur
som lever och överlever på spektakulära vis genom årets
alla växlingar. I den här boken får du färdas med NARVALAR
på deras riskfyllda turer i jakt på mat under isen, uppfostra
ORANGUTANGUNGAR i Borneo, klättra i bergen med
Kinas JÄTTEPANDOR och uppleva många andra
mäktiga DJURÄVENTYR från jordens alla hörn.
Här finns fler än 30 spännande djur, så unga
naturäventyrare kan upptäcka hundratals roliga
saker och nya fakta på varje sida i boken.
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ISBN 978-91-7663-173-7
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