12 Aug 2014 07:00
THE QUARTO GROUP, INC.
Half-Year Results for the Six Months Ended 30 June 2014
The Quarto Group, Inc. (LSE: QRT), the world's leading global illustrated book publisher and distribution group announces its half-year results for the six months ended 30 June 2014.
Financial Highlights
· Revenue of $65.6m (H1 2013 $72.2m); continuing operations down 3%
· Underlying 1 Profit before Taxation of $0.7m (H1 2013 $1.7m)
· Underlying 1 diluted Earnings per Share of 2.0 cents (H1 2013 5.6 cents)
· Net debt reduced to $81.5m (H1 2013 $83.3m); down $7.0m on a constant currency basis including proceeds of the sale of a Swiss property for $1.9m
· Interim dividend maintained at 3.35p (H1 2013 3.35p)
Operational Highlights
· Continuing revenue in the core publishing businesses down 1% as a result of US wholesaler HDA ceasing operations, backlist destocking and weak uptake of new titles by major book retailers
· Better prospects for the publishing businesses in the second half based on order book visibility, strong foreign sales and flow through of 2013 investment in product development
· Turnaround of ANZ display marketing business continues, with greater visibility of improvement in Australia than New Zealand
· Board further strengthened by the addition of Jess Burley in May
1Underlying is before amortization of acquired intangibles, gain on sale of property and exceptional items.
Commenting on the results, Chief Executive Officer, Marcus Leaver, said:
"Despite a tough first half we expect the new product and the marketing & sales initiatives that we invested, in 2013, to deliver a strong second half in our publishing businesses. There are positive signs of the turnaround we targeted in the Books & Gifts Direct business in Australia and New Zealand. The Group should deliver earnings growth in 2014 as expected."
Chairman, Tim Chadwick, added:
"We are making steady progress and our people have shown resolve in what has been a challenging year to date. Despite adverse exchange rates, we have paid down debt and will continue to do so. We have a settled Board and have established the requisite Audit, Remuneration and Nomination Committees. We are maintaining the interim dividend and will continue our focus on earnings growth and continuing to pay down debt."
For further information, please contact:
Quarto 020 7700 9004
Marcus Leaver, CEO
Mick Mousley, CFO
Bell Pottinger 020 7861 2840
Elly Williamson
Harriet Clarfelt
About The Quarto Group
The Quarto Group (LSE: QRT) is the leading global illustrated book publisher and distribution group and is listed on the London Stock Exchange. Quarto employs over 400 talented and creative people in five distinct but complementary businesses - Quarto International Co-Editions Group; Quarto Publishing Group USA; Quarto Publishing Group UK; Books & Gifts Direct, Australia & New Zealand and Regent Publishing Services, Hong Kong.
The Group is well positioned in resilient segments of book publishing with rich reserves of Intellectual Property. Quarto is uniquely positioned for growth as the industry adapts to new means of marketing, sales and routes to market. The Group's headquarters are in London where the Company was founded in 1976.
Business Review
Group Performance
The first half of the year has been an undeniably challenging time for Quarto.
Our core publishing businesses have shown resilience in the face of some adversity, particularly in the US where the wholesaler, HDA, ceased trading and has impacted profitability by more than $0.5m. The turnaround we believed would be possible in our display marketing business is underway. To date this has had greater success in Australia than New Zealand, where we have incurred further restructuring costs of $0.3m.
As detailed in the 2013 Annual Report, the Board is committed to reflecting operational expenses, such as these, through the P&L and not separating them out as exceptional items as has been done in the past.
We have continued to focus on debt reduction despite adverse exchange rates and we include proceeds from the sale of a Swiss property for $1.9m, which resulted in a non-recurring profit of $0.6m. This sale and the progress made in ANZ resulting from our ongoing strategic review may yet afford further opportunities to create the optimal group.
Despite all of the challenges outlined, the group's four businesses have turned in a performance which puts us on track for our expectations of earnings growth for the full year. We expect a greater than usual second half weighting as our investments in product and marketing & sales initiatives from FY2013 come through; they are beginning to already in our International Co-Editions business. We continue to enjoy a great degree of visibility in many areas of the business, which underpins our cautious optimism at the half year. This visibility will be enhanced with the direct sales relationships we have entered into, as discussed below.
During this half, we have also commenced a comprehensive gift and stationery programme and increased our focussed investment in children's books, going from five dedicated children's imprints to eight. We continue to explore joint ventures around the World.
Divisional Performance
Quarto International Co-Editions Group
· Revenue $12.6m (H1 2013 $10.7m)
· Operating profit $737k (H1 2013 $32k)
After consolidating several imprints in 2013 to give this business a new direction, this business has had a good first half.
Our Brazilian joint venture has made an encouraging start having launched 20 titles that will make a small positive contribution to operating profit in 2014. This showcases the group's ability to use the Quarto platform to build new revenue.
The forward order book for this business allows healthy forward visibility for the full year that shows particular strength in foreign language sales.
Quarto Publishing Group USA
· Revenue $27.0m (H1 2013 $29.1m)
· Operating profit $2.2m (H1 2013 $3.6m)
This business experienced a tough first half, largely because the distributor for our books into Lowes and Tractor Supply Company ('TSC') - HDA - ceased trading. After making no sales into these stores for four months, we have now established a direct relationship with both companies in May and achieved sales in June that gives us confidence that future sales into these stores will be more profitable than when we distributed via HDA.
The first half results are set against a strong comparative last year. Further we have seen our major North American book retailers destocking backlist and supporting front list buys cautiously.
The second half should see better sales via Lowes and TSC and a better publishing performance with more 'lead' titles developed in the imprints that were reorganised in 2013 and where we invested in new product. In addition we shall see the benefit of a better co-edition performance, visible through the co-edition order book that is now managed by the combined Quarto Foreign Rights team.
Quarto Publishing Group UK
· Revenue $7.6m (H1 2013 $8.3m)
· Operating profit $329k (H1 2013 $499k)
The new Managing Director has settled in well and met management expectations for the half-year. This a good performance in a tough domestic market while seeing the benefits of our US sales team doing an excellent job of selling our UK originated titles in that market.
Expectations for the second half are healthy, based on the number of 'lead' titles due to be published, driven by efforts taken by new publishing management to reinvigorate the pipeline during the course of 2013 with investment in new product.
Books & Gifts Direct, ANZ
· Revenue $11.8m (H1 2013 $12.3m)
· Operating profit $585k (H1 2013 $984k)
New management for the display marketing business was put in place in September last year. We consolidated our Australia and New Zealand businesses, now one display marketing business under the re-invigorated brand Books & Gifts Direct, ANZ on 1 March 2014. We have seen overall improvement but performance has varied by geography. Australia had a challenging first half but has a good order book for the year as a whole and better product scheduled for delivery in the second half. New Zealand also faced a challenging market and bore some further restructuring costs as we merged two businesses in the North Island into one and re-branded as Books & Gifts Direct. Issues with product mix are being resolved which should allow for a better second half.
Other
· Revenue $6.5m (H1 2013 $11.8m)
· Operating profit $623k (H1 2013: $855k)
First half numbers for 'Other' include The Image Factory (H1 2013: $4.4m) which was sold in H2 last year. Regent, our Hong Kong based print broker, is performing in line with expectations.
Outlook
Our business is always second half weighted, and this year we anticipate it being more so than usual. We continue to enjoy a great degree of visibility in many areas of the business, which underpins our cautious optimism at the half year. Despite the setbacks of the first half of the year, the comprehensive restructuring we did in all areas of the business in FY2013 will manifest themselves; the sales, marketing and operational efficiencies are beginning to show effect and the investment in intellectual property will come through as new books get published. Quarto is stronger and more coherent than it has been and continues to show its resilience.
On the basis of current levels of underlying trading, the Group is on track to meet management expectations for the year and deliver both debt reduction and earnings growth.
THE QUARTO GROUP, INC
CONDENSED CONSOLIDATED INCOME STATEMENT
for the six months to June 30, 2014
| Six months ended June 30, 2014 | Six months ended June 30, 2013 | Year ended December 31, 2013 |
| $'000 | $'000 | $'000 |
|
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|
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Revenue | 65,566 | 72,194 | 176,318 |
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|
|
Operating profit before amortization of intangibles, gain on sale of property, and exceptional items | 2,383 | 4,033 | 15,957 |
Amortization of non-current intangible assets | (247) | (216) | (434) |
Gain on sale of property | 633 | - | - |
Exceptional items | - | (817) | (5,318) |
|
|
|
|
Operating profit | 2,769 | 3,000 | 10,205 |
|
|
|
|
Finance costs | (1,722) | (2,448) | (4,796) |
Financial income | 84 | 163 | 353 |
|
|
|
|
Profit before taxation | 1,131 | 715 | 5,762 |
Taxation | (242) | (220) | (1,416) |
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Profit for period | 889 | 495 | 4,346 |
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Profit for the period attributable to: |
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|
|
Owners of the parent company | 714 | 279 | 3,934 |
Non-controlling interests | 175 | 216 | 412 |
| 889 | 495 | 4,346 |
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|
Earnings per share (Note 6) | 3.6c | 1.4c | 20.0c |
Diluted earnings per share (Note 6) | 3.6c | 1.4c | 20.0c |
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|
The following information is presented as additional information and does not form part of the Income Statement : | |||
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Underlying earnings per share (Note 6) | 2.0c | 5.6c | 44.0c |
Underlying diluted earnings per share (Note 6) | 2.0c | 5.6c | 44.0c |
THE QUARTO GROUP, INC
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
for the six months to June 30, 2014
| Six months to June 30, 2014 | Six months to June 30, 2013 | Year to December 31, 2013 |
| $'000 | $'000 | $'000 |
|
|
|
|
Profit for the period | 889 | 495 | 4,346 |
Other comprehensive income |
|
|
|
Foreign exchange translation differences | 846 | (2,096) | (2,002) |
Reclassification of translation reserve on disposal | - | - | 202 |
Cash flow hedge: change in fair value | 156 | 588 | 1,136 |
Net income recognised directly in equity | 1,002 | (1,508) | (664) |
Total comprehensive income and expense for the period | 1,891 | (1,013) | 3,682 |
Attributable to: |
|
|
|
Owners of parent | 1,724 | (1,254) | 3,247 |
Non-controlling interests | 167 | 241 | 435 |
| 1,891 | (1,013) | 3,682 |
THE QUARTO GROUP, INC
CONSOLIDATED BALANCE SHEET
at June 30, 2014
| June 30, | June 30, | December 31 |
2014 | 2013 | 2013 | |
| $'000 | $'000 | $'000 |
Non-current assets |
|
|
|
Goodwill | 42,112 | 40,495 | 41,367 |
Other intangible assets | 1,183 | 1,186 | 991 |
Property, plant and equipment | 2,471 | 9,103 | 3,752 |
Deferred tax asset | 2,149 | 2,672 | 2,226 |
Total non-current assets | 47,915 | 53,456 | 48,336 |
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Current assets |
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Intangible assets: Pre-publication costs | 63,838 | 55,586 | 56,221 |
Inventories | 23,489 | 21,879 | 19,181 |
Trade and other receivables | 42,247 | 44,937 | 56,043 |
Derivative financial instruments | - | 50 | - |
Tax receivable | - | 385 | - |
Cash and cash equivalents | 12,677 | 20,377 | 23,879 |
Total current assets | 142,251 | 143,214 | 155,324 |
Total assets | 190,166 | 196,670 | 203,660 |
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Current liabilities |
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|
Short-term borrowings | (94,145) | (16,814) | (16,603) |
Derivative financial instruments | (243) | - | (427) |
Trade and other payables | (38,267) | (36,703) | (52,784) |
Tax payable | (592) | - | (671) |
Total current liabilities | (133,247) | (53,517) | (70,485) |
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Non current liabilities |
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|
|
Medium and long-term borrowings | - | (86,850) | (78,291) |
Deferred tax liabilities | (5,082) | (5,261) | (4,938) |
Derivative financial instruments | - | (865) | - |
Other payables | - | (46) | - |
Total non-current liabilities | (5,082) | (93,022) | (83,229) |
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Total liabilities | (138,329) | (146,539) | (153,714) |
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Net assets | 51,837 | 50,131 | 49,946 |
Equity |
|
|
|
Share capital | 2,045 | 2,045 | 2,045 |
Paid in surplus | 33,764 | 33,764 | 33,764 |
Retained profit and other reserves | 11,052 | 7,134 | 9,328 |
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Total equity attributable to owners of the parent | 46,861 | 42,943 | 45,137 |
Non-controlling interests | 4,976 | 7,188 | 4,809 |
Total equity | 51,837 | 50,131 | 49,946 |
THE QUARTO GROUP, INC
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
for the six months to June 30, 2014
Share capital | Paid in surplus | Hedging reserve | Translation reserve | Treasury shares | Retained earnings | Equity attributable to owners of the parent | Non-controlling interests | Total | |
$'000 | $'000 | $'000 | $'000 | $'000 | $'000 | $'000 | $'000 | $'000 | |
At December 31, 2012 | 2,045 | 33,759 | (1,453) | (1,858) | (643) | 12,333 | 44,183 | 6,947 | 51,130 |
Total comprehensive income for the period | - | - | 588 | (2,121) | - | 279 | (1,254) | 241 | (1,013) |
Share options exercised | - | 5 | - | - | 9 | - | 14 | - | 14 |
At June 30, 2013 | 2,045 | 33,764 | (865) | (3,979) | (634) | 12,612 | 42,943 | 7,188 | 50,131 |
Total comprehensive income for the period | - | - | 548 | 298 | - | 3,655 | 4,501 | 194 | 4,695 |
Dividends to shareholders | - | - | - | - | - | (2,427) | (2,427) | - | (2,427) |
Dividends paid to non controlling interests | - | - | - | - | - | - | - | (168) | (168) |
Purchase of non-controlling interests | - | - | - | - | - | 120 | 120 | (2,405) | (2,285) |
At December 31,2013 | 2,045 | 33,764 | (317) | (3,681) | (634) | 13,960 | 45,137 | 4,809 | 49,946 |
Total comprehensive income for the period | - | - | 156 | 854 | - | 714 | 1,724 | 167 | 1,891 |
At June 30, 2014 | 2,045 | 33,764 | (161) | (2,827) | (634) | 14,674 | 46,861 | 4,976 | 51,837 |
THE QUARTO GROUP, INC
CONDENSED CASH FLOW STATEMENT
for the six months to June 30, 2014
| Six months to June 30, 2014 | Six months to June 30, 2013 | Year to December 31, 2013 |
| $'000 | $'000 | $'000 |
Profit for the period | 889 | 495 | 4,346 |
Tax expense | 242 | 220 | 1,416 |
Net finance costs | 1,638 | 2,285 | 4,443 |
Depreciation | 490 | 778 | 1,374 |
Amortization of non-current intangible assets | 247 | 216 | 434 |
Amortization of pre-publication costs | 9,122 | 8,798 | 17,899 |
Movement in fair value of derivatives | (28) | (99) | 61 |
Profit on sale of fixed assets | (628) | (120) | 1,367 |
Loss on disposal of subsidiaries and businesses | - | - | 1,801 |
Changes in working capital | (3,075) | (247) | 2,789 |
Corporation tax paid | (431) | (1,435) | (2,087) |
Net cash from operating activities | 8,466 | 10,891 | 33,843 |
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Purchase of tangible fixed assets | (327) | (471) | (1,998) |
Proceeds on disposal of subsidiaries & businesses | - | - | 1,057 |
Proceeds on disposal of fixed assets | 1,852 | 175 | 4,861 |
Investment in pre-publication costs | (15,626) | (12,984) | (19,468) |
Purchase of subsidiaries/minority interests | (1,977) | - | - |
Interest received | 84 | 192 | 353 |
Net cash used in investing activities | (15,994) | (13,088) | (15,195) |
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Exercise of share options | - | 14 | 14 |
Dividends paid | - | - | (2,427) |
Interest paid | (1,760) | (2,469) | (4,886) |
Dividends paid to non-controlling shareholders | - | - | (168) |
Net loans repaid | (2,082) | (665) | (13,400) |
Net cash flows from financing activities | (3,842) | (3,120) | (20,867) |
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Net decrease in cash and cash equivalents | (11,370) | (5,317) | (2,219) |
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Cash and cash equivalents at beginning of period | 23,879 | 26,718 | 26,718 |
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Foreign currency exchange differences on cash and cash equivalents | 168 | (1,024) | (620) |
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Cash and cash equivalents at end of period | 12,677 | 20,377 | 23,879 |
THE QUARTO GROUP, INC
NOTES TO THE INTERIM FINANCIAL STATEMENTS
for the six months to June 30, 2014
1. Introduction
These interim consolidated financial statements are for the half year to June 30, 2014. They were approved by the Board on August 11, 2014 and are unaudited, as is the case with the comparative figures to June 30, 2013. These interim financial results do not comprise statutory accounts within the meaning of Section 434 of the Companies Act 2006. Statutory accounts for the year to December 31, 2013, prepared in accordance with International Financial Reporting Standards as adopted by the EU, which carried an unmodified Auditors' Report, have been filed with the Registrar of Companies and did not contain a statement under Section 498(2) or (3) of the Companies Act 2006.
2. Basis of preparation
These interim financial statements have been prepared in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority and with IAS 34, "Interim Financial Reporting", as adopted by the European Union.
The Directors have formed a judgement 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. The Group has significant banking facilities. In particular, the Group has committed facilities of $111.6m through to December 6, 2014 and thereafter, $95m through to April 30, 2015. The Group is currently reviewing its financing arrangements, which include the extension or renegotiation of existing facilities. The Group has continued to comply with its bank covenants and is budgeted to do so for the foreseeable future.
The accounting policies adopted are consistent with those of the annual financial statements for the year ended December 31, 2013, as described in those financial statements.
3. Segmental analysis
|
Revenue 2014 $000 |
Revenue 2013 $000 | Operating Profit 2014 $000 | Operating Profit 2013 $000 |
Revenue |
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Quarto Publishing Group USA | 26,957 | 29,083 | 2,188 | 3,622 |
Quarto Publishing Group UK | 7,624 | 8,276 | 329 | 499 |
Quarto International Co-Editions Group | 12,645 | 10,745 | 737 | 32 |
Books & Gifts Direct, ANZ | 11,814 | 12,323 | 585 | 984 |
Other | 6,526 | 11,767 | 623 | 855 |
| 65,566 | 72,194 | 4,462 | 5,992 |
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Segment result before |
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amortisation of non-current tangibles |
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and exceptional items |
|
| 4,462 | 5,992 |
Amortisation of non-current intangibles |
|
| (247) | (216) |
Exceptional items |
|
| - | (817) |
Segment result |
|
| 4,215 | 4,959 |
Gain on sale of property |
|
| 633 |
|
Unallocated corporate expenses |
|
| (2,079) | (1,959) |
Operating profit |
|
| 2,769 | 3,000 |
Investment income |
|
| 84 | 163 |
Finance costs |
|
| (1,722) | (2,448) |
|
|
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Profit before tax |
|
| 1,131 | 715 |
Tax |
|
| (242) | (220) |
Profit after tax |
|
| 889 | 495 |
4. Exceptional items
Exceptional items in H1 2013 primarily related to restructuring costs.
5. Taxation
Taxation for the six months to June 30, 2014 is based on the estimated underlying tax rate for the year. The rate that has been used is 25.0% (June 30, 2013: 25.0% and December 31, 2013: 21.0%).
6. Earnings Per Share and Underlying Earnings Per Share
The calculation of earnings per share of 3.6c (June 30, 2013: 1.4c; December 31, 2013: 20.0c) is based on 19,696,729 shares (the weighted average number of issued shares, excluding those held as treasury stock) (June 30, 2013: 19,694,189 shares; December 31, 2013: 19,694,658) and profits of $714,000 (June 30, 2013: $279,000; December 31, 2013: $3,934,000). The calculation of underlying earnings per share is based on earnings of $387,000 (June 30, 2013 $1,095,000; December 31, 2013: $8,673,000), calculated as follows:
| June 30, | June 30, | December 31, 2013 |
2014 | 2013 | ||
| $'000 | $'000 | $'000 |
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|
Earnings after non-controlling interests | 714 | 279 | 3,934 |
Amortization of non-current intangible assets * | 172 | 147 | 297 |
Gain on sale of property* | (499) | - | - |
Exceptional items* | - | 669 | 4,442 |
| 387 | 1,095 | 8,673 |
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Underlying earnings per share | 2.0c | 5.6c | 44.0c |
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* net of tax |
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| |
There is no dilution in earnings per share or underlying earnings per share for the six months to June 30, 2014 and June 30, 2013 or for the year to December 31, 2013.
7. Dividend
The interim dividend of 3.35p per share is payable on October 27, 2014, to shareholders on the register on September 26, 2014, with an ex-dividend date of September 24, 2014.
8. Reconciliation of figures included in the Announcement
| June 30, | June 30, | December 31, |
| 2014 | 2013 | 2013 |
| $'000 | $'000 | $'000 |
Underlying operating profit | 2,383 | 4,033 | 15,957 |
Amortization of non-current intangible assets | (247) | (216) | (434) |
Gain on sale of property | 633 | - | - |
Exceptional items | - | (817) | (5,318) |
Operating profit | 2,769 | 3,000 | 10,205 |
|
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|
|
Underlying profit before taxation | 745 | 1,748 | 11,514 |
Amortization of non-current intangible assets | (247) | (216) | (434) |
Gain on sale of property | 633 | - | - |
Exceptional items | - | (817) | (5,318) |
Profit before taxation | 1,131 | 715 | 5,762 |
9. Net debt
| June 30, | June 30, | December 31, |
2014 | 2013 | 2013 | |
| $'000 | $'000 | $'000 |
Cash and cash equivalents | 12,677 | 20,377 | 23,879 |
Short term borrowings | (94,145) | (16,814) | (16,603) |
Medium and long term borrowings | - | (86,850) | (78,291) |
Net debt | (81,468) | (83,287) | (71,015) |
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By currency: |
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US Dollars | (38,075) | (47,434) | (38,200) |
£ Sterling | (45,635) | (42,748) | (39,245) |
Other currencies | 2,242 | 6,895 | 6,430 |
| (81,468) | (83,287) | (71,015) |
Total borrowing facilities, at June 30, 2014, were $114.2m. Committed facilities total $111.6m and comprise a $95m syndicated facility which extends to April 30, 2015, and a $16.6m private placement facility, with repayment on December 7, 2014.
10. Risks and uncertainties
The principal risks and uncertainties affecting the business activities of the Group remain those detailed in the Annual Report for 31 December 2013, a copy of which is available on the Group website at www.quarto.com. The Board considers that these remain a current reflection of the risk and uncertainties facing the business for the second half of the financial year.
11. Directors' Responsibility Statement in respect of the Condensed Interim Financial Statements
The directors confirm that this condensed set of financial statements has been prepared in accordance with IAS 34 "Interim Financial Reporting" as adopted by the European Union, and that the interim management report includes a fair review of the information required by Disclosure and Transparency Rules of the Financial Services Authority, paragraphs DTR 4.2.7 and DTR 4.2.8.
The directors of The Quarto Group, Inc. are listed in The Quarto Group, Inc. Annual Report for 31 December, 2013. A list of current directors is maintained on the Quarto website: www.quarto.com.