Annual Report • Apr 5, 2018
Annual Report
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ANNUAL REPORT 2017 KONINKLIJKE BRILL NV
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BRILL ANNUAL REPORT 2017
Members Steven Perrick Catherine Lucet Robin Hoytema van Konijnenburg
Managing Director
Herman A. Pabbruwe
KONINKLIJKE BRILL NV Plantijnstraat 2 POBOX 9000 2300 PA Leiden
T +31 71 53 53 500
This annual report is available as PDF on brill.com under: About / Investor Relations relations
In 2017, Brill made good progress on its strategy. We expanded our market positions, increased market presence and completed our major investments. Succession planning was completed timely. Financially, 2017 was a year with mixed results. We showed healthy revenue growth, but the profit level was disappointing due to a variety of one – off effects.
We started the year with our first major acquisition in the German speaking countries; Schöningh & Fink. In August, our Asian presence was expanded by opening a representative office in Beijing to support our sales activities in China. By acquiring Sense Publishers as of 1 July, we entered a new market segment: Educational Sciences. With this acquisition we can further strengthen our presence in the field of Social Sciences.
Moreover, as part of our 'build on' strategy in the German market, we acquired mentis Verlag, effective January 1 st 2018. Mentis is a small but well-known German publisher in the field of Philosophy. The program will be added to Schöningh & Fink. During the year we made good progress on the integration of Schöningh & Fink and Sense Publishing, which both contributed to 2017 profits.
Our online book sales grew with double digits in our core markets, most notably in the Americas. Our underlying global print book business was resilient, especially thanks to growth in Asia. In the US, a key print books client over-ordered for a sustained period in 2016 and 2017 due to an EDI (electronic ordering) issue, leading to high returns in 2017. The issue was uncovered in 2017 and consequently an amount of EUR 0.2 million was credited in 2017 relating to 2016. Also, the relatively fast migration in the US from print to eBooks, led to a relatively stronger decline in print book sales in that market.
Underlying we could largely maintain the overall organic growth pace of last year. In 2017, sales deals over EUR 0.1 million came in mostly in the second half of the year, rather than spread out during the year as in 2016. A positive fact is that most of these deals have renewal potential for the next few years.
The two strategic technology projects R-Suite, an editorial workflow program, and the replacement and integration of our online platforms Brill.com and Brillonline.com progressed despite a few set-backs and delays. Once fully implemented in 2018, we expect to vastly improve our on-line service and create significant value out of these investments through efficiencies in the production and e-business processes in the years to come.
EBITDA ended at EUR 4.2 million (2016: EUR 4.5 million). During 2017, we faced non-recurring items related to returns, royalty accruals and audit and acquisition related expenses. At year end we saw additional adverse developments. Costs of Goods Sold was impacted by higher product support costs towards the end of the year. Also, CoGS were impacted by changes in accounting estimates. We adjusted the pattern of amortization of our capitalized content, in line with market driven changes in the timing of benefits expected from these assets. Moreover, an increased materiality level for capitalizing content development costs added to CoGS. Both steps lead to more reasonable and balanced valuations. Going forward, we expect the growth of content amortization to abate due to significant cash savings in typesetting costs which started to materialize in 2017 thanks to our investments in content management systems. Personnel costs increased reflecting acquisitions as well as organic developments. Adjusting for the non-recurring items described above, we see positive underlying trends which help support our positive outlook for 2018 and beyond.
Despite significant capital investment, acquisition spending and lower EBITDA, year-end liquidity exceeded our expectations and amounted to EUR 3.8 million. This is the result of further improvements in working capital of EUR 0.6 million (2016: EUR 1.6 million). Excluding the effect of acquisitions, stock reduced further reflecting the integral use of Printing on Demand. Also, before acquisition effects, we saw lower receivables.
Given our cash position and the strong underlying indicators for our business we confidently propose a dividend of EUR 1.32, underlining our commitment to a stable or growing dividend. After having reviewed the capitalization and financial structure of the company, we decided to increase the leverage of the company and take bank credit. We wish to maintain access to financial resources for investments and fitting acquisitions, but our balance sheet will allow us to propose an extraordinary dividend of EUR 3.00.
Since 2015, the Management Team works on a coherent agenda, based on a strategic plan which is developed in active consultation with the Supervisory Board. The plan is primarily based on organic development and offers solid, attractive opportunities for sustainable value creation through three focus areas:
Following the scheduled handover of management in May 2018, the Management Board will consist of two statutory directors: Peter Coebergh as CEO and Olivier de Vlam as CFO and COO. Also, Jasmin Lange has been appointed Chief Publishing Officer. Together, this new Executive Committee remains committed to building on this chosen strategy. In 2018, we will focus on monetizing the investments made in 2017 and realizing the value embedded in these activities, but also on enhancing our publishing policy and Brill's internal organization.
In 2017 we further developed our policies on Corporate Sustainability. We are proud to have committed to the UN's Global Compact Agenda and will work hard to live up to its demands in the area of sustainable business management.
A vital element of who we are is our position as a listed company and the compliance with the applicable rules and regulations. However, we also strongly feel about our values and business principles which have been explicitly laid out in this report for the first time. Perhaps the leading concept is maintaining harmony between our patrons; Pallas Athena and Hermes. Striking a balance in serving both Scholarship and Commerce is key to the long-term success and long-term value creation for all stakeholders.
Brill is fortunate to have stakeholders who are actively involved and who contribute to our vibrant business outlook. We all care for this special publishing house which will celebrate its 335th anniversary in May 2018.
It has been an honor and privilege to serve this company for the last fourteen years.
Leiden, April 4, 2018
Herman A. Pabbruwe Managing Director of Koninklijke Brill NV
All amounts: x EUR 1,000
| 2017 | 2016 | 2015 | 2014* | 2013 | |
|---|---|---|---|---|---|
| Results | |||||
| Revenue | 36,394 | 32,177 | 30,809 | 29,601 | 29,284 |
| Gross profit | 23,843 | 21,019 | 20,412 | 19,987 | 19,848 |
| EBITDA[1] | 4,156 | 4,496 | 3,794 | 3,680 | 4,504 |
| Operating profit | 3,315 | 3,712 | 3,015 | 2,675 | 3,478 |
| Profit for the year | 2,260 | 2,797 | 2,332 | 2,153 | 2,461 |
| Adjusted Profit [2] | 2,342 | 2,797 | 2,332 | 2,153 | 2,461 |
| Free cash flow [3] | -43 | 2,329 | 3,201 | 822 | 2,634 |
| Net cash flow from investment activities excluding Content | -3,996 | -2,131 | -962 | -2,765 | -1,185 |
| Average invested capital [4] | 22,008 | 20,973 | 21,224 | 21,001 | 20,505 |
| Growth compared to previous year | |||||
| Revenue | 13.1% | 4.4% | 4.1% | 1.1% | 6.4% |
| Gross profit | 13.4% | 3.0% | 2.1% | 0.7% | 5.0% |
| EBITDA[1] | -7.6% | 18.5% | 3.1% | -18.3% | 6.4% |
| Operating profit | -10. 7% | 23.1% | 12.7% | -23.1% | 7.4% |
| Profit from continued operations | -19.2% | 20.0% | 8.3% | -12.5% | 6.2% |
| Profitability | |||||
| Gross profit as % of revenue | 65.5% | 65.3% | 66.3% | 67.5% | 67.8% |
| EBITDA as % of revenue | 11.4% | 14.0% | 12.3% | 12.4% | 15.4% |
| Operating profit as % of revenue | 9.1% | 11.5% | 9.8% | 9.0% | 11.9% |
| Profit for the year as % of revenue | 6.2% | 8.7% | 7.6% | 7.3% | 8.4% |
| Revenue/average invested capital | 1.7 | 1.5 | 1.4 | 1.4 | 1.4 |
| NOPLAT as percentage of revenue | 6.7% | 8.5% | 7.2% | 6.7% | 8.9% |
| ROIC | 11.1% | 13.0% | 10.1% | 9.3% | 12.6% |
| Balance sheet ratios | |||||
| Shareholders' equity / total assets | 56.0% | 58.6% | 58.1% | 59.1% | 61.4% |
| Current assets / current liabilities [5] | 0.95 | 1.11 | 1.73 | 1.83 | 2.01 |
| Personnel | |||||
| Average number of employees (FTE) | 161 | 132 | 132 | 132 | 123 |
| Revenue per employee | 226 | 244 | 233 | 224 | 238 |
| EBITDA per employee | 26 | 34 | 29 | 28 | 37 |
| Average personnel costs per employee (FTE) | 67 | 71 | 68 | 63 | 65 |
* Restated figures, refer annual report 2015.
[1] EBITDA = Earnings Before Interest, Taxes, Depreciation and Amortization, the operating income before the amortization of intangible fixed assets and the depreciation of tangible fixed assets. See note 23
[2] Adjusted Profit is Profit adjusted for amortization of acquired intangible assets as of 2017
[3] Free Cash Flow = Net Cash Flow adjusted for cash flow from financing activities See note 23
[4] (Average) Invested Capital = (average of) fixed assets minus deferred tax liabilities related to acquired intangibles + working capital less cash and net tax receivables and financial instruments. See note 23.
[5] 2017 and 2016 impacted by reclass of content to fixed assets
In thousands of euros, based on weighted average number of outstanding shares
| 2017 | 2016 | 2015 | 2014* | 2013 | |
|---|---|---|---|---|---|
| Weighted average number of outstanding shares | 1,874,444 | 1,874,444 | 1,874,444 | 1,874,444 | 1,874,444 |
| Shareholders' equity per share | 14.62 | 14.69 | 14.49 | 14.32 | 14.51 |
| Increase in % | -0.5% | 1.4% | 1.2% | -1.4% | 2.0% |
| EBITDA per share | 2.22 | 2.40 | 2.02 | 1.96 | 2.40 |
| Increase in % | -7.6% | 18.8% | 3.1% | -18.3% | 6.2% |
| Earnings per share | 1.21 | 1.49 | 1.24 | 1.15 | 1.31 |
| Increase in % | -19.1% | 20.2% | 7.8% | -12.5% | -57.1% |
| Free cash flow per share | -0.02 | 1.24 | 1.71 | 0.44 | 1.40 |
| Increase in % | -101.9% | -27.5% | 289.3% | -68.6% | -53.0% |
| Dividend per share | 1.32 | 1.32 | 1.24 | 1.15 | 1.12 |
| Increase in % | 0% | 6.5% | 7.8% | 2.7% | 3.7% |
| Pay-out ratio | 109.1% | 88.4% | 100% | 100% | 85% |
| Extraordinary dividend per share | 3.00 | ||||
| Number of outstanding shares at year end | 1,874,444 | 1,874,444 | 1,874,444 | 1,874,444 | 1,874,444 |
| Highest share price during the year | 37.36 | 28.00 | 27.95 | 25.83 | 22.90 |
| Lowest share price during the year | 27.29 | 20.95 | 22.70 | 21.95 | 19.25 |
| Share price at year end | 35.50 | 27.73 | 23.36 | 25.73 | 22.14 |
* Restated figures, refer annual report 2015.
When the then general manager Evert Jan Brill (1812-1871) bought the Leiden-based publisher Luchtmans in 1848 and re-named it under his own name, he continued the business started by Jordaan Luchtmans (1652- 1708) in 1683. Facilitating the flow of information between authors and their readers remained the core business of the thriving publishing house. In 1896, Brill became a publicly listed company and one hundred years later, in 1996, the word 'Koninklijke' (royal) was added to the firm's name. Brill developed throughout the twentieth century into a small but significant international publisher. Today, the company is a broadly oriented publishing house and has many of the characteristics of an international university press, although with a clear focus on sustainable economic value creation as a strategy to protect its independence and standing in the market. Brill focuses on the academic research market in the areas of humanities and social sciences, international law, and natural history. The company outsources pre-press, printing, IT, and distribution to third parties, while only investing in its core activities and employing proven technologies.
Throughout its history, Brill has not only grown organically, but has also acquired many other publishers and imprints, including Nijhoff, IDC Publishers, Humanities Press, Styx, Index Islamicus, Gieben, Koninklijke Van Gorcum, Transnational, Hotei, Global Oriental, Forsten, Emerald and KITLV. At the end of 2013, Brill acquired Hes & De Graaf, followed by Editions Rodopi BV in the summer of 2014, Schöningh & Fink effective 1 January 2017 and Sense in July 2017. Brill currently uses the following imprints: Brill ǀ Nijhoff, Hotei, Brill ǀ Hes & De Graaf, Brill ǀ Rodopi and Brill | Sense and maintains the Schöningh and Fink imprints. With the 2003 takeover of Martinus Nijhoff, publisher of the prestigious publication series of The Hague Academy of International Law, Brill gained a leading position in the field of international law publishing. The contract with this prestigious Summer School was renewed at the end of 2014.
Brill provides choice through a dual format publishing policy, based on a digital-first process. Books play a major role in the humanities, unlike the fields of natural sciences and engineering which focus largely on journals. Brill also supplies important primary source material, such as scans of historic archives and collections of documents, which are primarily sold online. Digital sales have grown in recent years and will be the prevailing format across books, journals and primary sources. Brill distributes the e-version of its products directly and through third parties, thereby strengthening its position and the dissemination of its publications. Due to the long-term value of scholarly information in the humanities, the life span of our products is generally long. Brill still sells modest quantities of older titles from its stock, or has these reprinted in small runs using digitization on demand and printing on demand. Since 2007 all new books are available as E-books and some of our much older and long running book series were successfully digitized and brought onto the market as a collection. Brill also offers regional and subject based collections. In this way, we make whole to our authors our unqualified promise that books from Brill will always remain available.
Brill has been an international player from the start. More than ninety-five percent of Brill's sales are generated outside of the Netherlands, comparable to the proportion of Brill's authors who reside abroad. Most clients are in Europe and North America, with Asia emerging. Brill is in contact with all top global academic research centers, but cherishes its traditionally strong link with the University of Leiden. Partly thanks to Brill's leading position in several areas in which the university specializes such as Islamic studies, minor languages, archeology, and Sinology – Leiden scholars are particularly well represented at Brill.
Brill is engaging with the emerging field of digital humanities. Brill has identified several technologies which we perceive will have a deep impact on the humanities and social sciences. Geographical Information Systems (GIS) and Spatial Software will introduce the use of maps and 3-D/4-D and will help analyze data by showing their spatial dimensions. Semantic search and related technologies will allow deep searching of text and linking them to each other. Pattern and image recognition facilitate comparative analyses and find similarities or spot differences. The applications will vary from making handwriting machine readable to the identification of subjects in paintings. Finally, we expect that statistical analysis will become fundamental to all the fields in which we publish. Applications will vary broadly and the availability of Open Data will trigger mining of data. In some cases, technology used in the digital humanities will enable new search engines (e.g. those that look for concepts rather than individual words), new visual applications (digital maps), or software (e.g. apps to scan images). In almost all cases Brill expects that compliance with linked (open) data standards will be necessary. Brill has joined select, relevant pilot projects and sometimes co-sponsors research activities in public-private partnership; with the objectives of learning from participation, becoming early adapters and acquiring licenses to promising software. Joining forces in digital scholarly research contributes to Brill's standing as a forward-looking publisher.
Brill's direct sales efforts are focused on university libraries. For the past several years, libraries throughout the world have seen their budgets for the humanities come under pressure, yet university libraries have thus far maintained a relatively stable collection development policy and steady demand. The last few years have also witnessed an increasing trend toward purchases being made only when there is specific demand by scholarly end users. However, the institutional nature of the sales dictates that purchasing is done by the library.
Purchases by libraries are often made through third parties; journal agents act as intermediaries for subscriptions and traditional library suppliers have in part transformed into electronic middlemen.
Brill's marketing and sales strategy is focused on achieving the widest possible distribution of its products to reach beyond its primary market of professional colleagues targeted by the author. Cooperation with companies such as Google, Scopus, and Yewno increases the discoverability of Brill's publications and, thereby, its ability to operate more successfully in the present information society.
Brill's publishing strategy consists of reinforcing and protecting its well-established brands and monitoring developments in specific areas of scholarly research. Brill employs a standard contract with its authors to establish a reasonable and legally sound basis for controlled distribution of the research by the authors themselves or by their institutions. This legal basis is achieved by a transfer of copyright or by licensing agreement. Brill plays an active role in industry developments, such as Open Access and Institutional Repositories, and has not experienced significant problems arranging copyrights and licenses.
Brill's portfolio is spread widely across numerous academic disciplines, sales channels, product formats, front and backlist, and is geographically diversified.
Brill is a centrally managed company with several corporate and delegated functions. The overall day-to-day management of Brill is entrusted to the Managing Director, who is also responsible for business development and human resources policies. The primary business activities rest with the publishing units, which focus on the key subject areas in which Brill operates. Our acquisition editors are responsible for multimedia product development and contact with their editors and authors. They are actively supported by two central departments: Sales & Marketing and Finance & Operations, each of which is led by an Executive Vice President.
Based on the ongoing appointment by the AGM of PricewaterhouseCoopers Accountants N.V. (PwC) as the company's independent auditor, the Supervisory Board instructed PwC to audit the financial statements of Koninklijke Brill NV for the 2017 financial year. For the 2017 financial statements an unqualified independent auditor's report was issued. We therefore recommend that shareholders approve these annual financial statements. We propose distributing an ordinary dividend of EUR 1.32 per share certificate for 2017. Also, based on our assessment of the capitalization and the financial structure of the company which was announced in the AGM of 2017, we propose to the AGM to pay an additional extraordinary dividend of EUR 3.00 per share. This special dividend will be paid from reserves and will lead to a responsible increase of the leverage of the company. The necessary cash resources are provided through newly agreed bank facilities; we consider the term sheet of the loan appropriate and justified. We expect the loan to be paid back in full after 6 years.
In addition to the usual detailed quarterly reports, the Board received interim reports in certain areas in preparation for meetings. During the year under review, the Supervisory Board met with the Managing Director and the management team to discuss or approve issues including: risk management, staffing developments, management development, long‐term company strategy, cost development and management, the progress and development of publishing platforms, liquidity planning, credit facilities, investor relations, corporate governance issues and various investments. In 2017 special attention was given to individual presentations by each publishing unit concerning their market position and strategy, enabling the Board to better interpret the 2017 update of Brill's strategic plan. In considering the plan to expand in China, the Board weighed risks and opportunities before approving the decision.
The subject of business development opportunities and acquisitions is on the agenda for every meeting and progress reports are discussed as well as thoroughly prepared lists of possible partnerships in various countries. Reports from the external independent auditor are received and discussed on a regular basis. Progress reports on issues from the management letter issued by the external independent auditor receive special attention. Risk assessment and measures to mitigate risks are always discussed in the context of the annually updated management letter. In the bi‐annual meetings with the Works Council, issues such as corporate culture and the tone in the company have been discussed without the presence of management and staff.
Seven meetings of our Board were held in Leiden and two telephone conferences took place. At all meetings, the entire Board was present. A recurring item on our annual corporate calendar is the remuneration of the Managing Director. We have decided to increase his salary with 2% for 2017. The objectives in the context of the variable remuneration scheme of the Managing Director and staff were determined and evaluated. The longstanding strategy of quality of the profits earned from core business, growth through product development, exploitation of electronic publications, and the acquisition of large projects has been fully maintained and where possible anchored in targets.
There were informal consultations between members of the Supervisory Board and the Managing Director and his team during this year. The Supervisory Board also continued to begin each meeting without the presence of the Managing Director, with the aim of discussing the functioning of the Supervisory Board, its individual members, and of the Managing Director and his team. The Board met with the Management Team and a broad selection of staff as they are invited to our meetings to present their strategic plans, major programs or investments. This gives the Board a chance to observe internal and hierarchical relationships as well as the tone in the company and the corporate culture in practice.
The evaluation of the Board itself took place in 2017, without help from external consultancy, but based on a structured list of questions and assessment which each member had filled out and which was jointly discussed afterwards. This evaluation, together with the Board's evaluation of the role, responsibilities and functioning of the Managing Director in view of the increased complexity of the business has led, inter alia, to an adapted design of the Management Board and Executive Committee following the upcoming succession of the current Managing Director.
The annual meetings with the external independent auditor to discuss the management letter resulting from the interim audit and the final reports took place in the presence of the Managing Director and staff. When discussing the management letter, this was followed by the customary annual discussion between the Supervisory Board and the independent auditor, without the presence of the Managing Director and staff.
During 2017 the Board has taken notice of the increased size and complexity of the business, and the increased requirements posed to the Company's system of internal control. After balancing increased cost against growing external and internal requirements the Board requested an investment in Brill's internal controls. This program commenced in 2017 and will be further enhanced in 2018. Notwithstanding the above, in 2017 the Board concluded that the company has no need to appoint a separate internal auditor. In the light of the international expansion and increasing complexity of the organization, the Board is following this matter closely.
The Board has furthermore spent considerable time on continuing the dialogue with investors regarding our Corporate Governance structure. We are happy that the change in voting policy announced by Brill's Trust Office has met with agreement within our investor community and that relations have been normalized. As part of the new government structure, the option agreement with Stichting Luchtmans was adjusted and renewed by the company and the Stichting Luchtmans, following the authorization granted in the AGM.
In anticipation of the retirement of the current Managing Director in May 2018, the Board spent considerable time on the issue of succession. Based on interviews with internal and external stakeholders, the Board has decided that the increased complexity of the company can be best handled by a Management Board of two. Possible profiles and organizational models have been considered and a survey of internal and external candidates has been discussed by the Board. The Board is pleased to have found two well prepared internal candidates who have convinced the Board that they have the right level of experience and the right ideas to take the company into the future. The Works Council has concurred with this conclusion and in early October 2017 Peter Coebergh, currently EVP Sales & Marketing, and Olivier de Vlam, currently EVP Finance & Operations, have been announced as the new CEO respectively CFO/COO from 18 May 2018 onwards. Their contracts will follow the Corporate Governance Code.
In close consultation with the current Managing Director and the Board, the new team has invited Ms. Jasmin Lange to become Chief Publishing Officer, effective 1 January 2018. Together the three new executives will form the Executive Committee of the company. During the process, attention was paid to the aspect of diversity in the top management of the company.
The Supervisory Board should be composed in such a way that each member of the Board – and the Board as a whole – can fulfill its role, which includes overseeing management policies and the general business of the company and its affiliates, as well as adequately advising the Managing Director. Given the global nature of the company's activities and those of its affiliates, it is imperative for all members of the Board to possess international experience. Moreover, there must be at least one member who is especially familiar with the operations of a publishing house and has experience as a publisher. Additionally, one member of the Board
must have financial expertise, meaning that he or she will have acquired relevant knowledge and experience of financial administration and accounting within listed companies and other larger legal entities.
The Board, collectively, serves as audit committee. Also in 2017, the Board decided that separate commissions are not called for. The members of the Board need to have sufficient time at their disposal to perform their duties; in particular this applies to the Chairman of the Supervisory Board, and the Board met this requirement. The Supervisory Board consists of three persons. The members of the Board are independent within the context of the Dutch Corporate Governance Code.
We consider the composition balanced with two male members and one female member, all offering their individual but complementary expertise.
The Annual Report describes how the company has dealt with the implementation of the Dutch Corporate Governance Code that was in force during 2017. The new draft Code has been discussed in the Board and the prevailing concept of long term value creation has been welcomed. The Supervisory Board annually evaluates its instruments and processes in relation to the Code, and in 2017 maintained the policy to depart from the Code regarding use of certification as a possible method of protection. There were no transactions with conflicting interests relating to the Supervisory Board and Managing Director.
On May 16, 2017, the Annual General Meeting of shareholders took place at the company's office in Leiden. All resolutions presented were approved, including the proposed dividend EUR 1.32 per share.
The Board would like to express its gratitude to all involved in further improving the dialogue with Brill's investors. We consider having a stable base of investors supportive of Brill's strategy key to its successful execution. In 2017, Brill made significant progress in all areas of its strategy. Although non-recurring items and changes in accounting estimates dampened the reported results, we see an impressive number of projects, investments and innovative activities that will lead to a promising future. Amidst this high level of activity, the company has managed to further improve operational processes and grow the business, and we consider that a major achievement.
The Board would like to thank all staff for their contribution in 2017.
Leiden, April 4, 2018
Supervisory Board Steven Perrick Catherine Lucet Robin Hoytema van Konijnenburg
Chairman of the Supervisory Board of Koninklijke Brill NV since August 24, 2016, term runs to 2020 Attorney at Spinath + Wakkie, Amsterdam Professor emeritus in Civil Law at Amsterdam University Chairman Stichting Ammodo Board member Stichting Continuïteit NN Group Board member Stichting Preferred Shares Mylan Board member of Stichting Preferente Aandelen ASML Board member of Stichting tot het houden van Preferente aandelen Wereldhave N.V. Deputy Judge at the Court of Appeal in Arnhem Editor and advisor of law publications
Member of the Supervisory Board of Koninklijke Brill NV since 2013, current term runs to the AGM in May, 2021 (appointed with special support from Works Council Brill) Managing Director of Editis Education & Réference Vice President of Cap Digital Independent Board member and member of the Audit Committee Casino
Member of the Supervisory Board of Koninklijke Brill NV since 2015, term runs to 2019 Senior Director Pensions Governance of Heineken International B.V. Board member Vereniging Effectenuitgevende Ondernemingen (VEUO) Board member American Chamber of Commerce in the Netherlands Chairman of Stichting Heineken Pensioenfonds Chairman of the Scottish & Newcastle Pension Scheme Board member of the Heineken Afrika Foundation Chairman of the Supervisory Board, Roeminck Insurance NV
Koninklijke Brill NV, a public limited company under Dutch law, with its registered office at Plantijnstraat 2, 2321 JC Leiden, is the parent company of the Brill Group. The share capital of the company is divided into ordinary shares and cumulative preference shares. There are currently no cumulative preference shares issued. Of the issued ordinary shares, approximately 99% are certified and administered by the Stichting Administratiekantoor Koninklijke Brill NV. Only share certificates are listed on Euronext Amsterdam. Most certificates are held byDutch investors.Over 60% of the certificates are held in tranches of 3% or more. Koninklijke Brill NV is a statutory two-tier company (operating under the Dutch 'structuurregime'). The articles of association, available on the company's website, regulate inter alia the appointment and dismissal of Supervisory Board and Management Board members, the rights allocated to the Annual General Meeting and the amendment of the articles of association.
Brill's Corporate Governance is set up in line with its business objectives and aligns with the Dutch Corporate Governance code except where noted otherwise below. In addition to the Code, Brill has implemented its Core Values and Business Principles which is available, together with Brill's other policies, at brill.com.
The functioning of the Annual General Meeting of Shareholders follows the stipulations of the Dutch Civil Code and is detailed in Brill's articles of association (available at brill.com). Brill's most notable deviation from the Code is the policy regarding use of certification as a possible method of protection. Brill is a relatively small, highly specialized and profitable publisher, active in the same areas as several very large publishing companies in an industry which is in consolidation. To pursue Brill's mission, continuity and independence are required. Therefore, management deems protection against hostile takeovers to be necessary.
Accordingly, the company has implemented defensive structures. Firstly the company has cooperated with the issuance of certificates of shares and these can be seen as a defensive measure in that the Stichting Administratiekantoor Brill (Trust Office) reserves the right in the event of situations as referred to in Art. 2:118a.2 DCC, not to issue voting proxies nor to accept binding voting instructions. During 2017, the Trust Office changed its voting policy, please refer to the Trust Office Board report.
Secondly, Brill has the possibility of issuing preference shares. In the event of such an issue, the preference shares would be placed with Stichting Luchtmans, which has the right to acquire preference shares to a maximum of 100% of the ordinary issued share capital.
Pursuant to a provision in the articles of association, the conversion of share certificates is possible to a limited extent (1%). In addition, shareholding is limited to individuals, the company itself, the Trust Office, and companies that were shareholders in the past (before July 29, 1997).
Share certificates will be maintained as long as they contribute to the set of measures that aim to ensure maximum protection and the enabling of a balanced decision making on the future of the company.
In line with the Code, the Board of the Trust Office consists of three independent members. The Board of the Trust Office shares the opinion of the Managing Director and Supervisory Board relating to the use of share certificates as a defensive mechanism.
Several responsibilities have been allocated to the Combined Meeting - the joint meeting of the Supervisory Board and the Management Board. The rights of the Combined Meeting include the determination of the number of members of the Supervisory Board, authority on profit distribution proposals, the making of proposals to amend the articles of association, dissolution and legal merger / demerger of the company. The Supervisory Board has not formed separate committees and currently does not intend to do so.
Diversity is an important aspect of the corporate management culture, as expressed in Brill's Core Values, where Brill states the importance of diversity and inclusiveness. Consequently, it is Brill's objective to achieve a balanced composition of all its governance bodies. In 2017, the company's Management Board consisted of one person (male), therefore the question of balance in the Management Board was not applicable. In designing the new management structure following the succession of the current Managing Director, Brill's objective regarding diversity was considered. Consequently, per January 1 st , 2018 a female executive was appointed Chief Publishing Officer and as of May 2018, the Management Board will consist of two statutory directors, both male, working with the CPO in the company's key management body, the Executive Committee. The company has a Supervisory Board, since many years consisting of three persons of which one is currently female. Given the current composition of the management layers below the Executive Committee, Brill believes that maintaining this balanced distribution will be feasible in the future.
Regarding transparency between the Managing Director and the Supervisory Board, and between Supervisory Board members, clear agreements were made. The Managing Director's employment agreement is drawn up in line with the best practice provisions of the code. The company's existing rules of conduct, including regulations on insider trading, sexual intimidation, fraud and corruption and rules for misconduct reporting were further enhanced in 2017 by implementing the Brill General Business Principles (available at brill.com). The Principles were implemented at the end of 2017. However, management believes that the Principles documents values and behavior that is generally in existence at Brill. During 2017, on one occasion, Brill had to take action against an employee whose behavior was not in line with our Core Values, resulting in termination of the employee.
The Supervisory Board and the Management Board meet annually to discuss implementation of best practice guidelines and compliance with current legal requirements. They currently hold that the corporate governance structure of the company is broadly in line with the principles expressed in the Dutch Corporate Governance Code, except for the use of share certificates as a defensive mechanism.
Authors in closely defined market niches provide the foundation for future growth through their involvement in series, journals, manuals, and encyclopedias. In their capacity as researcher, they provide the purchase stimulus, often via their libraries and institutes. The librarians, in turn, only subscribe to series when they trust in the quality and pricing of future publications. The value of these subtle relationshipswith key stakeholdersis andwillremain the reason thatthe Supervisory Board andManaging Director believe the company deserves maximum protection.
The Supervisory Board and the Management Board are aware that protection of the company is generally only temporary in nature and primarily aims to create room to carefully weigh the strategic alternatives for the company and, if necessary, evaluate the situation with the key stakeholders. Therefore, it must be made clear to all stakeholders and especially to shareholders and holders of certificates of shares, what the company's strategy is, and what valuable elements from past, present and future are incorporated therein. The aim is to make the company an attractive investment for shareholders who prefer a strategy focused on long term sustainable value creation. Sustainable value creation is, in turn, largely dependent on Brill's standing among customers and authors.
An active investor relations' agenda is in place to communicate this coherent message, and retaining the trust and support of investors is a basic element of the corporate governance policy.
Regarding aspects of best practice provisions not relevant to protection, the Management Board and the Supervisory Board remain of the opinion that these are further supplementing the existing corporate governance structure. The experience the company has gained with the introduction of provisions in respect to corporate governance has been favorable. The release of the updated Dutch Corporate
Governance code in 2017 was followed with great interest by the Management Board and the Supervisory Board. During the year its benefits and implications were reviewed but this has not led to fundamental changes to the Corporate Governance structure in place. We are of the opinion that Brill's current governance supports strategies that help create long term value.
Brill believes that a listed company of modest size should be able to afford the cost and effort involved in proper compliance with the code, and continues to strive for further improvements in its governance structure. The Supervisory Board and the Management Board believe the proposed revised rules and the extended duty of compliance clearly contribute to improvement in managing the company.
Supervisory Board Managing Director
Brill's Core Values and General Business Principles apply to all Brill companies and their subsidiaries that together make up the Brill Group. These govern how Brill and all its entities operate and conduct business. Hereafter 'Brill' refers to the Brill Group and all its underlying entities.
Brill's mission is to be a leading international academic publisher in the humanities and social sciences, international law, biology and natural history. Brill meets a need for multimedia information amongst specialist academic target groups and markets. To achieve its mission, the company must add value and grow consistently, mainly by increasing its market share in the fields in which it is active as well as in adjacent niches. The overriding objective is to maximize Brill's long-term value creation benefitting all stakeholders, including the global community that provides Brill its license to operate.
Our shared core values of quality service to the scholarly community, integrity and respect for people underpin all the work we do and are the foundation of our General Business Principles. The General Business Principles apply to all transactions, large or small, and drive the behavior expected of every employee in every Brill company in the conduct of its business at all times. We are judged by our actions; therefore, our reputation will be upheld if we act in accordance with our Core Values, these Business Principles and the law. We encourage our business partners to live by them or by similar principles. It is the responsibility of management to lead by example, to ensure that all employees are aware of these principles, and behave in accordance with the spirit as well as with the letter of this statement. Employees know that acting in line with the Principles is not optional and non-compliance can have consequences.
The application of these principles is underpinned by communication procedures, which are designed to ensure that our employees understand the principles. As part of the assurance system, it is also the responsibility of management to provide employees with safe and confidential channels to raise concerns and report instances of non-compliance. In turn, it is the responsibility of Brill employees to report suspected breaches of the Business Principles to Brill.
Brill employees share a set of core values – quality service to the scholarly community, integrity and respect for people. We also firmly believe in the fundamental importance of trust, diversity, teamwork and professionalism, and taking pride in what we do.
As part of the General Business Principles, we commit to sustainable development of our company. We are aware of Brill's legacy and are committed to an equally illustrious future. This requires balancing short- and long-term interests, integrating business, environmental and social considerations into our decision-making.
At Brill, we believe that creating sustainable value for all stakeholders is essential to ensure the long-term viability of the company. The company's ability to create value hinges on achieving a balance between serving the scholarly community and business considerations. To achieve this balance, we define value in terms of value created for our stakeholders. This value creation, and Brill's standing with each of these stakeholder groups is the condition for our company to remain relevant within a changing media landscape. We recognize the following stakeholders and areas of value creation:
Readers Content and Usability Value
Investors Economic Value
Long-term profitability is essential to achieving our business goals and to our continued growth. It is a measure both of efficiency and of the value that customers place on Brill products and services. It supplies the necessary corporate resources for the continuing investment that is required to develop and produce future publications to meet customer needs. Without profits and a strong financial foundation, it would not be possible to fulfil our responsibilities. Criteria for investment and divestment decisions include sustainable development considerations (economic, social and environmental) and an appraisal of the risks of the investment. Risk management is a key element of our management process of sustainable value creation.
Brill companies aim to provide the scholarly community with the highest level of quality and service. To this end, Brill invests not only in developing its network of scholarly authors and editors but also in offering them sound processes of peer review, continuous availability of their publication, editorial tools and standards that meet up to date requirements for digital dissemination, competitive production quality and a reliable distribution channel that ensures availability at each author's target audience of academics who use new technology in an increasingly networked digital environment. We are committed to standards of editorial integrity and independence, and our editorial policy only applies academic quality as a criterion for publishing, not adherence to any political, religious or other non-academic viewpoints.
Brill companies insist on integrity and fairness in all aspects of business and expect the same in our relationships with all those with whom we do business. The direct or indirect offer, payment, soliciting or acceptance of bribes in any form is unacceptable. We do not engage in the practice of facilitation payments to speed up or secure the performance of a routine government action. Employees must avoid conflicts of interest between their private activities and their part in conducting company business. Employees must also declare potential conflicts of interest. All business transactions on behalf of a Brill company must be reflected accurately and fairly in the accounts of the company in accordance with established procedures and are subject to audit and disclosure. As a publicly listed company, Brill is committed to following all rules around insider trading.
Brill companies act in a socially responsible manner within the laws of the countries in which we operate in. Brill companies do not make payments to political parties, organizations or their representatives. Brill companies do not take part in party politics. However, when dealing with governments, Brill companies have the right and the responsibility to make our position known on any matters, which affect us and our stakeholders, which is in accordance with our values and the Business Principles.
Where individuals wish to engage in community activity, including standing for election to public office, they will be given the opportunity to do so; however, we do not use Brill's assets, including our time at work, to further personal political activities or interests.
We create value for the global community and specifically the scholarly community by being a reputable publisher who facilitates the scholarly process in selected scholarly disciplines. Specifically, we believe that editorial integrity and freedom of press is in full service of the free flow of scholarly information. Acting efficiently, in the meaning of creating output using the minimal required amount of resources in the broadest sense, is of direct benefit to the scholarly process as well as to society at large, and therefore supportive to Brill's long-term reputation and continuity.
Our corporate sustainability policy can only be successful if it ties in with our core capabilities and the longterm interests of our stakeholders. Consequently, we focus on just those initiatives where we feel we can make a difference. At the same time, we strive for high standards and permanent improvement in all general facets of responsible corporate citizenship – and we expect the same from our vendors and contractors.
Brill companies recognize that regular dialogue and engagement with our stakeholders is essential. We are committed to reporting of our performance by providing full relevant information to legitimately interested parties, subject to any overriding considerations of business confidentiality. In our interactions with employees, business partners and local communities, we seek to listen and respond to them honestly and responsibly. Brill staff is committed to responsible use of digital communications and social media in line with Group policies.
We comply with applicable laws and regulations of the countries in which we operate. Brill's tax policy is aimed at achieving an efficient tax structurewhile paying fair amounts due in the constituencies where it does business.
To create a coherent framework for conduct of business within the Brill Group, these General Business Principles have been detailed further into the following documents:
For documents listed above which are not included in this report, please refer to brill.com
At Brill we believe that our ability to create sustainable value for all stakeholders is essential to the long-term viability of the company. We recognize the following areas of value creation:
We are proud that every year, an increasing number of prominent scholarly authors select Brill as their publisher of choice. This choice is a vital one to the development of an author's scholarly field and individual career. Authors select Brill for the reputation of its brand, journal titles and book series. Independence, longterm commitments and strict peer review are key to maintaining a strong reputation. Authors know that the scholarly teams that curate the research we publish have been selected based on the quality of their contribution to the field. Brill provides tools and support to maintain an efficient and high-quality publishing process, based on a deep know-how of publishing and the publishing experience. Authors and editors must be served in the best possible way. Brill has the investment capabilities for more complex and capitalintensive projects. Authors know that Brill has access to the world's premier research libraries through its distribution system and that Brill will work with them or their institution in various commercial models according to their preference.
Our publications can be found in the most eminent institutions in each field in which we publish. In working with these institutions, we strive to offer flexible and attractive models that enable libraries and funders to work with us efficiently. We offer our content through platforms which enable them to provide library patrons with easy access to our publications. We provide librarians with data and tools to evaluate the use of our services to their patrons and to calibrate their purchasing decisions. We offer funders flexible models to subsidize scholarly research of choice, either in traditional or in Open Access structures. We work with global distribution partners that enable efficient ordering processes. In 2017, we invested in constructing a new digital platform that will further enhance ease of access and communication with Brill, readers and clients.
For our readership, ease of access and ease of use is the primary consideration. We support scholars in performing their critical task of progressing their scholarly field. Online readers do not search for content from a brand or supplier but rather by subject or keyword and then prioritize results based on the reputation of the journal title or book collection. On our platforms, a large majority of internet traffic originates from Google (Scholar) searches. Increasingly we see readers accessing our platforms from mobile devices. Our job is to make the experience seamless, enabling a fast and effective search experience and when the reader arrives at our platform, a comprehensive and efficient research experience. Where applicable, readers will be offered additional purchase options relevant to their interest.
For those readers preferring the print format we aim for quality and service by working with Printing On Demand providers who are quality leaders in their region. Those customers preferring the print option value a high-quality product which is available for use within a short period of time. The implementation of a multisite POD structure further delivered value in that context. Only in exceptional cases offset printing is considered the preferred method of production. This applies mainly to major reference works and when technical or economic considerations indicate special binding requirements or larger print runs.
The economic value created for our investors is determined by the company's ability to profitably grow the business. The resulting value creation is a precondition to maintain our investor's confidence and support in case of additional capital requirements. A focused investor relations policy remains vital to communicate the value created and to manage expectations.
The scholarly research community realizes a steadily growing output in the form of scholarly books and journal articles. Brill's ability to grow the business rests on being granted the right to publish a stable or increasing proportion of the high-quality research that is produced, and to successfully bring the resulting publications to the market. In doing so Brill must remain intimate with changing market preferences for alternate business models and ensure appropriate geographical coverage, for example in Asia.
In addition, Brill invests in self-generated publication initiatives such as dictionaries, encyclopedia, other reference works or primary sources where it believes synergies can be created from Brill's reputation, its author community and its existing portfolio of products and services. These opportunities can represent significant value due to their unique and proprietary nature and associated recurring revenue streams.
Profitability at Brill, as stated by the Return on Invested Capital or ROIC is driven by two key factors:
Margin – measured as Net Operating Profit Less Adjusted Taxes (NOPLAT) divided by Revenues. We believe that, even more than the required continuous operating efficiency improvements, product portfolio structure is paramount to long-term improvement of margin.
Asset Turnover – as measured by the average amount of invested capital required to support the revenue. We actively seek to optimize capital deployment to keep ROIC at target levels.
Our ROIC performance therefore is driven both by our ability to generate profitable revenue as well as by controlling the balance sheet, and our KPI system is geared towards monitoring these drivers.
In 2017, Brill reported mixed results on its economic value drivers. Revenue grew by 13%, of which 11% through acquisitions - and asset turnover increased from 1.5x to 1.7x. However, NOPLAT margin dropped and consequently ROIC declined from 13.0% to 11.1% which still exceeds our after tax weighted average cost of capital. (For details, please refer to note 23 to the Consolidated Financial Statements).
Brill has a unique company culture and working environment which is an asset for attracting and retaining talent, despite the company's limited size. Staff values their employment because of the internationally oriented company culture combined with high professional standards, development opportunities, and global exposure. Brill develops these factors through job rotation, delegation of authorities, training – both on the job as well as formalized training – and periodical team and general staff events. During 2017 we
devoted special attention to the cultural integration of the Schöningh & Fink team in Paderborn (GER), for example through extensive integration workshops, mutual visits and a joint staff event with Leiden staff.
We create value for the global community and specifically the scholarly community by playing our role as a reputable publisher who facilitates the scholarly process in selected scholarly disciplines in a responsible and efficient manner, in the meaning of creating output using the minimal required amount of resources in the broadest sense. We believe that this is of direct benefit to the scholarly process as well as to society at large, and therefore supportive to Brill's long-term reputation and continuity.
At Brill we believe that our corporate sustainability policy can only be successful if it ties in with our core capabilities and the long-term interests of our stakeholders. Consequently, we focus on a few initiatives where we feel we can make a difference. At the same time, we strive for permanent improvement in all general facets of responsible corporate citizenship.
For further details on our Corporate Sustainability policy, please refer to the relevant chapter in this report.
The remuneration of the chairman and the members of the Supervisory Board is set at a fixed annual amount and does not include variable elements. The members do not receive any performance-related remuneration or shares and do not accrue pension rights with the company. They receive no severance pay when they exit the Board. The remuneration of the Supervisory Board is regularly evaluated, if necessary using the advice of a third party. Remuneration was adjusted in 2017. Brill established guidelines governing the holding of and transactions in securities, otherthan those issued by Brill, by Supervisory Boardmembers.
The remuneration of the Management Board is determined by the Supervisory Board based on the remuneration policy. This is in line with the principles and the best practice provisions of the Dutch Corporate Governance Code. The policy with respect to the remuneration of the Management Board is designed to enable a qualified and expert person to be attracted and retained. The Supervisory Board, if necessary with the aid of an external expert, conducts annual reviews to establish whether the Management Board's remuneration is in line with the market development. The remuneration for 2017 has a fixed portion and two performance-related variable components of which one is for the current year and the second for a three-year horizon.
As part of its remuneration policy and in line with the Code, Brill monitors and reports on the company's pay ratio. This indicator compares the salary of the Managing Director (Fixed + variable components) against the average salary of all employees. In 2017, the pay ratio was 5.6. Brill deems the height of the payout ratio to be appropriate given the size and profile of the company.
The Supervisory Board decided to increase the Managing Director'sfixed remuneration as of 1 January 2017 by 2%. Furthermore, current policy holds that the company partly funds the Managing Director's pension premiums, provided that the Director contributes 30% of the premiums due. The new rules with regard to capped contributions for salaries above EUR 100 thousand did not lead to additional costs. The Supervisory Board has agreed with the Managing Director to maintain the amount for pension premium which existed before the cap and have him provide for personal savings. The company does not grant loans, advances, or guarantees to the Managing Director.
A The Supervisory Board sees variable remuneration as a meaningful part of the remuneration package of the Managing Director. The targets and performance conditions reflect the drivers for growth and value creation in the short, medium and long term. Variable compensation, determined by performance metrics, therefore, is a significant part of total remuneration. From 2009, the variable component of remuneration related to short-term targets has been a maximum of 40% and for the three-year, long-term objective, a maximum of 40% of the base salary in the year that the objective was agreed.
B The policy of the company relating to the contract of employment is in line with best practice provision of the Code. The applicable notice period is four months and is in line with standard practice.
C As usual, in 2017 the variable remuneration of the Managing Director was dependent on a combination of short-term and long-term performance criteria. Details on the performance criteria and performance assessment regarding 2017 are included in the financial statements, note 21.
D No rights are allocated to the Managing Director for the acquisition of options or shares. The Managing Director's holding of Brill certificates of shares is considered a long-term investment which he committed to not sell or pledge during his employment. Following his retirement in May 2018, the Managing Director has committed to keep his certificates for at least another year.
E The Supervisory Board has made an agreement with the Managing Director about ownership of and transactions in securities other than those issued by Brill.
The risk management policy of the company is updated in the context of the company's strategic plan. Over time, the company adopted an approach consistent with its scale, ambitions and organization structure.
Risk management is integral to Brill's overall management structure. Risks classified as having strategic impact are discussed with the Supervisory Board annually to enable the Board to make proper evaluations regarding Brill's results and prospects. Furthermore, the Board evaluates the entire risk management framework on an ongoing basis.
Brill's policy requires that mitigating measures applied to each risk are commensurate to the level of impact and the risk appetite that Brill defines regarding the specific risk category.
Management of risk at Brill is generally executed through three categories of risk management tools:
Organization and Governance – The organizational structure and culture of Brill must support identification of risk and avoidance of risk by taking well informed decisions on a timely basis. This requires certain levels of delegation and empowerment. Governance must ensure an adequate framework of accountability. Internal Control Framework – the framework of internal controls must provide reasonable assurance that:
Business Policies – The framework of business policies must ensure that Brill can:
Risk management is in the hands of the Management Team of Brill, under the end responsibility of the Managing Director. Day to day supervision lies with the EVP Finance and Operations, and execution is delegated as follows. Design, implementation and execution of financial control measures is carried out by the Controller, whereas the design, implementation and execution of IT related controls are carried out by the team that is accountable for administration of the system. Specific measures and improvements are implemented, driven by a combination of management's assessment of current risk profiles and the annual Management Letter supplied by the external independent auditor. Brill's Supervisory Board reviews all reporting by the external independent auditor. Due to the small scale of operations and the high degree of centralization of accounting, Brill does not have an internal auditor. The decision to abstain from appointing an internal auditor is reviewed annually by the Supervisory Board.
To assign risk management accountability correctly within the organization, Brill classifies risks as follows: A. Level of impact of the risk on the business of Brill
Consequently, Brill's Risk management analysis and tooling framework can be summarized as follows:
| Nature of risk | ||
|---|---|---|
| Market Operations |
Impact level of risk | |
| Financing | Strategical Risk management tooling |
|
| Regulatory Financial Reporting |
Tactical Organization Controls Policies Operational |
|
| Compliance |
The risks set out in this overview have been classified per the system described above and are linked to the objectives pursued in Brill's strategy, the company's applicable risk appetite, and the mitigation strategies in place. The following depicts a visual classification of specific risks at the strategic impact level to illustrate our assessment of our risk profile and the level of risk that the company is willing to take:
The risk appetite ratings in the following table should be interpreted as ranking measures rather than as an absolute, calibrated, proportional measure of risk. Risk appetite per category is based on an annual management assessment.
| Nature of | Description of the Risk | Objective | Risk | (Type of) Mitigation in |
|---|---|---|---|---|
| the Risk | threatened | Appetite | place | |
| (1=lo & | ||||
| 5=hi) | ||||
| Market | 1. Reputation: Various events may | Strategic | 1 | Organizational: |
| impact the company's reputation | objective to | Organizational structure | ||
| versus its stakeholders which is | expand in | that enables the company | ||
| the cornerstone to Brill's ability to | current and | to react and adapt flexibly | ||
| run and develop the business | adjacent | to changing market | ||
| segments | circumstances. | |||
| Business policies: | ||||
| Editorial policies, | ||||
| Communication policy, | ||||
| Investor relations policy, | ||||
| Code of conduct policy. |
| 2. Funding environment: Our | Expand in | 3 | Business policies: | |
|---|---|---|---|---|
| customers and authors depend on | current and | Increased focus on | ||
| their respective governments' and | adjacent | repeatable business, | ||
| societies' willingness to support | segments | expansion into adjacent | ||
| Humanities and Social Sciences | market segments, tap | |||
| for funding of their purchases at | alternative funding | |||
| Brill and their collaboration with | sources (ERC) | |||
| Brill | ||||
| Operations | 3. Outsourcing: failed outsourcing | Enhance | 1 | Organizational: |
| may impact business continuity or | operating | quality of Brill staff | ||
| quality and pricing of services | capacity | Control measures: | ||
| used leading to reduced | SLA's, vendor selection | |||
| competitiveness. | process | |||
| Business policies: | ||||
| insurance, contingency | ||||
| and back-up measures | ||||
| 4. HR Risk: we may not be able to | Achievement | 2 | Business policy: | |
| attract and retain the right staff | of strategic | Develop Brill reputation | ||
| plan | and culture as attraction | |||
| and retention mechanism | ||||
| 5. IT and cybersecurity risk: | Enhance | 2 | Control measures: | |
| Deficiencies in our IT general | operating | Segregation of duties, IT | ||
| controls may lead to reduced | capacity | user & access | ||
| efficiency, business continuity and | management policies | |||
| increased risk of fraud or exposure | Business policies: | |||
| to cybersecurity risks | Contingency and back up | |||
| measures, security | ||||
| measures, | ||||
| communication on IT and | ||||
| cybersecurity risks | ||||
| Financing | 6. Currency: Significant swings in | Improve | 2 | Business policies: |
| and other | the USD / EUR exchange rate may | financial | Hedging policy (refer to | |
| impact our results | performance | financial statements) | ||
| 7. Impairment risk: The company | Improve | 2 | Internal controls: | |
| carries substantial intangible | financial | Annual review of the value | ||
| assets on its balance sheet. | performance | of intangible assets | ||
| Deteriorating business | Business policies: | |||
| performance may lead to | Conservative valuation | |||
| impairments which could cause | calculations when doing | |||
| substantial erosion of equity. | acquisitions, reduction of | |||
| assets required to run the | ||||
| business |
| 8. Capital: Investors may not be | Expand in | 1 | Business policies: | |
|---|---|---|---|---|
| willing to fund Brill's strategic | current and | Investor relations policy, | ||
| plan | adjacent | focus on financial | ||
| segments | performance | |||
| improvement | ||||
| Internal Controls: | ||||
| Framework of controls | ||||
| aimed at financial | ||||
| reporting reliability. | ||||
| Regulatory | 9. Regulatory: EU Open Access | Expand in | 2 | Business policies: |
| policy may impact our ability to | current and | In addition to our journal | ||
| further grow our journal business | adjacent | subscription business we | ||
| segments | develop our database | |||
| (subscription) business | ||||
| which is not touched by | ||||
| this policy. Also, we keep | ||||
| developing a portfolio of | ||||
| Open Access publication | ||||
| options to prepare for | ||||
| changing market demand | ||||
| and possible paradigm | ||||
| shifts . |
In 2017 Brill made some progress in further enhancing the company's framework of internal controls, based on recommendations made by the external independent auditor following discussion with management and the Supervisory Board. Specific improvements were made in segregation of duties regarding key IT systems and clarification of rules around end-user IT. We enhanced visibility of certain implemented controls and enhanced reporting systems to support management and external reporting. Improvements in controls concerning client access to our online databases are included in the scope of our program to renew Brill's online platform which has its main improvement impact in 2018.
Notwithstanding the above, certain risks relating to outsourcing and technology management materialized during 2017. The delay in the go -live of our new online platform caused delayed business benefits in terms of digital revenue that can now be realized later. An error in EDI implementation for the ordering process between a major US customer and our logistical provider caused over – ordering during 2016 and 2017 and consequently, excessive returns during 2017. In addition, we reported omissions in our royalty accruals which we identified in the first half year, leading to additional expenses in 2017.
The 2017 interim review performed by the external independent auditor reported some progress on the issues and recommendations for improvement that were outstanding by the end of 2016. However, the external independent auditor identified additional opportunities for improvement also considering the increased complexity of the business. Furthermore, some issues have not been solved in 2017 and are now deferred to 2018. In general, the improvement opportunities center around IT General Controls and the visibility and formalization of implemented control measures, as well as on the balance in the framework of internal controls.
In the publishing department, 2017 has seen a lot of new activity.
The publishing houses Ferdinand Schöningh and Wilhelm Fink (S&F) joined early in the year and almost doubled Brill's cooperation with scholars in the German speaking countries. We expect this market to -over time- develop a strong interest for predominantly English language publications for a global market. The combination of Brill's product for the international institutional market in English and S&F's list which is currently geared to a market of individual book buyers in German offers interesting synergetic potential. Especially the student and retail oriented trade list under the UTB umbrella opens new market approaches for Brill. It makes us a more prominent player for the German academy, offers good potential for cross selling and retail coverage in Germany and better opportunities to gain market share in Open Access publication programs. Thematically, the combination is also promising, particularly in philosophy, modern history, art history, theology and canon law. The acquisition of mentis Verlag strengthens the philosophy list further and will help Brill cover a larger part of this important field.
In the first year of integration, good progress has been made in defining the rules of our common publishing practice and start implementing programs to standardize and leverage economies of scale. Adjusted for some delays in moving the program to Brill's electronic platforms, revenue of S&F met expectations and the staff in Paderborn deserves a compliment for publishing a vibrant front list.
Moreover, the team of publishers have secured the new edition of Huizenga's Herbst des Mittelalters and is working on attracting other major publication projects. We hope that based on our successful acquisition of S&F and mentis Verlag and the respectful integration of the combined programs, Brill will be able to attract other high-quality publishing companies in the "DACH" market who look for help in establishing a digital presence and a global reach.
Mid-year we acquired Sense Publishers, a first acquisition in the field of the Social Sciences. In the first six months a great number of new books were published in their special field of Educational Studies. Right from the start the publishing staff began to acquire continuity product such as major reference works and journals, based on Brill's successful practice in these formats. We are confident that the list will keep developing swiftly to become a cornerstone in this much larger market, which is somewhat new to Brill. The Social Sciences have a slightly different publication culture; there is more journal orientation and the research is often data driven. This will offer good opportunities to give new energy to some product formats in Brill's humanities programs. Obviously, some smaller programs of Brill which border the Social Sciences, such as regional studies, cultural studies, gender studies, sociology of religion are the first to benefit from these synergies. As with our strategy for the DACH market, also the Social Sciences are expected to offer good leads for further acquisitions going forward.
As in almost every year, Brill managed to take over separate publishing assets, such as Arkyves (art history database, see the article on Digital Humanities in the brochure Brill in 2017) and the full rights to the International Encyclopedia of Comparative Law.
Meanwhile, the existing Brill organization saw important new products across the board and welcomed new talent in Linguistics, Asian Studies, History of Sciences and Digital Humanities. In addition to books and journals, the product formulas Critical Reading (anthologies of key papers in specific fields), Brill's Research Perspectives (long review articles sold as journals as well as books) and Primary Sources Online saw promising new titles.
The Asian Studies list maintained its momentum and the contemporary Chinese Studies program kept developing well. Also, the development of the East Asian linguistics list offers good opportunities, including harvesting of dictionaries and grammars published by Brill in the past. The primary sources collections of historic Asian newspaper and gazettes were expanded. The bibliography of Asian Art (ABIA) was relaunched.
In the History program, the Luther collection played an important role. The Encyclopedia of Early Modern History saw two new volumes and is on track to publish the full 15 volumes. On a contemporary note, an agreement with the casa de las Americas in Havana opened the door for a first primary source collection; Cuban History and Cultural Relations was marketed successfully through a campaign making use of salesforce.com software. Other collections such as Weapons of Mass Destruction and other U.S Intelligence, among others on Asia and all based on released CIA files, continue to build Brill's reputation in modern history. The same goes for the SHAFR guide, which contains the annotated bibliography of U.S. foreign relations since 1600.
In the Law list several developments are worth mentioning; in our negotiations with the consortium of Dutch universities (VSNU), all law journals have been made available for Open Access articles from Dutch authors as part of a lump sum deal for all subscription based journals of Brill. It will be interesting to watch how many submissions this option will trigger in the next couple of years. If successful, the consortium may want to negotiate an overall agreement with Brill along the same lines.
After many years of co-publishing, the exclusive rights have been acquired for the International Encyclopedia of Comparative Law. For China, several legal publications have been published. Some of these appear as Brill Research Perspectives. This formula and brand is now exclusively reserved for Brill to roll out across all disciplines, Law being the piloting publishing unit.
The Middle Eastern, Islamic and African Studies team developed publishing plans for the area in general and for Iran Studies in particular. Our bid for Open Access projects, resulting from research paid for by the European program Horizon 2020, was successful. Also in other publishing programs we have been granted multi-year commitments from research groups in France, The Netherlands and Germany for Open Access publications.
In the unit which covers Art, Religion, Philosophy and Classical Studies, many projects appeared and many reference works are in progress. Special mention is given to the Peshitta, a text critical edition of the Syriac Bible. This and other long-standing series are digitized for on line publication. Ongoing major works such as the Textual History of the Bible will provide the scholarly setting of a coherent cluster of reference works. The major History of Global Christianity project is being revitalized for publication in 2018 and beyond.
Also in Art & Architecture, the relaunch of Arkyves and the cooperation with the Harvard Semitic Museums are of note. New projects for Jewish art and Archaeology have been started and the first volume of the Encyclopedia of Jewish History and Culture, a translation from German, saw the light in 2017. The Art Sales Catalog database showed the holdings of the museums in Boston and Philadelphia which have added their collections in 2017.
In Philosophy, we are working across the Leiden and Paderborn teams to create a multi-lingual program of journals, books and reference works. A few new journals under which Revue de Synthèse joined the list and the mentis Verlag acquisition in early 2018 will foster our presence in the field. Meanwhile the Classical Studies program keeps featuring classical philosophy, a/o. in Philosophia Antiqua, and carries large numbers of reference works, companions, handbooks and journals. The concept of digitizing long-standing series of monographs was successfully applied to the Mnemosyne Supplements.
The impressive Brill Dictionary of Ancient Greek by Franco Montanari is being marketed on a continuous basis and grew it's online presence based on an improved license to libraries. The dictionary will have to be reprinted in 2018.
2017 was a record year in terms of revenue. Brill is now closer to the objective to achieve sufficient scale for structural improvements in profitability. However, we also incurred several significant one-off effects. As a result, EBITDA and net profit came out lower compared to 2016.
In 2017 we elected to change the classification of our investment in product development costs from Inventories (under IAS 2) to Intangible Assets (under IAS 38). This is intended both to provide the user of these statements with greater transparency as to our investment level and to bring reporting more in line with the digital reality, meaning that the content is an asset that can be employed both to produce print books and to sell digital licenses. The change is only a reclassification and has no impact on results.
Furthermore, following the two acquisitions made in 2017, we assessed our approach towards accounting for acquired intangible assets. Further to this assessment we elect to amortize acquired intangible assets in line with their useful life, where this can be reliably established. Pursuant to this change, an amount of EUR 82 thousand was recognized as amortization in the 2017 income statement.
In 2017, Brill's revenue increased by 13% to EUR 36.4 million (2016: 32.2 million). This growth, breaking down into 2% organic (3% when adjusting for the returns issue) and 11% acquisition, compares to 4% reported growth in 2016. Key drivers for our organic growth in 2017 were digital publications including e-books, major reference works, journal subscriptions and primary sources, whereas print books declined due to excess returns (EUR 0.2 million) and changing market preferences.
| (in EUR million) | Revenue | % of total Growth | Year on Year Growth |
|---|---|---|---|
| Revenue 2016 | 32.2 | 100.0% | |
| Acquisitions | 3.5 | 11.0% | n.a. |
| Print books | -0.4 | -1.2% | -3.1% |
| e-books | 0.8 | 2.4% | 9.4% |
| Journals | 0.2 | 0.7% | 2.4% |
| Primary Sources | 0.1 | 0.4% | 10.8% |
| Other | -0.0 | -0.2% | n.a |
| Revenue 2017 | 36.4 | 113.1% | 113.1% |
Revenue generated through digital products was EUR 18.3 million or 50% of total, versus EUR 17.0 million or 53% in 20161 ; an increase of EUR 1.3 million or 8%. The acquisition of Schöningh & Fink brought the percentage of digital product down as this company is in its early stages of publishing e-books.Revenue generated through subscriptions was EUR 13.8 million or 38% of total, up from 13.4 in 2016; an increase of EUR 0.4 million or 3%.
Across combined print and digital formats, books grew by 18% and journals by 2% reflecting acquisitions, successful sales efforts but also continued new book title output, growth in subscription value and new journal title development. A persistent trend in the print monograph format remains hyper-specialization where it becomes harder to achieve the same print runs per title as before. In other words, we need more title output to realize the same level of revenue.
The balance of major sales deals (i.e. over EUR 100 thousand per order) versus last year was neutral. We successfully closed deals with new clients, for example in Canada and South America but also with existing e-book customers – notably in China.
1 Note 2016 aligned with a changed measurement of digital versus print journals starting 2017
Growth in Asia was particularly strong, amongst others because of our increased presence and visibility in the region. During the year we opened an office in Beijing; partly because of that we saw strong growth in the Chinese market. Growth in the Americas was impacted by excess book returns due to erroneous over – ordering by one of our largest distributors in 2016 and 2017. Corrected for this effect, underlying total growth in North America was 6% and for total Brill was 3%. e-Book sales showed double digit growth in our core markets North America, Western Europe and Asia. The decline in Middle East revenue is due to the large deal we had in Lebanon in 2016.
Total Cost of goods sold increased by 13% from EUR 11.2 million to EUR 12.6 million mostly due to acquisitions, growth in product development costs and content digitization costs. In addition, we updated our amortization schedule to reflect a persistent, market driven shift in the phasing of the sales pattern of book titles, leading to accelerated, non-cash costs of EUR 0.3 million. Despite underlying volume growth of 10%, journal costs were flat versus 2017 because of typesetting savings. Overall, we saved EUR 0.4 million in cash typesetting spend versus 2016, an achievement that is already showing in our working capital and which will benefit profits in years to come.
Cost of goods sold was impacted by significant non-recurring items of EUR 0.4 million (2016: EUR 0.5million). These items partly originate from integration expenses made for digitizing content of acquired businesses, from additional royalty obligations, and from the one time component of the accelerated amortization of content and inventory mentioned above. Going forward we expect the growth of content amortization to abate because of savings in typesetting.
Personnel costs increased by EUR 1.5 million or 15% in 2017 (2016: 3%). The increase was caused by 13% acquisition effects, and 3% organic increases in salary costs (a total of changes in FTE, Collective Labor Agreement adjustments and mix).
Other operating costs increased by EUR 1.7 million or 24% mainly due to acquisitions. The organic increase of EUR 0.5 million or 8% is partly caused by operational expansion (office costs, IT, support cost) but also by nonrecurring items of EUR 0.2 million which include acquisition related expenses, corporate governance related costs and increased audit fees.
At EUR 0.8 million, depreciation and amortization other than recognized in Cost of Goods Sold were 16% higher than 2016. Taking a modified approach versus the past, Brill now amortizes acquired publishing rights in line with estimated remaining useful life, in as far this useful life can reliably be estimated (e.g. in a purchase price allocation exercise). Refer Note 4 and 5 to the Consolidated Financial statements for details. This change caused most of the increase in amortization. As of 2018 we expect further increases in amortization of intangible assets given our current investment activities. Financing income reversed into financing cost because of foreign currency results amounting to EUR -0.2 million (2016: EUR +0.1 million).
The above developments had an adverse impact on EBITDA, which ended at EUR 4.2 million, 8% below last year. As mentioned above, EBITDA was impacted by significant non-recurring items in revenue and cost which total EUR 0.8 million.
The lower EBITDA, higher amortization and adverse exchange rate results resulted in lower Net profit. Net profit amounted to 6% of revenue (2016: 9%).
The number of outstanding shares remained the same relative to 2016. Consequently, earnings per share amounted to EUR 1.21, down by 19% from 2016 (EPS 2016 EUR 1.49).
Excluding acquisition effects, inventories declined further because of our POD policy. Deferred income increased by EUR 0.3 million or 4%. As a result, we could again show a modest improvementin working capital. Tax payments were below last year because of a one-off effect in 2016 relating to settlement of our reinvestment reserve.
Investments increased to EUR 7.1 million from 5.8 million last year, mostly due to acquisitions and capital investments. This effect was mitigated somewhat because of lower investments in content – partly a result of lower typesetting expenditure.
Return on Invested Capital (ROIC) declined to 11.1% versus 13.0% in 2016. Despite the high investment level, asset turnover improved due to the revenue growth and improvements in working capital. Operating margin however declined because of the addition of low NOPLAT margin revenue (S&F), one-off expense items and project activity.
The balance sheet total (EUR 48.9 million) increased relative to 2016 (EUR 47.0 million). Equity amounted to EUR 27.4 million at the end of 2017 (EUR 27.5 million at the end of 2016). Solvency declined to 56.0% in 2017 (2016: 58.6%), so solvency remained at the high end of our target range of 40-60%.
Because of the high investment level, acquisitions and the lower results, mitigated somewhat by improved working capital, our liquidity at year end declined from EUR 6.3 million in 2016 to EUR 3.8 million in 2017.
The Supervisory Board and the Management Board regularly evaluate whether the public listing is in the interest of the company. A stock exchange listing fosters well-spread ownership and a sustainable business model, which aligns well with Brill's long-term orientation. Because of the listing, Brill's holders of certificates of shares have the benefit of certain liquidity, which is of importance to smaller parties. Liquidity provider NIBC takes positions and thereby ensures continuous pricing, which to some extent mitigates excessively sharp price fluctuations. This is important because small trade volumes could otherwise lead to major price swings, causing an undesirable dynamic that may be completely unrelated to the actual course of events within Brill. In 2017, Brill again took part in various meetings with interested current and potential investors.
Brill maintains a dividend policy which is aimed at steady or increasing dividend. Furthermore, we wish to adhere to our corporate solvency policy of 40-60%. In line herewith and supported by the strategic progress made in 2017 we will propose to the General Meeting of Shareholders that will be held on 17 May 2018, an allcash ordinary dividend for 2017 of EUR 1.32 per share plus a one-time extraordinary dividend of EUR 3.00 per share. As a result, per year end 2018 our solvency should be in the range of 40-50%. This proposal reflects the
strength of our balance sheet at the end of the year and our confidence in further improving results in the future.
Brill's annual reports do not include numerical statements about future developments in terms of revenue and results. Our focus is on further development of the publishing program and getting the value out of our recent investments, whereas longer term we seek to expand and enhance the portfolio in terms of faster growing, recurring revenue streams.
In 2018, compared to 2017, we expect reduced levels of capital investment as we are finishing the largest programs from our strategic roadmap. Given the strength of our balance sheet and our prospects we have determined that an adjustment in our capital structure is appropriate; which is why we have decided to propose an additional dividend to the AGM and to negotiate an expanded financing package with our banks – to be implemented in 2018. We will continue to invest modest amounts in R&D relating to Digital Humanities, developing concepts that we can realistically market within foreseeable timeframes. As always, revenue will be balanced towards the end of the year and will partly depend on our success in realizing our planned publishing calendar and in landing a few larger orders. It should be noted that the staffing growth we experienced in 2017 and inflationary pressure on salary costs will have a significant impact on our staffing expense in 2018, even though we currently do not expect significant staff growth in 2018. We expect that the recent weakening of the US dollar will negatively impact our revenue in 2018 however the impact will be dampened somewhat by our hedging policy.
Overall, the company is cautiously optimistic about the future, especially about growing revenue and improving profits in 2018, our 335th year.
The key internal factor determining the success of the company is its personnel. It is therefore important to recruit and retain skilled and motivated professionals. Brill's policy, which is aimed at controlling the costs of personnel, optimizing work processes, providing clear job definition, and offering professional development, is closely monitored by management and the Supervisory Board, and measures are taken when necessary.
Brill is managed by its Management Board. Currently this Board exists of one Managing Director, who is also - in his capacity of acting Executive Vice President Publishing - responsible for Publishing, Business Development and HR policy. The Management Team includes the Managing Director, the EVP Sales & Marketing and the EVP Finance & Operations. Starting January 1 2018, the Management Team includes a newly appointed Chief Publishing Officer. Brill's subsidiaries have statutory directors who are locally based and who combine this role with their primary sales or publishing roles. They have regular meetings with the Management Team.
The Management Team meets every two weeks and focuses on setting the organization's objectives and coordinating publishing activities, sales and marketing, production, distribution, financing, administration, automation of work processes, management information, and human resources management.
Brill's Publishing Directors each head up a Publishing Unit. They report to the EVP Publishing, and as of January 1 2018, to the CPO. Publishing Directors and (Senior) Acquisitions Editors are responsible on a rotating basis for coordinating and optimizing cooperation with other departments.
Key Figures Human Resources
The workforce increased significantly relative to the preceding year and amounted to 164.9 FTEs (2016: 133.3 FTEs) at year end. This increase was anticipated and mainly the result of acquisitions (21 FTEs), expansion of our Asian presence and underlying growth in our publishing and sales & marketing teams. Average FTE was 160.5 versus 131.7 in 2016.
| FTEs | Year end 2017 | Year end 2016 |
|---|---|---|
| Publishing Activities | 65.9 [40.0%] | 49.3 [37.0%] |
| Operations * | 48.8 [29.6%] | 43.8 [32.9%] |
| Sales & Marketing | 35.8 [21.7%] | 27.8 [20.9%] |
| Other ** | 14.4 [8.7%] | 12.4 [9.3%] |
| Total | 164.9 [100%] | 133.3 [100%] |
* Departments for desk editing, bibliographic support, electronic publishing technology, data management,
production management, distribution and IT.
** General Management and the departments of Finance & Control, Legal, and Human Resources.
The split of FTE by country was as follows:
| FTEs | Year end 2017 | Year end 2016 |
|---|---|---|
| The Netherlands | 112.4 | 108.2 |
| United States | 19.8 | 19.1 |
| Germany | 23.9 | 1.0 |
| Asia | 5.8 | 2.0 |
| Other | 3.0 | 3.0 |
| Total | 164.9 [100%] | 133.3 [100%] |
In terms of the ratio of men to women, the share of women decreased in 2016 from 60.3% to 59.8%. The share of part-time workers showed a decrease and made up 34.6% (2016: 39.7%) of the workforce in 2017. Sickness leave showed an improvement from 4.2% in 2016 to 3.3% in 2017.
The age structure of the workforce changed relative to 2016 and was as follows:
| AGE | 2017 | 2016 |
|---|---|---|
| 20 - 29 years | 9.5% | 11.0% |
| 30 - 39 years | 27.9% | 26.7% |
| 40 - 49 years | 26.8% | 24.7% |
| 50 - 59 years | 24.0% | 26.7% |
| Older than 60 years | 11.7% | 10.9% |
The average age increased in the year under review from 44.8 at the end of 2016 to 45.1 at the end of 2017. The outflow of FTE in 2017 was 8.7%, whereas the inflow was 27.9%:
| FTE's outflow | 2017 | 2016 |
|---|---|---|
| Retirement | 1.0 | 1.7 |
| Brill initiative | ||
| Temporary contracts | 6.6 | 3.1 |
| Other | 2.6 | 0.7 |
| Own initiative | ||
| Employment 0-2 years | 2.0 | 0.7 |
| Employment 2-5 years | 0.9 | 1.0 |
| Employment 5-10 years | 2.9 | 2.0 |
| Employment 10-15 years | 0.0 | 0.0 |
| Total FTE outflow | 13.9 | 9.2 |
| Total outflow in % | 8.7% | 7.0% |
| FTE's inflow | 2017 | 2016 |
|---|---|---|
| Acquisitions / divestment | 20.7 | 0.0 |
| Temporary position | 3.0 | |
| Permanent contracts | 17.7 | |
| Other | ||
| Temporary contracts | 12.2 | 8.1 |
| Permanent contracts | 12.0 | 5.8 |
| Total FTE inflow | 44.9 | 13.9 |
| Total inflow in % | 27.9% | 10.5% |
In 2017, Brill's pension plan continued to be operated by Pensioenfonds PGB. The pension plan is what is referred to as a collective defined contribution (CDC) plan including a conditional indexation scheme. The pension plan is considered a Defined Contribution pension plan for accounting and reporting purposes. No additional arrangements have been set up for senior management.
The year 2017 made a good start with the addition of the new German colleagues in Paderborn. From the beginning the Works Council has been in touch with their German counterpart, the Betriebsrat, through Skype and in person. The council also had regular meetings with its Boston liaison. Although officially the council does not represent the colleagues abroad it values regularly speaking with them, as business in the other offices and in Leiden have a mutual impact.
Elections were organized but not executed since there were five candidates for the five available positions. Maarten Frieswijk and Stijn Wieger van der Heide stepped down and Debbie de Wit (vice-chair) and Carmen Loh joined as new members. Together with Tessel Jonquière (chair), Tom Weterings (secretary) and Wies van Leeuwen they constitute the Works Council May 2017–April 2019.
Several Requests for Advice were handled this year. In the first two months, two requests were finalized that had already been initialized in 2016, on the acquisition of Schöningh & Fink and the return to the public system (UWV) regarding the long-term disability insurance (Beëindiging Eigenrisicodragerschap WGA).
In June the council received the request to advice on the acquisition of Sense Publishers. The councilstressed a concern about the workload involved with a take-over, given that the implementation of all Schöningh & Fink business was still underway, but was otherwise enthusiastic about the new venture.
In September the council advised positively on the succession plan for Herman Pabbruwe, who will retire in 2018. The Supervisory Board made a good case for the appointment of two statutory directors: a CEO and a CFO/COO. The council was especially pleased with the intention to also appoint a Chief Publishing Officer to complement the Executive Team.
Recurring issues during the monthly meetings with Management were the corporate governance discussion with the shareholders, the challenges around the office renovation and regular updates on Triple-C, RSuite and the integration of acquired companies. At the top of the list were topics concerning HR, such as the finalization of the Working from Home pilot, changes within the job-grading system, the current and new Collective Labor Agreement, posting of the company regulations, vacancies and response to job openings. In general, concerns were expressed regarding the workload of the HR department and the ensuing delays.
As before, the council had an open and substantive working relationship with the CEO, Herman Pabbruwe, through monthly meetings. The council met the Supervisory Board in two regular meetings, in February and November, all in a spirit of confidence. In February the council used its enhanced right of recommendation for the re-appointment of Catherine Lucet as Supervisory Board member. Incidental meetings with HR director Ina de Lange and the EVPs Peter Coebergh and Olivier de Vlam, as well as with some of the project leaders of the major projects under discussion, were constructive and pleasant.
A topic that is high on the 2018 agenda is the new General Data Protection Regulation. The council looks forward to its cooperation with Herman Pabbruwe during his final months in office, but also to meeting with the new CEO and Executive Committee as of May, in order to continue the pleasant cooperation.
Brill's mission is to be a leading international academic publisher in the humanities and social sciences, international law, biology and natural history. Through its mission, Brill meets a need for multimedia information amongst specialist academic target groups and markets. Providing quality service to authors and researchers is the core business. To achieve its mission, the company must grow consistently, mainly by increasing its market share in the fields in which it is active as well as in adjacent niches. The overriding objective is to maximize Brill's value creating potential for all stakeholders, including the global community that provides Brill its license to operate.
To achieve Brill's mission, the corporate strategy centers around three goals:
• Expand market position
We build on our leading position as the publisher of choice for many academic researchers in the Humanities, Social Sciences and International Law. Additionally, we aim to enter adjacent segments where Brill's key assets (reputation, distribution, infrastructure) can be leveraged. These goals could be achieved organically or through acquisition. Adjacent areas which seem likely for development would include those where Social Sciences and Natural and Life Sciences have natural touching points with subjectsin which we are strong traditionally such aslanguage, philosophy and ethics, religion and history. Brill actively explores acquisition opportunities based on clear priority setting. Furthermore, we will expand the formats in which we publish – for example in digital humanities – and more actively manage the business models offered.
• Develop market presence
We are investing in our marketing and sales execution capability to be closer to our client and achieve improved market coverage. This entails expanding the sales force, notably in the Asian and US markets but also enhancing our communications to raise awareness of the depth and breadth of our portfolio. Communication and sales efforts will be more concentrated around the signature titles that define Brill's reputation. Digital marketing and social media are increasingly employed to improve efficiency and effectiveness of our marketing operation.
• Invest in Operations
We continue to invest Brill's digital business capabilities to facilitate value creation. Strategy-driven roadmaps for investment are in place for key business applications used in the business, for our content management process and for our online publishing platforms. We support our operations with standard software applications that are widely used in the business and which are provided by reputable partners, such as Klopotek, RSuite, Pubfactory and Highwire. IT operations are structured to optimize risk and efficiency through a combination of on-premise and cloud models, the balance of which is permanently reassessed.
We believe that following through on these strategic tenets during the timeline of the plan will enable us to operate within our objective EBITDA margin range of 15-20% and achieve a long-term average organic growth slightly more than the market growth, with a return on invested capital showing material headroom to our weighted average cost of capital.
Brill's Corporate Sustainability policy plays a vital role in the value creation process. Brill focuses on two areas:
As an independent publisher, Brill strives to make a constructive contribution to the creation of an (equally) accessible free and open information society. The demand for reliable information that is scrutinized in terms of quality and objectivity is very high. Because the company operates at its own risk and expense, it does not have to answer to any government or organization for its decision to publish or refrain from publishing a given work. Publishing practices and products are assessed by actively seeking the opinions of globally highlyesteemed researchers (peer review) and internationally active librarians (library advisory committees) and researchers (peer review).
Brill's sustainability policy also manifests itself in the company's Developing Countries Program. Brill not only actively participates in existing programs, but also takes initiatives that are developed in cooperation with professional publishers and international organizations. Examples in this regard are: Research4Life, INASP, Association of Commonwealth Universities, and Publishers for Development. As part of Research4Life Brill is currently taking the lead in setting up a new program focusing on International Law and dubbed: 'Global Online Access to Legal Information' (GOALI). This is done in close cooperation with academic libraries, such as Yale and Cornell Law School Libraries,the Library of the International Labour Organisation (ILO) in Geneva as the lead UN entity, and other academic publishers and key stakeholders.
As part of its research capacity building strategy, Brill has an Adopt-a-Library program in place through which it annually donates collections of books to libraries and universities in developing countries. These donations are supported by workshops for academics and librarians that focus on how faculty can increase the impact of their research by publishing nationally and internationally and how to make the best use of limited resources. Such workshops are given throughout the year by Brill publishers as part of research capacity building. Brill's endeavors in this context tie in with existing initiatives, such as Research4Life and INASP's Author Aid, an online mentoring system of international academics and researchers that promotes coaching and the exchange of knowledge between developed and developing countries in a very practical and effective manner. To advance accessibility and distribution, Brill offers discounts on its Open Access fees to academics and scientists in developing countries as part of its Brill Open Program.
As a well-established international company with a longstanding history, Brill attaches great importance to its historic reputation in the Netherlands and beyond. The city of Leiden and its university deserve a special mention in this regard. The Brill Fellowship available at the Scaliger Institute, makes it possible for researchers to study the special collections of Leiden University's library and is just one example of the way in which the company manifests its loyalty to the city and its university. Brill also contributes to Leiden's annual VeerStichting symposium and fosters and maintains good relations with Dutch heritage institutes. The company has granted corporate sponsorship to the Siebold Museum (Japan Studies) and the newly re-opened Rijksmuseum Boerhaave (History of Science), both in Leiden.
Actively contributing to these initiatives supports the future development of the global scholarly community and Brill's network within that community. Therefore, we strongly believe that an active policy in this regard is in the interest of all stakeholders.
As a reputable company with a long history, Brill takes its responsibilities as a corporation to heart. The company strives to be reliable, honest, predictable, and cooperative. Creating value and long-term relationships with authors and users are key policy objectives. Authors can be sure that their books and articles will be easy to find and always remain available. Brill uses the services of internationally preferred suppliers selected based on price and quality. In addition, our printsuppliers have Forest Stewardship Council (FSC) certification. The universal 'Brill' typeface, the use of which saves time and money, was developed as an efficient and therefore paper-friendly font family. Brill's vendor policy contains unequivocal provisions pertaining to social conditions (the exclusion of child labor, for example) and the substances and materials to be used. Brill's General Business Principles are clear about our values and their impact on the conduct of our business. Brill aims to be a reliable, responsible and attractive employer (refer Value Creation at Brill).
To formalize its commitment to sustainability, Brill joined the UN Global Compact in 2016, subscribing to its Ten Principles of doing Sustainable Business in an increasingly changing global world. It is the world's largest Corporate Sustainability initiative that calls on companies to align their strategies and operations with universal principles on human rights, labor, environment, and anti-corruption. In 2017 Brill submitted its first update report to the UN.
Brill's tax policy is aimed at achieving an efficient tax structure while paying fair amounts due in the constituencies where it does business. The transfer pricing arrangements put in place within the group are aimed at being sustainable within the context of the current OECD initiatives and concerns which have emerged in the global community.
The Managing Director of Koninklijke Brill NV is responsible for the preparation of the financial statements in accordance with IFRS as adopted by the European Union and the provisions of Part 9 Book 2 of the Dutch civil Code. In addition, the Managing Director is responsible for the preparation of the Director's Report which is included in the Annual Report 2017.
In the Annual Report, the Managing Director endeavors to present a true and fair view of the financial position of the Group at the balance sheet date and the development of the Group in the year under review. In the section Risk Management, management identified the main risks that are currently known to management which could affect the achievement of Brill's strategic objectives or which could lead to misstatements in the financial statements, as well as the measures implemented to manage these risks. These measures can provide reasonable but not absolute assurance against material losses or material errors.
As required by the provisions of 1.4.3 of the Corporate Governance code and section 5.25c par 2c of the Dutch Act on financial supervision, the Managing Director confirms that to his knowledge:
(Statement according Corporate Governance Code)
(Statement according 5.25c par c2)
Leiden, April 4, 2018
Herman A. Pabbruwe Managing Director
| 45 | Consolidated statement of financial position, before appropriation of profit | |
|---|---|---|
| 46 | Consolidated income statement and statement of comprehensive income for the year ended 31 December, 2017 |
|
| 47 | Consolidated statement of cash flows for the year ended 31 December, 2017 | |
| 48 | Consolidated statement of changes in total equity | |
| 49 | General Information | |
| 49 | 1. | Reporting Entity |
| 49 | 2. | Basis of preparation of the Financial Statements |
| 60 | Notes to the consolidated financial income statements | |
| 60 | 3. | Business combinations, acquisitions and divestments of publishing rights |
| 62 | 4. | Tangible fixed assets |
| 63 | 5. | Intangible fixed assets |
| 66 | 6. | Income tax expense |
| 67 | 7. | Inventories |
| 68 | 8. | Trade and other receivables |
| 68 | 9. | Cash and cash equivalents |
| 68 | 10. | Share capital and reserves |
| 69 | 11. | Interest bearing loans |
| 70 | 12a. | Trade creditors and other payables |
| 70 | 12b. | Provisions |
| 70 | 13. | Financial instruments |
| 72 | 14. | Financial risk management |
| 74 | 15. | Segment information |
| 76 | 16. | Expenses |
| 78 | 17. | Finance income and expense |
| 78 | 18. | Earnings per Share (EPS) |
| 78 | 19. | Dividend paid and proposed |
| 79 | Supplemental information related to the consolidated financial statements | |
| 79 | 20. | Commitments |
| 79 | 21. | Information concerning related parties |
| 81 | 22. | Events after balance sheet date |
| 81 | 23. | Reconciliation of non-GAAP information |
In thousands of euro's
| 31 December | 31 December | |
|---|---|---|
| 2017 | 2016*) | |
| ASSETS | ||
| Non - current assets | ||
| Tangible fixed assets [4] | 488 | 303 |
| Intangible fixed assets [5] | 31,574 | 29,186 |
| Financial assets | 12 | 0 |
| 32,074 | 29,489 | |
| Current assets | ||
| Inventories [7] | 3,236 | 3,045 |
| Trade and other receivables[8] | 9,154 | 8,002 |
| Income tax to be received | 334 | 34 |
| Derivative financial instruments [13] | 346 | 117 |
| Cash and cash equivalents [9] | 3,787 | 6,304 |
| 16,857 | 17,502 | |
| Total assets | 48,931 | 46,991 |
| Equity attributable to owners of Koninklijke Brill NV | ||
|---|---|---|
| Share capital [10] | 1,125 | 1,125 |
| Share premium | 343 | 343 |
| Retained earnings | 23,900 | 23,577 |
| Other reserves[10] | -226 | -308 |
| Undistributed profit | 2,260 | 2,797 |
| 27,402 | 27,534 | |
| Non – current liabilities | ||
| Provisions [12b] | 45 | 0 |
| Deferred tax liabilities[6] | 3,775 | 3,693 |
| 3,820 | 3,693 | |
| Current liabilities | ||
| Trade and other payables [12a] | 8,787 | 6,789 |
| Deferred income | 8,713 | 8,439 |
| Provisions [12b] | 100 | 0 |
| Derivative financial instruments [13] | 105 | 422 |
| Income tax to be paid | 4 | 114 |
| 17,709 | 15,764 | |
| Total liabilities | 48,931 | 46,991 |
*) 2016 restated for reclassification from inventories to intangible assets, refer Note 5.
| 2017 | 2016 | |
|---|---|---|
| Gross profit | ||
| Revenue [15] | 36,394 | 32,177 |
| Cost of goods sold [16] | -12,551 | -11,158 |
| 23,843 | 21,019 | |
| Expenses [16] | ||
| Selling and distribution expenses | -6,476 | -5,745 |
| General and administrative expenses | -14,052 | -11,562 |
| Operating profit | 3,315 | 3,712 |
| Finance income [17] | 19 | 147 |
| Finance expenses[17] | -269 | -46 |
| Profit before income tax | 3,066 | 3,813 |
| Income tax expense [6] | -806 | -1,016 |
| Profit attributable to | ||
| shareholders of Koninklijke Brill NV | 2,260 | 2,797 |
| Other comprehensive (expense) income – items that | ||
| might be reclassified to future profit or loss statements | ||
| Exchange rate differences in translation of foreign operations [10] |
-116 | -24 |
| Cash flow hedges [10] | 263 | -108 |
| 147 | -132 | |
| Income tax relating to these items | -66 | 27 |
| 81 | -105 | |
| Total comprehensive income for the period attributable | ||
| to shareholders of Koninklijke Brill NV | 2,341 | 2,692 |
| Earnings per share (EPS) [18] | ||
| Basic and diluted earnings per share attributable | ||
| to shareholders of Koninklijke Brill NV | 1.21 | 1.49 |
In thousands of euro's
| 2017 | 2016*) | |||
|---|---|---|---|---|
| Cash flow from operating activities | ||||
| Profit before income tax | 3,066 | 3,813 | ||
| Adjustments for | ||||
| Amortization and Depreciation fixed assets | 962 | 861 | ||
| Amortization Content [5] | 3,461 | 3,148 | ||
| Finance income – net | 250 | -102 | ||
| Loss on divestment | - | 217 | ||
| Change in operating assets and liabilities | ||||
| Change in working capital | 554 | 1,520 | ||
| Change in provisions | 0 | -104 | ||
| Cash generated from operations | 8,293 | 9,353 | ||
| Interest paid | -28 | -34 | ||
| Income tax paid | -1,222 | -1,494 | ||
| Net cash flow from operating activities | 7,043 | 7,825 | ||
| Cash flows from investing activities | ||||
| Investment in tangible fixed assets [4] | -359 | -71 | ||
| Investment in intangible fixed assets (non-content) [5] | -1,671 | -976 | ||
| Investment in Content | -3,090 | -3,465 | ||
| Payments for acquisitions, net of cash acquired [3] | -1,866 | -95 | ||
| Payments for acquisitions relating to other periods [8] | -100 | -890 | ||
| Net cash flow from investing activities | -7,086 | -5,496 | ||
| Cash flow from financing activities | ||||
| Dividend paid to company shareholders[19] | -2,474 | -2,324 | ||
| Net cash flow from financing activities | -2,474 | -2,324 | ||
| Net cash flow | -2,517 | 5 | ||
| Cash and cash equivalents as per January 1st | 6,304 | 6,299 | ||
| Net cash flow | -2,517 | 5 | ||
| Cash and cash equivalents as per December 31st [9] | 3,787 | 6,304 |
*) 2016 restated for reclassification from inventories to intangible assets, refer Note 5
In thousands of euro's, as per 31 December
| Share | Share | Retained | Currency | Currency | Undistributed | Total | |
|---|---|---|---|---|---|---|---|
| capital | premium | earnings | Translation | Hedge | Profit | equity | |
| Reserve [10] | Reserve [10] | ||||||
| Balance as per January 1st 2016 | 1,125 | 343 | 23,569 | -123 | -80 | 2,332 | 27,166 |
| Total comprehensive income for the | |||||||
| period | |||||||
| Profit for the year | 0 | 0 | 0 | 0 | 0 | 2,797 | 2,797 |
| Other comprehensive income | 0 | 0 | 0 | -24 | -81 | 0 | -105 |
| Total comprehensive income for the period |
0 | 0 | 0 | -24 | -81 | 2,797 | 2,692 |
| Total contributions by and distribution to owners |
|||||||
| Dividends paid over prior year | 0 | 0 | 0 | 0 | 0 | -2,324 | -2,324 |
| Retained earnings prior year | 0 | 0 | 8 | 0 | 0 | -8 | 0 |
| Total contributions by and distribution to owners |
0 | 0 | 8 | 0 | 0 | -2,332 | -2,324 |
| Balance as per December 31st, 2016 | 1,125 | 343 | 23,577 | -147 | -161 | 2,797 | 27,534 |
| Total comprehensive income for the period |
|||||||
| Profit for the year | 0 | 0 | 0 | 0 | 0 | 2,260 | 2,260 |
| Other comprehensive income | 0 | 0 | 0 | -116 | 197 | 0 | 81 |
| Total comprehensive income for the | 0 | 0 | 0 | -116 | 197 | 2,260 | 2,341 |
| period | |||||||
| Total contributions by and | |||||||
| distribution to owners | |||||||
| Dividends paid over prior year | 0 | 0 | 0 | 0 | 0 | -2,474 | -2,474 |
| Retained earnings prior year | 0 | 0 | 323 | 0 | 0 | -323 | 0 |
| Total contributions by and | 0 | 0 | 323 | 0 | 0 | -2,797 | -2,474 |
| distribution to owners | |||||||
| Balance as per December 31st, 2017 | 1,125 | 343 | 23,900 | -263 | 36 | 2,260 | 27,402 |
Koninklijke Brill NV (together with its subsidiaries referred to as 'Brill' or the 'Group') is a corporation established and based in the Netherlands at Plantijnstraat 2, 2321 JC in Leiden. Brill's shares are quoted on the Euronext Amsterdam. This report contains a description of Brill's activities in the Management Report, section 1 General report. These financial statements were authorized for issue by decision made on 4 April 2018, by Brill's Supervisory Board and Managing Director.
The consolidated financial statements contain the financial statements for Brill and its subsidiaries as per December 31st, 2017. The financial statements of Brill's subsidiaries have been prepared for the same period as Brill's, using consistent standards of accounting. Note 21 to the consolidated financial statements contains information on Brill's subsidiaries.
The consolidated financial statements of Koninklijke Brill NV have been prepared in accordance with IFRS as endorsed by the EU and the statutory provisions of Part 9, book 2, of the Dutch Civil Code.
The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. The preparation of consolidated financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the company's and the group's accounting policies. The areas involving more judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in paragraph 2.6.
All balances, transactions, cost and income within the Group and all profits and losses originating from intragroup transactions are eliminated completely. Subsidiaries are consolidated as of the date of acquisition meaning the date at which Brill obtained control over the acquired business. The Group controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and can affect those returns through its power over the entity. Subsidiaries continue to be consolidated until the moment Brill loses control over the financial and operating policies, generally with shareholdings of less than 50%.
Business combinations are identified when the Group obtains control over an integrated set of assets and activities that is capable of being conducted and managed for providing economic benefits to the Group. In general, before qualifying as business combinations, the acquired business will need to meet the test of incorporating demonstrable inputs (for example intellectual property rights, customer groups, author networks), processes (such as editorial activities or marketing and selling activities) and outputs (in most cases, revenue).
Business combinations are accounted for using the acquisition method as at the acquisition date, which is the date on which control is transferred to the Group. When a business combination is achieved in stages, the Group's previously held equity interest in the acquired entity is re-measured to its acquisition-date fair value and the resulting gain or loss, if any, is recognized in financing results.
The Group measures goodwill at the acquisition date as the sum of the fair value of the consideration transferred and the recognized amount of any non-controlling interests in the acquired business, less the net recognized amount (generally fair value) of the identifiable assets acquired and liabilities assumed (including any publishing rights that have been identified). If the business is acquired in stages, the fair value of the existing equity interest in the acquired business is also included in the determination of goodwill. When the excess is negative, a bargain purchase is recognized immediately in profit or loss.
The consideration transferred does not include amounts related to the settlement of pre-existing relationships. Such amounts are generally recognized in profit or loss. Cost related to business combinations, other than those associated with the cost of debt or equity securities, that the Group incurs in connection with a business combination are expensed as incurred. Any contingent consideration payable (like earn-out arrangements) is recognized at fair value at the acquisition date.
Brill's consolidated financial statements have been prepared based on historic cost price, except for the financial derivatives which have been recognized at fair value. The functional and reporting currency is the euro, and all amounts have been rounded to thousands, except where noted differently.
On 1 January 2017 Brill adopted several new accounting policies to comply with amendments to IFRS. The accounting pronouncements, which are not considered by Brill as significant on adoption, are:
The financial statements are presented in accordance with the new standards above, which do not have a material impact on the consolidated results, financial position or cash flows.
Pursuant to the provisions of IAS 8.29 and effective 1 January 2017, Brill changed its accounting policy regarding the treatment of capitalized product development costs ("Content"). Until 2016, Content was accounted for as an element of Inventory, in line with the provisions of IAS 2. Brill management holds that Content meets the criteria for treatment under IAS 38 (Intangible Assets) and that changing the treatment serves the user of these financial statements better by reflecting that Content does not reflect items held for sale but rather (long-term) assets that Brill uses to generate items for selling (e.g. books and licenses to e-books). The amortization pattern of Content is based on the expected pattern of consumption of the expected future economic benefits embodied in the asset. In most cases, the expected pattern leads to a diminishing balance amortization pattern.
The change represents a reclassification and does not lead to any impact on the financial statements, other than an increase of fixed assets and a decrease of current assets. In line with this change, an amount of EUR 9,818 thousandwas reclassed in 2016 from Inventory to Content. For details, refer to the balance sheet and the notes thereto.
The following pronouncements which are potentially relevant to Brill have been issued by the IASB and are effective for annual periods beginning on or after 1 January 2018. Except when noted otherwise the company does not expect the impact of these policies to be material. Brill intends to adopt each standard as of its mandatory effective date.
The impact of IAS 40 is expected to be immaterial since Brill does not have investment properties.
In July 2014, the IASB issued the final version of IFRS 9 Financial Instruments that replaces IAS 39 Financial Instruments: Recognition and Measurement and all previous versions of IFRS 9. IFRS 9 brings together all three aspects of the accounting for financial instruments project: classification and measurement, impairment and hedge accounting. IFRS 9 is effective for annual periods beginning on or after 1 January 2018, with early application permitted. Except for hedge accounting, retrospective application is required but providing comparative information is not compulsory. For hedge accounting, the requirements are generally applied prospectively, with some limited exceptions.
Koninklijke Brill plans to adopt the new standard on the required effective date and will not restate comparative information. During 2017, Koninklijke Brill has performed an impact assessment of the relevant aspects of IFRS 9. This assessment is based on currently available information and may be subject to changes arising from further reasonable and supportable information being made available to Koninklijke Brill in 2018 when IFRS 9 will be adopted. Koninklijke Brill expects no significant impact on its statement of financial position and equity except for the effect of applying the impairment requirements of IFRS 9. With regard to the impairment requirements Koninklijke Brill expects an increase in the loss allowance resulting in a negative impact on equity as discussed below.
The Group does not expect a significant impact on its balance sheet or equity on applying the classification and measurement requirements of IFRS 9. It expects to continue measuring at fair value all financial assets currently held at fair value.
Trade receivables and other receivables are held to collect contractual cash flows and are expected to give rise to cash flows representing solely payments of principal and interest. Koninklijke Brill analyzed the contractual cash flow characteristics of those instruments and concluded that they meet the criteria for amortized cost measurement under IFRS 9. Therefore, reclassification for these instruments is not required.
IFRS 9 requires to record expected credit losses on trade receivables, either on a 12-month or lifetime basis. Koninklijke Brill will apply the simplified approach and record lifetime expected losses on all trade receivables. As a result of the unsecured nature of the receivables, Koninklijke Brill expects that the loss allowance will increase by EUR 88 thousand.
Koninklijke Brill determined that all existing hedge relationships that are currently designated in effective hedging relationships will continue to qualify for hedge accounting under IFRS 9. As IFRS 9 does not change the general principles of how an entity accounts for effective hedges, applying the hedging requirements of IFRS 9 will not have a significant impact on Group's financial statements.
In addition to the adjustments described above, on adoption of IFRS 9, other items of the primary financial statements such as deferred taxes, assets held for sale and liabilities associated with them, investments in the associate and joint venture, will be adjusted as necessary. The exchange differences on translation of foreign operations will also be adjusted. The impact of IFRS 9 adoption is expected to be as follows:
| In thousands of euros | ||
|---|---|---|
| Assets | adjustment | |
| Trade and other receivables | (b) | -88 |
| Total assets | -88 | |
Under IFRS 15, revenue is recognized at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer. The new revenue standard will supersede all current revenue recognition requirements under IFRS. Either a full retrospective application or a modified retrospective application is required for annual periods beginning on or after 1 January 2018. Early adoption is permitted. Given the limited expected impact, Koninklijke Brill plans to adopt the new standard on the required effective date using the full retrospective method.
For contracts with customers in which the sale of printed publications is generally expected to be the only performance obligation, adoption of IFRS 15 is not expected to have any impact on Koninklijke Brill's revenue and profit or loss. Koninklijke Brill expects the revenue recognition to occur at a point in time when control of the printed publication is transferred to the customer.
For contracts with customers in which the sale of online publications is generally expected to be the only performance obligation, adoption of IFRS 15 is not expected to have any impact on Koninklijke Brill's revenue and profit or loss. Koninklijke Brill expects the revenue recognition to occur at the point in time when the customer obtains the right to use the licensed content. For the calendar year subscriptionsto online databases the revenue recognition will be over time. The adoption of IFRS 15 is not expected to have any impact on the revenue and profit and loss because revenue recognition under IFRS 15 is equal to the revenue recognition Koninklijke Brill uses.
Some contracts with customers provide a right of return. When a contract with a customer provides a right to return the good within the specified period, Koninklijke Brill currently accounts for the right of return as a provision when it is highly probable that a return will be received. This is similarto the expected value method under IFRS 15. Under the current accounting policy, the net amount of revenue minus cost of goods sold is recognized in the statement of financial position within Trade and other payables.
Generally, Koninklijke Brill receives only short-term advances from its customers. They are presented as part of Trade and other payables. There are no significant financing components in the contracts.
Koninklijke Brill has a few contacts with business partners to provide sales, marketing and fulfilment services for the publication made and owned by these partners. Koninklijke Brill does not own the rights or the inventory of these publications. Koninklijke Brill bears credit risk on the sales transactions as it is obliged to pay the partners even if the customer defaults on a payment. Koninklijke Brill currently accounts for these contract as if it is an agent. IFRS 15 requires assessment of whether Koninklijke Brill controls a specified good or service before it is transferred to the customer. Koninklijke Brill has determined that it does not control the goods before they are transferred to customers, and hence, is an agent in these contracts. On transition to IFRS 15 this will not have any effect on the income statement or on the consolidated balance sheet.
The presentation and disclosure requirements in IFRS 15 are more detailed than under current IFRS. The presentation requirements represent a significant change from current practice and will increase the volume of disclosures required in Koninklijke Brill's financial statements. Many of the disclosure requirements in IFRS 15 are new and Koninklijke Brill has assessed that the impact of these disclosures requirements will be limited. The impact will be limited due to the fact that Koninklijke Brill does not have contracts that contain many significant judgements. Koninklijke Brill will include extended disclosures with respect to the significant judgement made when assessing the contracts where Koninklijke Brill has concluded that it acts as an agent. In addition, as required by IFRS 15, Koninklijke Brill will disaggregate revenue recognized from contracts with customers into categories that depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. It will also disclose information about the relationship between the disclosure of disaggregated revenue and revenue information disclosed for each reportable segment. In 2017 Koninklijke Brill continued testing of appropriate systems, internal controls, policies and procedures necessary to collect and disclose the required information.
In summary, the impact of IFRS 15 adoption on Brill's financial results is expected to be nil.
Publishing rights, trade names and Goodwill are recognized at fair value from an acquisitions' purchase price allocation. Establishing fair value of these and other assets involves significant management estimates and judgments regarding the value and remaining useful life of intangible assets based on cash flow estimates and an estimated discount rate.
For the purchase price allocation analyses we used the multiple excess earnings method. We used historic sales pattern to forecast revenues from the titles in place at the date of acquisition for a period of 10 years. Commensurate portions of forecasted operating costs were allocated to establish full profitability. The discount rate used was the rate used by Brill at the corporate level at the end of 2016 (8.85% after tax). The resulting valuations were tested for plausibility in a weighted average rate of return analysis.
Where assets have indefinite lifetimes, they are tested for impairment annually. This requires an estimation of the business value of the cash generating units to which publishing rights and goodwill have been allocated. The procedure entails preparation of a cash flow forecast for each cash generating unit, determining a discount rate and calculating the discounted value of the estimated cash flows.
In the acquisition of Sense, a provisional purchase price allocation was prepared, involving significant, experience based management judgments regarding the allocation of the excess over fair value towards goodwill and intangible assets.
For details, refer to Notes 3 and 5 to the consolidated financial statements.
Prior to capitalization of other intangible assets, Brill prepares an estimate of the expected economic benefits. The largest asset class outside acquired intangibles is investments in content. Amortization of content related intangible assets is charged to the cost of goods sold line in the income statement. The amortization pattern of capitalized content is based on the expected pattern of consumption of the expected future economic benefits embodied in the asset.
Deferred tax assets are only recorded when it is probable that fiscal losses and/or deductible temporary differences can be settled against future profits.
The provision for bad debts is established on an individual basis where possible. The provision for print book inventory is based on statistical analysis of historic income generation by comparable book titles (sales pattern).
The fair value of forward contracts, currency options and interest swaps is established based on the fair value of these instruments at balance date.
Prepaid royalties are evaluated annually to assess recoverability. Evaluation is done using the sales pattern of comparable book titles.
All estimates disclosed are genuinely critical, and all the critical judgements are disclosed.
The Consolidated financial statements are prepared in euro, being the functional and reporting currency of the Group. Transactions in foreign currency are recorded at the exchange rate of the functional currency as per the transaction date. Monetary financial assets and liabilities in foreign currency are converted at the exchange rate of the functional currency at balance date. Any differences are recognized in the Income statement. Non-financial items in foreign currency valued at historic cost price in foreign currency are converted at the exchange rate prevailing at the date of the original transaction.
At balance date, the assets and liabilities of subsidiaries are converted to the euro at the exchange rate per balance date and the Income statement is converted at the weighted average exchange rate for the year. The exchange rate differences that originate from the conversion are recorded in the Comprehensive income statement. When divesting a foreign subsidiary, the cumulative balance of exchange rate differences recorded in Capital related to this subsidiary is transferred to the Income statement.
Tangible fixed assets are recorded at historic cost price, less cumulative depreciation and cumulative impairments (if applicable). Depreciation is linear according the useful life of the assets and taking in consideration any residual value. The book value of tangible fixed assets is tested for impairment when events or changes in circumstances indicate that the book value may not be realizable. The residual value and the useful life are reviewed annually and revised if necessary. A tangible fixed asset is derecognized from the
Balance sheet in case of divestment or if no future economic benefit is expected from either continued use or divestment. Any income or loss, resulting from the derecognition of the asset from the Balance sheet, is recognized in the Income statement at the moment of derecognition.
Intangible fixed assets are recognized at cost less accumulated amortization.
Publishing rights and goodwill resulting from business combinations are capitalized at the historic cost price. The business activities acquired have been selected to have strong components of long-lasting economic value that mutually reinforce each other such as brands or imprints, reputation, a product portfolio consisting of subscription or serial publications, or a backlist generating substantial revenue. However in some cases we determine, in the purchase price allocation process, that the publishing list requires significant continued development investment and that the titles purchased have a limited foreseeable economic useful life. In these cases we will proceed to linearly amortize intangible assets in line with their estimated economic useful life.
Acquired goodwill and publishing rights are allocated to Brill's Segments in accordance with their match to the respective publishing programs. We consider our Segments to be our lowest possible reportable level of cash generating units, since they form the principal managerial units within Brill, matching the key market segments in which Brill is active. Each Segment has separate management and is managed as a strategic business unit. The publishing programs contained within these segments have been selected for their potential to mutually reinforce each other's development. In 2017, S&F was added as a new segment.
Content cost of internally developed publications, primary sources and information systems are recognized as intangible fixed assets. These assets are valued at historic cost price or production cost. The amortization pattern of capitalized content is based on the expected pattern of consumption of the expected future economic benefits embodied in the asset; this pattern is based on historical data and updated in case significant differences arise. In most cases, the expected pattern leads to a diminishing balance amortization pattern. Amortization is recognized under Cost of Goods Sold. The amortization of information systems is linear, based on the estimated useful life of the asset. If the recoverable amount of the asset is lower than book value, additional impairments are recorded. The assets' useful lives are reviewed annually and revised if required.
Goodwill and indefinite – lived intangible assets are tested annually for impairment at the level of the cash generating unit, or more frequently if events or changes in circumstances indicate that they might be impaired. Other assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the impairment has been established, Brill prepares an estimation of the recoverable amount of the asset. The recoverable amount is the higher of the fair value of the asset after deduction of divestment expense and the value in use. If the book value is higher than the recoverable amount, the asset is assumed to be impaired and is marked down to the recoverable amount. In determining the value in use, estimated future cash flows related to the asset are discounted using a discount rate that considers current market evaluations of the time value of money and specific risks relating to Brill's business and financing structure. Losses related to impairments of assets related to Brill's continuing business are recognized in the Income statement.
At balance date, Brill assesses whether there are any indications that a recorded impairment loss from the past no longer exists or has diminished. If such indication exists, an estimate is prepared of the fair value. An impairment loss is only reversed if a change has occurred in the estimates used to establish the fair value of the asset since the recognition of the last impairment loss. If this is the case, the book value of the asset is increased to the fair value. The increased book value cannot be higher than the book value that would be
recorded (net after any applicable depreciation or amortization) in case no prior impairment losses had been recorded. Such reversal is recognized in the Income statement. After such reversal, any applicable depreciation or amortization charges are adjusted to reflect the revised book value of the asset in order to properly allocate its adjusted book value to the future periods.
The Inventory of finished products and publications in the editing stage is stated at the lower of cost and net realizable value, calculated as cost minus provision for obsolescence. Cost comprises direct materials and expenses including allocated labor. Allocated labor does not include any markup for overhead expenditure. Subsidies to publishing projects are only recorded when sufficient likelihood exists that these subsidies will be received and that all conditions precedent have been met.
The cost related to specific product formats (mostly printing and binding) are divided by the number of units produced and form the unit cost which is recorded in the Balance sheet in finished goods and charged to Cost of Goods Sold when a unit is sold. A provision for obsolescence is recorded at 100% of book value for Inventory for which no future sales are expected.
Trade receivables are recorded at fair value and subsequently measured against amortized cost. Provisions for individual positions are recorded only if objective evidence suggests that Brill may be unable to collect the complete receivable position. Bad debts are written off entirely once the inability to collect has been established with certainty.
Cash and cash equivalents in the Balance sheet (and the Consolidated statement of cash flows) consists of Bank, Cash and short-term deposits with a duration of three months or less.
Brill initially recognizes interest bearing debt, trade payables and other liabilities at fair value less any directly attributable transaction cost. Subsequent to initial recognition, these positions are measured at amortized cost with any difference between cost and redemption value being recognized in the Income statement over the period of the loan, using the effective interest method.
A provision is recognized if (i) Brill has a present obligation (legal or constructive) as a result of a past event, (ii) it is probable that an outflow of economic resources will be required to settle the obligation; and (iii) a reliable estimate can be made of the amount of the obligation.
If it is to be expected that (part of) the liability will be reimbursed, for example as part of an insurance arrangement, the reimbursement is recorded as a Current asset at the time that adequate certainty about the reimbursement has been established. The cost related to recording the provision is recognized in the Income statement, after deduction of any reimbursements to be received. If the impact of the time value of money is material, provisions are recorded at discounted value.
The pension arrangement for the Dutch employees is collectively arranged for in the Pensioenfonds voor Grafische Bedrijven (PGB). The pension plan continues to meet the criteria as set out in IAS 19 for a defined contribution arrangement. Pension arrangements for US employees are also classified as defined contribution arrangements. All pension premiums paid by Brill are recognized as expense in the Income statement.
Brill determines whether an arrangement contains a lease on the basis of the contents of the arrangement, weighing whether the execution of the arrangement depends on the usage of an asset or group of assets and whether the arrangement conveys the right to use the asset. Operating lease payments are recorded linearly as cost in the Income statement during the lease period.
Revenue is recognized when it has become likely that economic benefit will accrue to Brill and these benefits can accurately be determined. Revenue is then recognized at the fair value of the consideration received. This is deemed to occur at the moment that the material risk and benefit of ownership have been transferred to the buyer. The following specific recognition criteria apply:
This scope includes revenue from the supply of books (including reference works) and journals to third parties. Book revenue from one-time sales is recognized after physical delivery or after making the product accessible to the customer online. Journal and other subscription fees are initially recorded as short term liability (Deferred Income) and only recorded as revenue when the criteria for recognition have been met; in this case release and delivery of a journal issue or other publication, at which time a proportionate amount of the prepaid subscription fee is recognized as revenue. Delivery is made in printed or digital form, where digital includes the right to access the delivered content through a database. Furthermore, this includes rights and licenses to the content.
Database access revenue is recognized in line with the underlying contract. If the access rights are transferred indefinitely (Outright Purchase), the sale is recorded as revenue at the time of the sale. If the rights are transferred for a limited period, the sale is evenly recognized as revenue during the period of access. Discounts, sales tax and VAT are deducted from revenue.
Upon completion of a work, total production costs are recorded in Inventory as Finished Product. Finished product (product format specific cost) is divided by the number of copies printed to arrive at the unit cost per title. At delivery, unit costs are charged to the Cost of Goods Sold. When a journal issue is delivered, its costs are recorded directly in the Cost of Goods Sold. Cost for a journal issue contains direct production expenses, amortization of content, royalties and shipping costs.
Cost of capitalized content are amortized over the expected useful life of the asset; amortization is recognized under Cost of Goods Sold.
Income is recognized when the interest accrues according to the effective interest method, meaning the interest at rate which, when discounting the future cash flows over the expected lifetime of the instrument, the discounted value equals the net book value of the financial asset.
Cash flows from operating activities are calculated by the indirect method by adjusting the profit from operating activities for non-cash flows and autonomous movements in consolidated working capital. Operating cash flow also includes the costs for financing of operating activities and income tax paid on all activities.
Cash flows from investing activities are those arising from net capital expenditure and from acquisition and sale of business or publication rights. Cash and cash equivalent available at the time of acquisition or sale are deducted from the related payments or proceeds.
Cash flows from financing activities comprise the cash receipts and payments from dividend and debt instruments.
Brill, also through its German subsidiary, frequently receives project, program or generic subsidies from private or public funding bodies. These funding bodies generally aim to support scholarly communication, often in the form of a print cost subsidy or a general cost subsidy. A subsidy is fully allocated to the publishing project for which the subsidy was granted, and included in (offset against) the development cost capitalized for the project. The excess of subsidies over development cost is presented under other payables, since these represent a potential obligation until the moment of publication. At launch of the publication, the net amount of development costs and subsidies is included in the Inventory and expensed accordingly.
Tax owed or receivable for the current and previous periods is measured according to the amount that is estimated to be paid to or received from the tax authorities. The taxation is measured according to the prevailing legal rates and legislation.
A deferred tax asset or liability is recognized for temporary differences as per balance date between the tax book value of assets and liabilities and their value in these financial statements. Deferred tax assets are recorded for all temporary differences in so far as it is likely that there will be a taxable income against which the temporary difference can be offset. Deferred tax assets and liabilities are recorded for all taxable temporary differences except when:
Deferred tax assets and liabilities are measured at the tax rates which are expected to prevail during the period in which the claim is materialized or the liability is settled, based on legally determined rates and applicable tax law. Deferred tax assets and liabilities are netted if there is a legal right to net claims and liabilities, and if the deferred tax relates to the same taxable entity, the same tax authority and the same period.
Revenue, cost and assets are recorded after deduction of sales tax and value added tax. The net tax amount to be claimed or paid is recorded under payables or receivables in the Balance sheet.
Brill uses financial derivative instruments such as futures, options and interest swaps to manage risks related to foreign currencies and interest. If used, these financial derivatives are recorded, at fair value, as an asset if the value is positive and as a liability if it is negative.
The fair value of currency future sales contracts is determined according to the market value of comparable instruments. Hedge accounting is applied to forward contracts where these comply with the conditions for hedge accounting. At the moment of entering into the transaction, Brill registers the relationship between the hedging instrument and the hedged position, as well as the risk management objectives and assumptions. The effective portion of changes in fair value of the hedging instruments is recognized in Equity, after deduction of a reserve for deferred taxation. The amounts included in Equity are brought to the Income statement at the time that the underlying hedged position impacts the Income statement. When the instrument can no longer be classified as hedging instrument, or when the hedging instrument expires or is sold, the cumulative amounts remain in Equity until the expected transaction materializes.
If the transaction is not expected to materialize anymore, the amount is recognized in the Income statement. Hedging instruments which are insufficiently effective in achieving the hedge objective are not recognized through application of hedge accounting. Changes in value of non-effective contracts are recognized directly in the Income statement, under Financing cost.
The acquisition of the business activities of Schöningh & Fink was effective 1 January 2017. Schöningh & Fink is a German academic book publisher, offering a broad humanities oriented portfolio. Brill acquires tangible fixed assets, current assets and liabilities, publication rights, trade marks and contractswith business partners. In 2017, Schöningh & Fink contributed EUR 3.1 million revenues with EBITDA before group overhead charges of EUR 0.3 million.
The acquisition of 100% of the voting shares of Sense publishers BV is effective 1 July 2017. Sense is a specialist publisher in the field of educational sciences, an important field within the social sciences. Sense contributed revenues of EUR 0.4 million with EBITDA before group overhead charges of EUR 0.1 million.
The fair value of these business combinations is as follows:
| Carrying amount | Fair value adjustments | 2017 Recognized values | |||||
|---|---|---|---|---|---|---|---|
| S&F | Sense | S&F | Sense | S&F | Sense | Total | |
| Consideration paid | 1,146 | 1,526 | 1.146 | 1.526 | 2,672 | ||
| Deferred / contingent consideration: | |||||||
| Non – Current | 0 | 0 | 0 | 0 | 0 | ||
| Current | 0 | 46 | 0 | 45 | 45 | ||
| Cash & cash equivalents, financial | -12 | -2 | -12 | -2 | -14 | ||
| fixed assets | |||||||
| Total Consideration | 1,134 | 1,570 | 1,134 | 1,569 | 2,703 | ||
| Intangible assets [Note 5] | 0 | 0 | 179 | 459 | 179 | 459 | 638 |
| Other non- current assets | 31 | 0 | 0 | 0 | 31 | 0 | 31 |
| Inventories and Work in Progress | 624 | 0 | -158 | 0 | 466 | 0 | 466 |
| Receivables | 958 | 276 | 0 | 0 | 958 | 276 | 1,234 |
| Deferred tax assets | 0 | 0 | 38 | 0 | 38 | 0 | 38 |
| Other current assets | 13 | 5 | 0 | 0 | 13 | 5 | 18 |
| Payables and other current liabilities | -517 | -149 | 0 | 0 | -517 | -149 | -665 |
| Provisions | 0 | 0 | -145 | 0 | -145 | 0 | -145 |
| Fair value of net identifiable assets | 1,110 | 133 | -86 | 459 | 1,024 | 592 | 1,615 |
| Excess consideration over fair value | 24 | 1,437 | -24 | -1,436 | 0 | 0 | 0 |
| Goodwill [Note 5] | 110 | 978 | 110 | 978 | 1,088 | ||
| Total | 1,134 | 1,570 | 0 | 0 | 1,134 | 1,570 | 2,703 |
The purchase price allocation for Schöningh and Fink was completed in 2017. The purchase price allocation of Sense has been prepared provisionally, due to time constraints and availability of information. The areas that Brill currently expects to change are goodwill and intangible assets. No fair value adjustments have been applied in the period. The purchase price of Sense includes a contingent liability for which we do not expect any cash outflow in the future and which was valued at zero in the purchase price allocation. The deferred portion of the acquisition price of Sense is dependent on the full year profit of Sense and will be settled in 2018. The provisions represent contingent liabilities assumed by Brill regarding VAT returns and retirement benefits.
In November, Brill acquired the business activities of mentis Verlag, in Germany effective 1 January 2018. Mentis is a small, reputable publisher specializing in philosophy. Brill acquires current assets and liabilities, publication rights, trade marks and contracts with business partners. The purchase price is EUR 200 thousand. Following signing, Brill paid EUR 100 thousand (recognized as prepayment in other receivables in note 8). The remainder will be paid in HY1 2018. Brill expects full year revenue and EBITDA contribution of EUR 0.2 million and EUR 0.0 million respectively.
In addition, Brill acquired the rights to certain publications, structured as purchases of intangible assets. These include the Israel Journal of Ecology and Evolution, the Israel Journal of Plant Sciences, the International Encyclopedia of Church Law, for a total consideration of EUR 99 thousand.
These other titles acquired enhance our journal portfolio and reference work portfolio. The acquisition of these businesses results from Brill's strategy to expand its market position within selected niches. Cash payments related to all business combinations and purchases of publishing rights were as follows:
| Cash payments related to acquisitions | 2017 | 2016 |
|---|---|---|
| Amounts paid or to be paid | 2,905 | 985 |
| Paid in Prior year | -890 | 0 |
| Cash and cash equivalents included in target | -2 | 0 |
| Payments related to acquisitions prior years | 19 | 0 |
| Deferred portion of acquisition payments | -66 | 0 |
| Net cash payments related to acquisitions | 1,966 | 985 |
| Payments related to acquisition next year | -100 | -890 |
| Net cash payments related to acquisitions in period | 1,866 | 95 |
Acquisition-related costs of EUR 105 thousand are included in other expenses in the income statement and in operating cash flows in the statement of cash flows.
The intangible assets of Schöningh & Fink and Sense include publishing rights and trade names. The total amounts of intangible assets recognized in the balance sheet in respect of business combinations and acquisitions of assets were as follows:
| 2017 | 2016 | |
|---|---|---|
| Business Combinations | 638 | 0 |
| Other | 118 | 8 |
| Total (Note 5) | 756 | 8 |
As part of the acquisition accounting process, management separately identified and estimated the fair value of each asset described above. The assets that were valued in the purchase price allocation were appraised using the multiple excess earning method which involves significant estimates and judgments as disclosed in note 2.6. The publishing rights of S&F were tested for sensitivity to changes in after – tax WACC; a 1% in WACC results in a 12% decline of the after – tax value of the intangible assets. Given the similarity in methodology to be applied we expect a similar sensitivity in the intangible assets relating to Sense. An overview of all intangible assets is provided in Note 5.
The assets have an estimated remaining useful life of 5 years and will be amortized accordingly. The goodwill included in these transactions reflect the global (digital) distribution and product development opportunities that can be derived from the acquired businesses. In the case of Schöningh & Fink, amortization on the intangible assets is tax – deductible.
| Leasehold | |||
|---|---|---|---|
| 2017 | improvements | Other | Total |
| Book value as per January 1st, 2017 | 49 | 253 | 302 |
| Acquisitions | 0 | 31 | 31 |
| Investment | 168 | 191 | 359 |
| Depreciation | -25 | -176 | -201 |
| Exchange rate differences | 0 | -6 | -6 |
| Book value as per December 31st, 2017 | 193 | 293 | 486 |
| January 1st, 2017 | |||
| Cost | 673 | 2,915 | 3,588 |
| Accumulated depreciation | -624 | -2,662 | -3,286 |
| Net book amount | 49 | 253 | 302 |
| December 31st, 2017 | |||
| Cost | 842 | 3,714 | 4,556 |
| Accumulated depreciation | -649 | -3,421 | -4,070 |
| Net book amount | 193 | 293 | 486 |
| 2016 | Leasehold improvements |
Other | Total |
| Book value as per January 1st, 2016 | 61 | 375 | 436 |
| Investment | 0 | 70 | 70 |
| Depreciation | -12 | -194 | -206 |
| Exchange rate differences | 0 | 2 | 2 |
| Book value as per December 31st, 2016 | 49 | 253 | 302 |
| January 1st, 2016 | |||
| Cost before disposal | 674 | 7,073 | 7,747 |
| Disposal of assets | 0 | -4,230 | -4,230 |
| Cost | 673 | 2,843 | 3,517 |
| Accumulated depreciation before disposal | -613 | -6,698 | -7,311 |
| Accumulated depreciation of disposal | 0 | 4,230 | 4,230 |
| Accumulated depreciation | -613 | -2,468 | -3,081 |
| Net book amount | 61 | 375 | 436 |
| December 31st, 2016 | |||
| Cost | 673 | 2,915 | 3,588 |
| Accumulated depreciation | -624 | -2,662 | -3,286 |
| Net book amount | 49 | 253 | 302 |
Estimated useful life of fixed assets is as follows: Leasehold improvements 10 years, other fixed assets (computer equipment, furniture and other equipment) between 3 and 10 years. The depreciation is part of the general and administrative expenses in the consolidated income statement (refer note 16). The disposal of assets includes fully depreciated assets that are no longer present at Brill. In 2017, Leasehold improvements include a renovation of the Leiden office and other includes mostly computer hardware.
| Publishing | Trade names | Capitalized | Information | |||||
|---|---|---|---|---|---|---|---|---|
| 2017 | rights | and imprints | Licenses | Goodwill | Content WIP | Content | Systems | Total |
| Book value as per January 1st, 2017 | 15,189 | 0 | 0 | 1,879 | 1,945 | 8,189 | 1,984 | 29,186 |
| Acquisition | 458 | 298 | 0 | 1,088 | 0 | 0 | 0 | 1,845 |
| Investment | 0 | 0 | 271 | 0 | 3,082 | 7 | 1,399 | 4,760 |
| Transfer | -3,007 | 3,007 | 0 | |||||
| Amortization | -43 | -39 | -27 | 0 | 0 | -3,461 | -648 | -4,217 |
| Book value as per December 31st, 2017 | 15,604 | 259 | 244 | 2,968 | 2,020 | 7,743 | 2,735 | 31,574 |
| January 1st, 2017 | ||||||||
| Cost | 15,189 | 0 | 0 | 1,879 | 1,945 | 34,063 | 9,736 | 62,812 |
| Accumulated amortization | 0 | 0 | 0 | 0 | 0 | -25,874 | -7,752 | -33,626 |
| Net book amount | 15,189 | 0 | 0 | 1,879 | 1,945 | 8,189 | 1,984 | 29,186 |
| December 31st, 2017 | ||||||||
| Cost | 15,647 | 298 | 271 | 2,968 | 2,020 | 37,078 | 11,135 | 69,417 |
| Accumulated amortization | -43 | -39 | -27 | 0 | 0 | -29,335 | -8,399 | -37,843 |
| Net book amount | 15,604 | 259 | 244 | 2,968 | 2,020 | 7,743 | 2,735 | 31,574 |
| Publishing | Trade names | Capitalized | Information | |||||
|---|---|---|---|---|---|---|---|---|
| 2016 | rights | and imprints | Licenses | Goodwill | Content WIP | Content | Systems | Total |
| Book value as per January 1st, 2016 | 15,181 | 0 | 0 | 1,879 | 0 | 0 | 1,664 | 18,724 |
| Reclassification from stock | 0 | 0 | 2,226 | 7,592 | 0 | 9,818 | ||
| Acquisition | 69 | 0 | 0 | 0 | 0 | 69 | ||
| Investment | 0 | 0 | 3,465 | 0 | 976 | 4,441 | ||
| Transfer | -3,746 | 3,746 | 0 | |||||
| Divestment | -61 | 0 | 0 | 0 | 0 | -61 | ||
| Amortization | 0 | 0 | 0 | -3,148 | -656 | -3,804 | ||
| Book value as per December 31st, 2016 | 15,189 | 0 | 0 | 1,879 | 1,945 | 8,189 | 1,984 | 29,186 |
| January 1st, 2016 | ||||||||
| Cost | 15,181 | 0 | 0 | 1,879 | 0 | 0 | 8,760 | 25,820 |
| Accumulated amortization | 0 | 0 | -7,096 | -7,096 | ||||
| Net book amount | 15,181 | 0 | 0 | 1,879 | 0 | 0 | 1,664 | 18,724 |
| December 31st, 2016 | ||||||||
| Cost | 15,189 | 0 | 0 | 1,879 | 1,945 | 11,337 | 9,736 | 40,086 |
| Accumulated amortization | 0 | 0 | 0 | -3,148 | -7,752 | -10,900 | ||
| Net book amount | 15,189 | 0 | 0 | 1,879 | 1,945 | 8,189 | 1,984 | 29,186 |
Capitalized content cost typically consists of costs for typesetting, illustrations, editing, translations and all other cost that relate to preparing content for publication. During 2017, management decided to reclassify capitalized content from Inventory to Intangible Assets (refer Notes 2.7).During 2017 we changed our estimate regarding the pattern of consumption of economic benefits embodied in these assets, with an impact on cost of goods sold of EUR 347 thousand.
Publishing rights, brands and goodwill are related to business combinations and acquisitions of publishing rights. As per ultimo 2017, net book value was EUR 18.8 million (2016: EUR 17.1 million). Intangible assets with a definite useful life are amortized in line with their expected useful life, if applicable. In 2017, an amount of EUR 82 thousand was recognized in the income statement for amortization of acquired intangible assets (2016: nil). At the end of each reporting period, Brill reviews any indication whether the CGU's (segments) that contain goodwill and intangible assets may be impaired. In addition, Brill carries out annual impairment tests by comparing the carrying amount of the CGU's to the recoverable amount.
The recoverable amount is determined by calculation of the CGU's value-in-use. The value-in-use is determined by discounting the CGU's future cash flows. The cash flow projections are based on actual operating results, and the budget and strategic plans in force at the time of making the analysis. Furthermore, the three-year projections in the strategic plans are extended to 10 years. Management believes that this is a term in which relevant market trends (most importantly scholarly publication output) can be reliably forecasted.
Cash flows are discounted using a pre-tax discount rate of 12.1% (2016: 11.5%) that reflects current market assessments of the time value of money and the risks specific to the assets. In determining its discount rate, Brill uses the following variables:
| Variable for determining the weighted cost of capital | 2017 | 2016 |
|---|---|---|
| Risk free interest rate (in %) | 0.94 | 0.85 |
| Market debt premium (in %) | 1.20 | 1.05 |
| Market risk premium (in %) | 6.50 | 6.50 |
| Small Firm Premium (in %) | 3.00 | 3.00 |
| Leveraged Beta | 1.00 | 0.94 |
Key assumptions applied to the net present value calculations relate to growth of revenue and development of the cost of goods sold. These assumptions are based on management estimates as included in the most current business plans. Revenue growth assumptions are based on an expected continuous growth in output of and demand for scientific research whereas cost estimates assume a shift from variable expense to fixed expense, increasing slower than revenue. The annual impairment test carried out in 2017 showed that the recoverable amount for all segments for intangible assets and goodwill exceeded their carrying amounts. We also made an assessment whether a reasonably possible change in a key assumption would cause the carrying amount to exceed the recoverable amount.
| Applied terminal growth rate of cash flows (g) |
Increase in discount rate which would trigger an impairment |
|
|---|---|---|
| ARC | 0.8% | >5% |
| HIS | 1.0% | >5% |
| LAW | 0.7% | >3% |
| MIA | 0.5% | >3% |
| S&F | 0.5% | >5% |
Sensitivity tests applied to the valuations show that the valuations are highly robust against material (negative) variances in the applied terminal growth rate.
| Segment | Acquired intangible assets | Goodwill | Total | |||||
|---|---|---|---|---|---|---|---|---|
| 2017 | 2016 | 2017 | 2016 | 2017 | 2016 | |||
| LAW | 10,414 | 10,391 | 788 | 787 | 11,202 | 11,178 | ||
| MIA | 3,459 | 3,002 | 1,321 | 342 | 4,780 | 3,344 | ||
| HIS | 829 | 955 | 345 | 345 | 1,298 | 1,300 | ||
| ARC | 1.017 | 841 | 405 | 405 | 1,469 | 1,246 | ||
| S&F | 143 | - | 110 | - | 253 | - | ||
| Total | 15,863 | 15,189 | 2,968 | 1,879 | 18,831 | 17,068 | ||
Net book amounts by segment as per December 31 (refer note 15):
In addition to acquired intangible assets, Brill recognizes investments in information systems and internally developed content (capitalized product development costs). These assets are amortized in line with their expected useful life. In case of content, the estimation of remaining useful life is based on the expected pattern of consumption of the expected future economic benefits embodied in the asset. In most cases, the expected pattern leads to a diminishing balance amortization pattern, which generally covers a period of 10 years. In 2017, our estimate of the expected pattern changed with an additional effect of EUR 347 thousand in Cost of Goods Sold. Amortization of content is expensed within the Cost of Goods Sold. In 2017, amortization expenses within Cost of Goods Sold were EUR 3,461 thousand (2016: EUR 3,148 thousand).
The impact of adjusting the consumption pattern of the capitalized content with minus 5% in the first year would lead to a decrease of 2017 reported amortization of EUR 172 thousand.
Information systems are usually amortized in between 3 and 5 years. In 2017, Amortization expenses for Information systems were EUR 648 thousand (2016: EUR 656 thousand). These expenses were recognized in the income statement under General and administrative expenses. In 2017, Brill incurred major investments in information systems, principally related to the build of a new online platform and the required back office integration. At year end 2017 Brill had no material outstanding commitments for the purchase or build of intangible assets.
This note provides an analysis of Brill's income tax expense and Brill's deferred tax position.
| 2017 | 2016 | |
|---|---|---|
| Income tax on continued operations | ||
| - Current tax | 754 | 948 |
| - Deferred tax | 52 | 68 |
| Tax recognized in the consolidated income statement | 806 | 1,016 |
Of the total tax charge of 806 thousand, 119 thousand (2016: 153 thousand) is due in other jurisdictions than the Netherlands.
The table below reconciles the effective tax rate and the calculation of tax according to local nominal Dutch tax rates as per December 31st , 2017 and 2016.
| 2017 | 2016 | |
|---|---|---|
| Income before tax | 3,066 | 3,813 |
| Statutory Dutch income tax rate | 20% - 25.0% | 20% - 25.0% |
| Tax, at the nominal rate | 754 | 941 |
| - Effect of different tax rates outside the Netherlands | 38 | 63 |
| - Miscellaneous | 15 | 12 |
| Tax recognized in the consolidated income statement | 806 | 1,016 |
| Effective tax rate | 26.3% | 26.7% |
Deferred taxation is itemized as follows:
| Intangible | Plant and | Trade & other | Hedge | Total | |
|---|---|---|---|---|---|
| 2017 | assets | equipment | accrued expenses | contracts | |
| Net carrying amount as of 1 January, 2017 | -3,825 | 90 | 42 | 0 | -3,693 |
| Acquired through business combinations | -54 | 0 | 92 | 38 | |
| Recognized in profit and loss | 85 | -77 | -60 | -52 | |
| Recognized in other comprehensive income | 0 | -66 | -66 | ||
| Effect of movement in foreign exchange rates | 0 | 3 | -5 | 0 | -2 |
| Net carrying amount as of 31 December, 2017 | |||||
| -3,794 | 16 | 69 | -66 | -3,775 | |
| 2016 | |||||
| Net carrying amount as of 1 January, 2016 | -3,770 | 106 | 38 | -3,626 | |
| Recognized in profit and loss | -55 | -15 | 2 | -68 | |
| Effect of movement in foreign exchange rates | 0 | -1 | 2 | 1 | |
| Net carrying amount as of 31 December, | -3,825 | 90 | 42 | -3,693 | |
| 2016 | |||||
The deferred tax amount is for EUR 3,735 thousand non-current and for EUR 40 thousand current (recoverable within 12 months). Taxes due on hedge contracts with negative value are included in the tax accrual.
| Inventories | December 31, 2017 | December 31, 2016* |
|---|---|---|
| Publications in development | 291 | 331 |
| Finished goods | 2,945 | 2,714 |
| 3,236 | 3.045 |
*restated for reclassification of content to intangible assets
The inventory of finished goods includes a provision for obsolescence of EUR 2,706 thousand (2016 EUR 2,268 thousand). During the year, the provision was increased by EUR 411 thousand (2016 by EUR 406 thousand). This amount was charged as an expense in the income statement. During 2017, Brill changed the expected consumption pattern (refer to Note 5), leading to a further addition to the provision for obsolescence of EUR 70k. The impact of adjusting the consumption pattern with minus 5% in the first year will lead to an increase of the provision for obsolescence of EUR 119 thousand.
| Finished goods development details | 2017 | 2016 |
|---|---|---|
| December 31st prior year | 2,714 | 3,246 |
| Acquisition | 759 | |
| January 1st | 3,473 | 3,246 |
| Acquisition | ||
| Addition from work in progress | 1,177 | 682 |
| Increase of provision for obsolescence (expensed) | -411 | -406 |
| Expensed in cost of goods sold | -1,294 | -809 |
| December 31st | 2,945 | 2,714 |
| Trade and other receivables | December 31, 2017 | December 31, 2016 |
|---|---|---|
| Trade receivables Less: provision for bad debts |
7,656 -195 |
6,179 -201 |
| Net trade receivables | 7,461 | 5,978 |
| Prepayment for acquisition | 100 | 890 |
| Other receivables | 1,593 | 1,134 |
| 9,154 | 8,002 |
Trade and other receivables are classified as current. Trade debts are non-interest bearing and have average payment terms of thirty to ninety days, depending of the country of residence of the customers. The provision for bad debt is determined on an individual basis. Note 14 contains a risk analysis.
| Provision for bad debt details | 2017 | 2016 | |
|---|---|---|---|
| January 1st | 201 | 255 | |
| Provision recognized/released during the year | 8 | 40 | |
| Receivables written off during the year as uncollectible | -10 | -31 | |
| Amounts recovered during the year | -4 | -63 | |
| December 31st | 195 | 201 |
| Aging of receivables | December 31, 2017 | December 31, 2016 |
|---|---|---|
| Payment not due | 6,433 | 4,805 |
| Payment due: | ||
| 0- 30 days | 842 | 756 |
| 30-60 days | 119 | 131 |
| 60-90 days | 43 | 29 |
| > 90 days | 23 | 257 |
| 7,461 | 5,978 |
Cash and cash equivalents as per ultimo 2017 were EUR 3,787 thousand (ultimo 2016: EUR 6,304 thousand). Cash and cash equivalents not required for funding of the operations are converted in short-term bank deposits with variable rate, where possible. As per ultimo 2017 there were no short-term bank deposits.
The number of ordinary shares with par value of EUR 0.60 per share, issued and paid, was 1,874,444 in 2017 (2016: 1,874,444). The number of authorized shares was 2,500,000 in 2017 (2016: 2,500,000). In 2017, shareholder capital was EUR 1,125 thousand (2016: EUR 1,125 thousand).
Stichting Luchtmans has been granted a call option that gives it the right, in the event of hostile action or imminent hostile action against the company, to purchase a number of cumulative preference shares equal to, at most, 100% of the shares and depositary receipts issued at the time at which the option is exercised less one share. When the option is exercised, only 25% of the total nominal amount must be paid. The exercise price is equal to the nominal value. Stichting Luchtmans and the company have agreed that the option may be exercised up to 100% of the issued capital if and as long as shares and depositary receipts are listed on the Euronext Amsterdam NV exchange.
Other reserves consist of a currency translation reserve (including forex differences resulting from the translation of the accounts of the foreign subsidiaries) and a currency hedge reserve (including the share in the increase or decrease of the cash flow hedge for which it has been established that it is effective). Breakdown is as follows:
| Other reserves | Currency translation reserve | Currency hedge reserve | Total |
|---|---|---|---|
| January 1st, 2016 | -123 | -80 | -203 |
| Result revaluation | -24 | 174 | 150 |
| Reclassification to profit & loss | 0 | -282 | -282 |
| Recognized in other comprehensive income | -24 | -108 | -132 |
| Tax on revaluation result | 0 | 27 | 27 |
| Total mutation | -24 | -81 | |
| December 31st, 2016 | -147 | -161 | -308 |
| Result revaluation | -116 | 516 | 400 |
| Reclassification to profit & loss | 0 | -253 | -253 |
| Recognized in other comprehensive income | -116 | 263 | 147 |
| Tax on revaluation result | 0 | -66 | -66 |
| Total mutation | -116 | 197 | 81 |
| December 31st, 2017 | -263 | 36 | -227 |
At balance date, Brill had no bank loans or other interest-bearing liabilities. On December 31st, 2017 unused credit facilities of EUR 12.5 million were available (2016: EUR 12.5 million). The arrangement provides Brill with a facility of EUR 5 million current account facility and an additional EUR 7.5 million of current account facility specifically for the financing of acquisitions. The agreement is valid until cancellation. As a security for these bank loans – if and when applicable, Brill has pledged assets. The pledged assets consist of inventories and content for a book value of EUR 12.2 million (2016 EUR 13.2 million) and accounts receivable for a book value of EUR 6.0 million (2016 EUR 6.0 million) In addition, the covenants include two financial ratios:
| Net debt/EBITDA ratio | 2017 | 2016 |
|---|---|---|
| Cash and cash equivalents | -3,787 | -6,304 |
| Interest bearing loans | 0 | 0 |
| Net debts | -3,787 | -6,304 |
| EBITDA (see note 23) | 4,157 | 4,496 |
| Net debt/EBITDA ratio (must be less than 2.5) | -0.91 | -1.40 |
| Debt service ratio | 2017 | 2016*) |
|---|---|---|
| EBITDA (see note 23) | 4,157 | 4,496 |
| Income tax paid | -1,221 | -1,494 |
| Investment in tangible fixed assets | -359 | -71 |
| Investment in intangible fixed assets (non-product, non-acquisition) | -1,671 | -976 |
| Change in working capital | 554 | 1,620 |
| 1,460 | 3,575 | |
| Interest paid | 28 | 34 |
| Debt service ratio (must be higher than 1,1) | 52 | 105 |
*) restated for fixed asset reclassification
In 2017, as in 2016, Brill performed well within the boundaries of its covenants.
| Trade creditors and other payables | December 31, 2017 | December 31, 2016 |
|---|---|---|
| Trade creditors | 3,569 | 3,153 |
| Other taxes and social securities | 496 | 448 |
| Accruals | 2,669 | 1,808 |
| Other payables | 2,053 | 1,380 |
| 8,787 | 6,789 |
Trade creditors are non-interest bearing and normally have a payment due date of less than 30 days. Taxes, social securities and other payables are settled during the year.
| 2017 | 2016 | |
|---|---|---|
| Provisions | 145 | - |
The above provisions relate to the acquisition of Schöningh & Fink, where in the opening balance we recognized certain provisions related to contingent liabilities (refer Note 3).
Brill transacts currency forward agreements and other financial instruments exclusively with counterparties with prime credit rating. Valuation of financial instruments is based on fair value, considering current and future developments in interest and currency rates. The value of the currency forwards at the end of the reporting period is attributable to our counterparty without any risk discount. Changes in credit rating of our counterparties had no effect on the evaluation of effectiveness of our financial instruments.
The fair value of our financial instruments is the amount that would be received when selling the asset or paid when ceding the liability in a regular transaction between market participants at valuation date. The fair value of cash, accounts payable and accounts receivable as well as other current assets and liabilities is near book value, mainly because of the short maturity.
| Fair value | Book value | Fair value | ||
|---|---|---|---|---|
| 31-12-2017 | 31-12-2016 | 31-12-2017 | 31-12-2016 | |
| Financial assets | ||||
| Cash and cash equivalents | 3,787 | 6,304 | 3,787 | 6,304 |
| Trade and other receivables | 9,154 | 8,002 | 9,154 | 8,002 |
| Currency forward agreements | 346 | 117 | 346 | 117 |
| Financial liabilities | ||||
| Trade and other payables | -8,787 | -6,789 | -8,787 | -6,789 |
| Currency forward agreements | -105 | -422 | -105 | -422 |
The following table presents the recognized financial instruments that are offset, or subject to enforceable master netting arrangements and other similar agreements but not offset, as at 31 December 2017 and 31 December 2016. The column 'net amount' shows the impact on the group's balance sheet if all offsetting rights were exercised.
| Effects of offsetting on balance sheet | Related amounts not offset | ||||
|---|---|---|---|---|---|
| 2017 | Gross amount |
Offset in the |
Net presented in |
Amount subject to |
Net amount |
| balance | the balance | master netting | |||
| Financial assets | sheet | sheet | arrangements | ||
| Derivative financial instruments | 346 | 0 | 346 | -105 | 241 |
| Total | 346 | 0 | 346 | -105 | 241 |
| Financial liabilities | |||||
| Derivative financial instruments | 105 | 0 | 105 | -105 | 0 |
| Total | 105 | 0 | 105 | -105 | 0 |
| 2016 | |||||
| Financial Assets | |||||
| Derivative financial instruments | 117 | 0 | 117 | -117 | 0 |
| Total | 117 | 0 | 117 | -117 | 0 |
| Financial liabilities | |||||
| Derivative financial instruments | 422 | 0 | 422 | -117 | 305 |
| Total | 422 | 0 | 422 | -117 | 305 |
For hedging, Brill uses synthetic and regular currency forward agreements. At the end of the reporting period the position of the forward agreements was:
| Net forward position | Total amount contracts (in | USD) | Fair value contracts (in EUR) | |||
|---|---|---|---|---|---|---|
| 31-12-2017 | 31-12-2016 | 31-12-2017 | 31-12-2016 | |||
| Sell forwards Purchase forwards Net |
9,875 -2,550 7,325 |
9,700 -2,390 7,310 |
346 -105 241 |
-422 117 -305 |
The purpose of the cash flow hedge is to shield the probable future sale and purchase of our US dollar cash flows against fluctuations in the exchange rate until the moment of occurrence of the cash flow. The future US dollar cash flows will occur within twelve months after the end of the reporting period. Results of sell
forwards at 90 days before maturity are recognized in the income statement under the item net revenue. At maturity, the remainder of the results is recognized as financing results (revaluation of receivables). Results of the purchase forwards are recognized against the item to which the cash flow pertains, in the Cost of goods sold, Selling and distribution expenses or General operating expenses. Results of outstanding forwards will impact 2018 entirely. In 2017 an amount of EUR 5 thousand was recognized in the income statement for noneffectiveness (2016 EUR 1 thousand). From testing the forward agreements used for the cash flow hedge, the Group established that they are effective at the end of the reporting period.
As per 31 December 2017, Brill held the below financial instruments, valued at fair value, by valuation method:
| Fair value measurement | Currency forward agreements | |||
|---|---|---|---|---|
| of assets and liabilities | 31-12-2017 | 31-12-2016 | ||
| Level 1 | 0 | 0 | ||
| Level 2 | 241 | -305 | ||
| Level 3 | 0 | 0 | ||
| Total | 241 | -305 |
Every year, at the end of the reporting period, Brill evaluates the hierarchical classification of regularly used financial instruments, based on the lowest level of the utilized variables that have a material impact on the instrument's fair value. Changes in the valuation of the currency forward agreements are recognized in comprehensive income.
Brills functional and reporting currency is the euro. The US dollar is the only other currency relevant to Brill's business. In 2017, around 40% (2016: 41%) of invoiced sales originated from the United States. Normally, prices in US dollars are announced at the beginning of the year and are adjusted annually. In determining prices in US dollar, current exchange rate circumstances are considered. Since most expenses are in euro, Brill is net long in US dollars. Brill's policy is to hedge around 90% of the expected net incoming cash flow in US dollars for the next twelve months by using currency forward contracts or currency options. In addition, Brill attempts to limit currency risk by means of natural hedging, meaning entering in liabilities in US dollar to compensate receivables in US dollar. Furthermore, Brill hedges certain ongoing outgoing cash flow in US dollars to limit the impact of currency swings on the cost level. The net result is a limited currency risk. In 2017, Brill recognized a foreign exchange result of minus EUR 224 thousand (2016: 132 thousand).
The below table shows the impact of a change in exchange rate of the US dollar versus the euro on Brill's financial results:
| Impact of a 5% increase of | 2017 | 2016 | Impact of a 5% decrease of | 2017 | 2016 |
|---|---|---|---|---|---|
| the U.S. dollar value | the U.S. dollar value versus | ||||
| versus the euro | the euro | ||||
| Net revenue | 131 | 135 | Net revenue | -119 | -122 |
| Gross profit | 101 | 117 | Gross profit | -92 | -106 |
| Net profit | 149 | 165 | Net profit | -135 | -149 |
| Equity | -517 | -235 | Equity | 53 | 357 |
In determining the impact, Brill takes the current hedging contracts into account. The impact on Net profit is mainly caused by the change in valuation of assets and liabilities in US dollars. The impact on equity is mainly caused by changes in the valuation of the investment in the US subsidiary and the valuation of the cash flow hedge (refer note 2.24).
As per ultimo 2017, no long- or short-term bank credits or deposits were used. The risks of changes in interest rates on the profit and loss and equity are therefore nil. Brill's policy is to enter into interest rate swaps in case of a long-term borrowing, if it seems more likely than not that based on the interest rate expectations for the money and capital markets, the swap will cause the interest expenses to be lower.
The business of Brill is concentrated in Western Europe, the United States and Asia. Over 80% of Brill's sales are transacted via third parties, such as book distributors and journal subscription agents. Currently, a consolidation is ongoing in the trade market. Although the risk of insolvency of a trade customer is unchanged, this concentration does increase the potential impact of an insolvency. To control for this risk, Brill has taken out credit risk insurance on part of the credit risk with trade partners. For ongoing sales activity, Brill has access to relevant credit information. In addition, Brill's credit policy includes payment terms, credit limits, dunning policies and using factoring where applicable. Our cash flow is impacted by the payment behavior of our customers; therefore, compliance with payment terms is monitored closely. Our maximum exposure is limited to the amount of Trade Receivables in our statement of financial position at year end; however this amount is significantly limited by the application of credit insurance. Please refer to Note 8 for an assessment of credit quality.
In the journals business Brill runs almost no credit risk, because journal deliveries are made after receipt of payment by subscribers. It is in the interest of the publisher to deliver new issues to subscribers without interruption and for that reason, the publisher may, on an exception basis, deliver issues before payment has been received. A limited risk exists with regard to subscription fees paid by the customer to the subscription agent but not transferred yet to the publisher. Very limited risks exist relating the sale of online products because Brill can terminate access to the product at any time.
Periodically, Brill evaluates collectability of trade debtors not covered under credit insurance and based on this analysis, adjusts the provision for bad debts. Evaluation is carried out using the individual method, meaning that judgments about collectability are made by individual invoice. Objective judgment is formed on the basis of historic payment behavior of the trade debtor and information from third parties about the credit rating of the debtor. The maximum risk on trade and other receivables is equal to the total book value at balance date.
In 2017 the average number of Days Sales Outstanding for sales was 74 days (2016: 83 days). The Days Sales Outstanding calculation has been improved resulting in an adjusted days sales Outstanding for 2016.
Brill prepares quarterly evaluations of its liquidity position using a seasonal cash flow pattern in combination with expected changes in expenditure and income. Brill's policy is to ensure continuous availability of funds required through working capital management, ensuring availability of credit facilities or long term borrowings and by sustaining its ability to issue additional shares in order to finance measures that add structural value to the business. The below table shows the maturities of the Companies' financial liabilities.
| Balance | Maturity | ||||||
|---|---|---|---|---|---|---|---|
| amount | |||||||
| Immediate | < 3 months | 3-12 months | 1-5 year | > 5 year | Total | ||
| As per December 31st, 2017 | |||||||
| Trade and other payables | 8,787 | 3,000 | 2,954 | 2,833 | 0 | 0 | 8,787 |
| Currency forward receipts | 0 | -2,259 | -4,249 | -6,508 | |||
| Currency forward payments | 0 | 2,069 | 4,198 | 0 | 0 | 6,267 | |
| 3,000 | 2,723 | 3,065 | 0 | 0 | 8,546 | ||
| As per December 31st, 2016 | |||||||
| Trade and other payables | 6,789 | 3,428 | 2,087 | 1,274 | 0 | 0 | 6,789 |
| Currency forward receipts | 0 | -1,839 | -4,370 | -6,209 | |||
| Currency forward payments | 0 | 1,992 | 4,522 | 0 | 0 | 6,514 | |
| 3,428 | 2,240 | 1,426 | 0 | 0 | 7,094 | ||
The key components of capital managed by Brill are working capital and fixed tangible and intangible assets (collectively referred to as Invested Capital, refer to Note 23). Brill's financial policy is aimed at solid financing of Brill's growth objectives, where free cash flow should cover any applicable interest and redemption of longterm borrowing as well as cash dividends. Funding originates from either internal or external sources. Internal funding arises specifically from containing the growth of Invested Capital by attracting more subscription based business and reducing stock levels through printing on demand as well as pursuing policies that reduce fixed asset investment requirements, e.g. by using cloud versus on premise solutions. External funding originates from our standing credit facilities and maintaining access to capital markets through our investor relations policy. The policy assumes solvability of between 40 and 60% and adherence to the covenants relating to our credit facilities (refer to Note 11).
Brill's management evaluates company performance from a business segment perspective, a product portfolio perspective as well as from a geographical perspective. Business segments (Publishing Units) are evaluated based on revenue, income and Net assets in use. Certain asset and liability classes are considered Corporate and are not allocated to business segments. Product types are evaluated based on revenue. Geographical areas are evaluated based on revenue.
Brill's publishing activities are segregated into five business segments, identified as Publishing Units. The aggregation of these segments has been made based on management considerations, the nature and subject areas of their publications as well as the class of researcher at whom the publications are targeted:
Brill management primarily uses EBITDA to assess the profitability performance of the business segments, and a measure of Net assets (Invested capital) to assess the capital requirement of each segment. EBITDA is calculated based on direct EBITDA contribution minus allocated group services and overhead costs.
| Publishing Unit | LAW | MIA | HIS | ARC | S&F | Total |
|---|---|---|---|---|---|---|
| Revenue 2017 | 6,655 | 9,926 | 6,795 | 9,894 | 3,124 | 36,394 |
| Revenue 2016 | 6,516 | 9,292 | 6,733 | 9,636 | - | 32,177 |
| EBITDA 2017 (see note 23) | 1,691 | 128 | 430 | 1,796 | 110 | 4,155 |
| EBITDA 2016 (see note 23) | 1,417 | 419 | 728 | 1,932 | - | 4,496 |
| Invested capital 31-12-2017 | 11,721 | 6,326 | 2,498 | 1,583 | 805 | 22,932 |
| Invested capital 31-12-2016 | 9,756 | 5,663 | 3,149 | 2,511 | - | 21,080 |
In 2017, most PU's but especially ARC showed satisfactory revenue growth. HIS started the year knowing that the Crustacean Society awarded the publication of its journal to another publisher. Also, the unit incurred some publication delays and saw diminished success of its new product. Note that MIA includes the newly acquired business of Sense. Deterioration of MIA profitability is partly due to growth in staff during the year, leading to higher allocated costs; MIA's gross result increased by 7%, in line with revenue growth and direct EBITDA contribution was flat versus last year.
| Reconciliation assets | 31-12-2017 | 31-12-2016 |
|---|---|---|
| Invested capital | 22,932 | 21,080 |
| Adjustments | ||
| Current Liabilities | 17,758 | 15,764 |
| Deferred Tax Liabilities | 3,775 | 3,693 |
| Income tax, net | 334 | 34 |
| Derivative financial instruments, net | 346 | 117 |
| Cash and cash equivalents | 3,787 | 6,304 |
| Total Assets | 48,932 | 46,991 |
Product revenue segmentation is as follows:
| Revenue by product type | 2017 | 2016*) |
|---|---|---|
| Books | 9,757 | 8,730 |
| Journals *) | 7,389 | 7,273 |
| Primary sources | 1.106 | 1.084 |
| Digital revenue | 18,252 | 17,086 |
| Books | 15,838 | 12,945 |
| Journals*) | 2,110 | 2,056 |
| Primary sources | 194 | 89 |
| Offline revenue | 18,142 | 15,091 |
| Total | 36,394 | 32,177 |
*) Note: 2016 adjusted to align with 2017 allocation of revenue between print and digital (EUR 220 thousand changed from digital to print). Management believes this alignment better reflects customers' choices between the revenue models on offer.
In 2017, there was no customer that accounted for more than 10% of consolidated revenues.
Brill measures revenue by region in accordance with its priorities and managerial structure in the marketing and sales organization. Geographical spread of revenue (according to the location of the customer) is:
| Revenue by region | 2017 | 2016 |
|---|---|---|
| Asia & Oceania | 4,573 | 4,078 |
| Eastern Europe | 394 | 474 |
| Middle East & Africa | 1,297 | 1,345 |
| North America | 13,694 | 13,276 |
| Western Europe | 16,326 | 12,899 |
| Rest of World | 110 | 104 |
| 36,394 | 32,177 |
Asia showed double digit growth, both in print as well as in digital books. In North America and Europe, e-books showed double digit growth whereas print book revenue in North America was impacted by excess returns from a major distributor. The addition of Schöningh & Fink caused most of the increase in Western Europe. Excluding these effects, North America, as did Europe, showed a small decline in print book revenue in line with market trends.
The ownership of all intangible assets and most tangible assets lies in the Netherlands except for the assets of Schöningh & Fink whose ownership lies in Germany.
Cost of goods sold contains the following cost types: technical production and shipping cost, cost of online products and platforms, amortization of intangible fixed assets, and royalties.
| Cost of goods sold | 2017 | 2016 |
|---|---|---|
| Technical production costs, content and shipping cost | 11,069 | 9,841 |
| Royalties | 1,482 | 1,317 |
| 12,551 | 11,158 |
| Reconciliation Selling, General and administrative | 2017 | 2016 |
|---|---|---|
| with personnel cost and operating expenses | ||
| Selling and distribution expenses | 6,476 | 5,735 |
| General and administrative expenses | 14,052 | 11,572 |
| 20,528 | 17,307 | |
| Personnel cost | 10,767 | 9,323 |
| Operational expenses | 8,921 | 7,200 |
| Amortization of intangible assets (non-product related) [5] | 639 | 518 |
| Result on divestment of intangible assets [5] | 0 | 61 |
| Depreciation of tangible assets [4] | 201 | 205 |
| 20,528 | 17,307 |
Brill applies hedge accounting to expenses. Personnel cost contains an amount of EUR 20 thousand (2016 EUR minus 3 thousand) and Operational expenses contains an amount of EUR 2 thousand (2016 EUR minus EUR 2 thousand) as effect of hedge accounting.
Breakdown of personnel costs is as follows:
| Personnel costs | 2017 | 2016 |
|---|---|---|
| Salaries | 9,278 | 8,295 |
| Social security payments | 1,440 | 1,159 |
| Defined contribution pension arrangement | 1,024 | 705 |
| Other defined contribution arrangements | 268 | 367 |
| 12,010 | 10,526 | |
| Booked to Work in progress | -1,243 | -1,203 |
| 10,767 | 9,323 |
Personnel costs booked to work in progress relates mostly to the internal desk editing team. This team constitutes about 16% of Brill's overall workforce. Desk editing writes time to products, which is then capitalized or expensed. In addition to internal staff, Brill uses vendor services for most of the editing and typesetting activities for its publications.
The average workforce amounted to an average of 160.5 FTEs (2016: 131.7 FTEs). The total workforce engaged on a full-time basis at year-end showed an increase of 31.6 FTEs from 133.3 to 164.9 FTEs. This increase was anticipated and mainly the result of the acquisitions (20.7) as well as growth in Publishing and Sales and Marketing (including Asia expansion).
At the end of 2017, 52.5 FTEs (2016: 25.2 FTEs) were working outside the Netherlands (from Brill's offices in Boston, Paderborn, Singapore and Beijing, as well as from home offices in the United Kingdom, Canada, Germany and Switzerland). In addition to the addition of staff in Germany, we expanded our presence in Asia (from 2.0 end of 2016 to 5.8 in 2017).
The interest rate received on our current account balance was 0% in 2017 (2016: 0%). Since hedge accounting applies for the financial derivatives in use at Brill, the below results all relate to currency based revaluation effects on current and fixed assets and liabilities.
| Finance income | 2017 | 2016 |
|---|---|---|
| Interest received | 19 | 16 |
| Foreign exchange rate differences | 0 | 132 |
| 19 | 147 | |
| Finance expense | 2017 | 2016 |
| Interest paid | -45 | -45 |
| Foreign exchange rate differences | -224 | -1 |
| -269 | -46 |
Earnings per share was calculated by dividing Net income attributable to shareholders by the weighted average number of outstanding ordinary shares. At balance date, no stock options, redeemable preferred shares or other convertible instruments were outstanding that might lead to future dilution of earnings per share. After balance date, no share transactions took place.
| Earnings per share | 2017 | 2016 |
|---|---|---|
| Net income Weighted average number of shares issued |
2,260 1,874,444 |
2,797 1,874,444 |
| Earnings per share attributable to shareholders of Koninklijke Brill NV (in EUR) |
1.21 | 1.49 |
| Dividend | 2017 | 2016 |
|---|---|---|
| Dividend paid | ||
| Dividend paid for 2015: EUR 1.24 | 2,324 | |
| Dividend paid for 2016: EUR 1.32 | 2,474 | |
| Proposed dividend for 2017 | ||
| (not included as a liability per December 31st 2017) | ||
| Ordinary Dividend to be paid for 2017: EUR 1.32 | 2,474 | |
| Exceptional Dividend to be paid for 2017: EUR 3.00 | 5,623 | |
| Total dividend to be paid for 2017 | 8,097 | |
| Profit distribution proposal 2017 | ||
| Ordinary dividend on ordinary shares | 2,260 | |
| Added to retained earnings | 0 | |
| Net profit | 2,260 |
A rental agreement is in existence for our office located Plantijnstraat 2 in Leiden with duration until September 2023. A bank guarantee of EUR 115 thousand was issued in support of this agreement. Brill USA has a rental agreement for its office located on Liberty Square, Boston, MA with duration until February 2023. Brill Singapore has a rental agreement for its office located 31 Rochester Drive, Singapore with duration until May 2019. Brill's lease agreements in Paderborn and Beijing are short term in nature.
Furthermore, Brill has operational leasing contracts for company cars with duration of four years. Financial liabilities for leasing and rent are:
| As per December 31st, 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | >2022 |
|---|---|---|---|---|---|---|
| Company cars | 70 | 41 | 13 | 8 | 0 | 0 |
| Rent | 639 | 547 | 547 | 557 | 568 | 320 |
| 710 | 588 | 560 | 565 | 568 | 320 | |
| As per December 31st, 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | >2021 |
| Company cars | 60 | 53 | 28 | 5 | 0 | 0 |
| Rent | 562 | 562 | 572 | 583 | 594 | 917 |
| 622 | 615 | 600 | 588 | 594 | 917 |
These consolidated financial statements contain the financial statements of Koninklijke Brill NV and its subsidiaries:
In 2017, as in 2016, Koninklijke Brill NV had a 100% interest in Brill USA, Inc. At the time of a sale of print books to a third party, Brill USA purchases the books from Koninklijke Brill NV with a discount in line with market standards. Furthermore, Brill USA receives a commission in line with market standards for selling online publications.
Brill Asia Pte Ltd was incorporated as a 100% subsidiary of Brill as of January 1, 2016. Brill Asia performs publishing, marketing and sales and business development services to Koninklijke Brill NV and receives a market based fee in return.
Brill Consulting Beijing Ltd was incorporated as of July 5, 2017 as a 100% subsidiary of Brill Asia Pte Ltd. Brill Beijing provides marketing and sales services to the Group and receives a market based fee in return.
Brill Deutschland GmbH was incorporated as a 100% subsidiary of Brill on December 12, 2016. Brill Deutschland incorporates the Schöningh & Fink acquisition effective January 1, 2017.
Sense Publishers BV is a direct subsidiary of Koninklijke Brill NV. Sense was acquired with effective date 1 July 2017. It is Brill's intention to merge Brill and Sense during 2018.
Brill is managed by a statutory director (Managing Director), supervised by the Supervisory Board. The members of the Supervisory Board receive an annual remuneration. They do not receive cash or other deferred incentive payments, such as stock options or shares, not do they accumulate pension entitlements with Brill.
The remuneration of the Managing Director, as detailed in the remuneration policy consists of a fixed and a variable component. The variable component entails a short-term variable incentive, maximized at 40% of the fixed component and a three-year long-term variable component maximized at 40% of the fixed component. The Managing Director has no remuneration in stock options or shares. In addition, Brill pays 70% of the pension premium in the employee pension plan (see note 2.18) for the Managing Director.
| Remuneration of the Supervisory Board | 2017 | 2016 |
|---|---|---|
| Mr. S. Perrick | 34,000 | 15,000 |
| Mr. R. Hoytema van Konijnenburg | 29,011 | 25,812 |
| Mrs. C. Lucet | 28,123 | 25,108 |
| Mr. A.R. baron van Heemstra | 0 | 20,483 |
| 91,134 | 86,403 | |
| Remuneration of the Managing Director (pay-out) | 2017 | 2016 |
| Fixed | ||
| Salary | 260,000 | 255,000 |
| Pension premium paid by Brill | 75,136 | 73,837 |
| Variable | ||
| Anniversary payment | 10,625 | |
| Incentive plan (concerning performance of previous year) | 63,750 | 55,000 |
| 398,886 | 394,462 | |
| Total remuneration of Supervisory Board and Managing Director | 490,020 | 480,865 |
Remuneration pay out to the Supervisory Board and Managing Director in 2017 were as follows:
In 2018, the following amounts relating to variable remuneration will be paid out. In relation to the 2017 target achievement, an amount of EUR 129 thousand was recognized in the accounts of 2017 of which EUR 77 thousand is for the long-term target and EUR 52 thousand is for the short-term for payout in 2017. The shortterm variable income to the Managing Director is granted according to performance criteria which in 2017 were based on increase of revenue, increase of EBITDA, ROIC and two non-financial targets. The increase of revenue was met at 70% and accordingly the Managing Director was awarded a payout of 3% on this target. The ROIC target was met at 70% and accordingly the Managing Director was awarded a payout of 1.5%. The EBITDA target was not met, resulting in 0% payout. One of the two non-financial targets was fully met resulting in a pay-out to the Managing Director of 12.5%. Finally the Supervisory Board used its discretion to award a further 3% making the total short-term portion 20%.
The long-term (3 year) variable income to the Managing Director is granted according to performance criteria which were based on growth of revenue. The 2015-2017 target (payout 2018) of 20% autonomous growth over three years was not met in 2017, the 2016-2018 target (payout 2019) of 2.6% average organic growth of revenue was met in 2016 and 2017 and the 2017-2019 target (payout 2020) regarding acquisition volume was not met in 2017. In view of the retirement of the Managing Director, the Supervisory Board used its discretionary power to award 30% for the achievement of the 2016-2018 plan.
With these amounts, all remaining entitlements relating to long-term incentives of the Managing Director have been settled.
There are no other related party transactions.
On November 29, Brill announced the acquisition of mentis Verlag, a German publisher in the field of philosophy, effective January 1st, through a purchase of business activities. Brill expects mentis to add around EUR 0.2 million in revenue. Total consideration will be EUR 0.2 million. Two staff joined Brill in relation with the acquisition, of which one fulltime.
There are no other events after balance date that give additional information about the actual situation as per balance sheet date with relevant financial impact on the company.
Brill management believes an understanding of the company's performance is enhanced by using several Non-GAAP measures, respectively EBITDA, ROIC and free cash flow. In this note these measures are reconciled to GAAP measures.
Brill uses the term EBITDA to evaluate the performance of the total company and the operating segments.
| Reconciliation of Revenue and profit | ||
|---|---|---|
| before tax | 2017 | 2016 |
| Revenue | 36,394 | 32,177 |
| Cost of goods sold | -12,551 | -11,158 |
| Sales costs | -6,476 | -5,735 |
| General and administrative expenses | -13,212 | -10,787 |
| EBITDA | 4,156 | 4,496 |
| Depreciation and Amortization | -841 | -785 |
| Operating profit | 3,315 | 3,712 |
Koninklijke Brill uses the term ROIC to evaluate the performance of the total company. ROIC shows both our ability to generate profitable revenue as well as our ability to control the balance sheet. Return on investment is calculated by dividing net operating profit less adjusted tax rate by average Invested capital.
| Return on invested capital | 2017 | 2016 |
|---|---|---|
| Operating profit | 3,315 | 3,712 |
| Effective tax | -872 (26.3%) | -991 (26.6%) |
| Net operating profit less adjusted tax (NOPLAT) | 2,443 | 2,721 |
| Invested capital | 22,932 | 21,080 |
| Average invested capital | 22,007 | 20,974 |
| Return On Invested Capital | 11.1% | 13.0% |
| Asset turnover (revenue / average invested capital) | 1.7 | 1.5 |
| NOPLAT margin (NOPLAT / revenue) | 6.7% | 8.5% |
Free cash flow is a term used to evaluate the cash available to the company's investors.
| Free cash flow | 2017 | 2016 |
|---|---|---|
| Net cash flow | -2,517 | 5 |
| Dividend paid to shareholders | 2,474 | 2,324 |
| -43 | 2,329 |
Company Balance Sheet as at December 31, 2017
Company Income Statement for the year ended December 31, 2017
In thousands of euro's (before appropriation of profit)
| 2017 | 2016 | |
|---|---|---|
| ASSETS | ||
| Non – current assets | ||
| Tangible fixed assets [3] | 408 | 240 |
| Intangible fixed assets [4] | 30,901 | 29,186 |
| Financial fixed assets [5] | 2,670 | 841 |
| 33,978 | 30,268 | |
| Current assets | ||
| Inventories | 2,404 | 3,045 |
| Trade and other receivables[6] | 8,174 | 8,065 |
| Derivative financial instruments | 346 | 117 |
| Income tax receivable | 255 | 0 |
| Cash and cash equivalents [7] | 3,056 | 6,067 |
| 14,235 | 17,295 | |
| TOTAL ASSETS | 48,214 | 47,562 |
| Equity | ||
|---|---|---|
| Share capital | 1,125 | 1,125 |
| Share premium | 343 | 343 |
| Retained earnings | 23,900 | 23,577 |
| Other reserves | -226 | -308 |
| Undistributed profit | 2,260 | 2,797 |
| 27,402 | 27,534 | |
| Non–current liabilities | ||
| Deferred tax liability | 3,782 | 3,710 |
| 3,782 | 3,710 | |
| Current liabilities | ||
| Trade and other payables [8] | 8,187 | 7,343 |
| Deferred income | 8,714 | 8,439 |
| Provision | 23 | 0 |
| Tax to be paid | 0 | 114 |
| Derivative financial instruments | 105 | 422 |
| 17,029 | 16,318 | |
| TOTAL LIABILITIES | 48,214 | 47,562 |
In thousands of euro's
| 2017 | 2016 | ||
|---|---|---|---|
| Gross profit | |||
| Revenue | 28,140 | 26,874 | |
| Cost of goods sold | -8,882 | -7,914 | |
| 19,258 | 18,960 | ||
| Expenses | |||
| Selling and distribution expenses | -4,146 | -4,146 | |
| General and administrative expenses | -12,167 | -11,540 | |
| Operating profit | 2,946 | 3,274 | |
| Finance income | 26 | 148 | |
| Finance expenses | -267 | -46 | |
| Profit before income tax | 2,705 | 3,377 | |
| Income tax expense | -673 | -862 | |
| Results from subsidiaries, net of tax | 228 | 283 | |
| Profit from continued operations, attributable to | |||
| shareholders of Koninklijke Brill NV | 2,260 | 2,797 |
The company financial statements have been approved for publication by the Supervisory Board and the Managing Director on April 4, 2018. Koninklijke Brill NV is established as a Naamloze Venootschap (Public Limited Company), based at Plantijnstraat 2 in Leiden, the Netherlands and registered at the chamber of commerce under number 28000012. Its certificates of shares are traded publicly at Euronext in Amsterdam.
The company financial statements are prepared based on Title 9, book 2 of the DCC, applying the regulations of section 362.8 allowing the use of the same accounting policies as applied for the consolidated financial statements. These accounting policies are described in the Notes to the Consolidated Financial Statements. Subsidiaries are recognized under financial fixed assets using the net asset value, applying the IFRS accounting policies endorsed by the European Union.
Where the notes to the company financial statements and the consolidated financial statements are almost the same, we refer to the consolidated financial statements.
Goodwill relating to investments in consolidated subsidiaries is initially measured as the excess of the aggregate of the consideration transferred over the net fair value of the net identifiable assets acquired and liabilities and contingent liabilities assumed. If this consideration is lower than the fair value of the net assets of the subsidiary acquired, the difference is recognised in profit or loss.
Presentation of goodwill is dependent on the structuring of the acquisition. Goodwill is presented separately in the company financial statements if this relates to an acquisition performed by the company itself. Goodwill is subsumed in the carrying amount of the net asset value if an investment in a subsidiary is acquired through the company's intermediate subsidiary.
Goodwill impairment reviews are undertaken annually or more frequently if events or changes in circumstancesindicate a potential impairment. The carrying value of goodwill is compared to the recoverable amount, which is the higher of value in use and the fair value less costs of disposal. Any impairment is recognised immediately as an expense and is not subsequently reversed.
Goodwill relating to investments with significant influence (associates) and joint ventures is always included in the carrying amount of those investments.
Consolidated subsidiaries are all entities (including intermediate subsidiaries) over which the company has control. The company controls an entity when it is exposed, or has rights, to variable returns from its involvement with the subsidiary and can affect those returns through its power over the subsidiary. Subsidiaries are recognized from the date on which control is transferred to the company or its intermediate holding entities. They are derecognized from the date that control ceases.
The company applies the acquisition method to account for acquiring subsidiaries, consistent with the approach identified in the consolidated financial statements. The consideration transferred for the acquisition of a subsidiary is the fair value of assets transferred by the company, liabilities incurred to the former owners of the acquiree and the equity interests issued by the company. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Identifiable assets acquired and liabilities and contingent liabilities assumed in an acquisition are measured initially at their fair values at the acquisition date, and are subsumed in the net asset value of the investment in consolidated subsidiaries. Acquisition-related costs are expensed as incurred.
Investments in consolidated subsidiaries are measured at net asset value. Net asset value is based on the measurement of assets, provisions and liabilities and determination of profit based on the principles applied in the consolidated financial statements. If the net asset value, based on the business operation, is less than zero, the subsidiary will record a receivable vis-à-vis Brill nv in order to arrive at net zero book value.
When an acquisition of an investment in a consolidated subsidiary is achieved in stages, any previously held equity interest is remeasured to fair value on the date of acquisition. The re-measurement against the book value is accounted for in the income statement.
When the company ceases to have control over a subsidiary, any retained interest is remeasured to its fair value, with the change in carrying amount to be accounted for in the income statement.
When parts of investments in consolidated subsidiaries are bought or sold, and such transaction does not result in the loss of control, the difference between the consideration paid or received and the carrying amount of the net assets acquired or sold, is directly recognized in equity.
| Leasehold | |||
|---|---|---|---|
| 2017 | improvements | Other | Total |
| Book value as per January 1st, 2017 | 49 | 191 | 240 |
| Investment | 168 | 170 | 339 |
| Depreciation | -25 | -147 | -171 |
| Book value as per December 31st, 2017 | 193 | 215 | 408 |
| January 1st, 2017 | |||
| Cost | 674 | 3,205 | 3,879 |
| Accumulated depreciation | -624 | -3,014 | -3,638 |
| Net book amount | 49 | 191 | 240 |
| December 31st, 2017 | |||
| Cost | 842 | 3,375 | 4,217 |
| Accumulated depreciation | -649 | -3,161 | -3,810 |
| Net book amount | 193 | 215 | 408 |
| 2016 | Leasehold improvements |
Other | Total |
| Book value as per January 1st, 2016 | 61 | 290 | 351 |
| Investment | 0 | 70 | 70 |
| Depreciation | -12 | -169 | -180 |
| Book value as per December 31st, 2016 | 49 | 191 | 240 |
| January 1st, 2016 | |||
| Cost before disposal | 674 | 7,271 | 7,945 |
| Disposal of assets | 0 | -4,136 | -4,136 |
| Cost | 674 | 3,135 | 3,809 |
| Accumulated depreciation before disposal | -613 | -6,982 | -7,594 |
| Accumulated depreciation of disposal | 0 | 4,136 | 4,136 |
| Accumulated depreciation | -613 | -2,845 | -3,458 |
| Net book amount | 61 | 290 | 351 |
| December 31st, 2016 | |||
| Cost | 674 | 3,205 | 3,879 |
| Accumulated depreciation | -624 | -3,014 | -3,638 |
| Net book amount | 49 | 191 | 240 |
Estimated useful life of fixed assets is as follows: Leasehold improvements 10 years, and other fixed assets (investments in computer related equipment, and furniture and equipment) between 3 and 10 years. The depreciation is part of the general and administrative expenses in the consolidated income statement. The disposal of assets only includes fully depreciated assets that are no longer present at Brill.
| 2017 | Publishing rights |
Goodwill | License | Capi talized Content |
Con tent WIP |
Infor mation Systems |
Total |
|---|---|---|---|---|---|---|---|
| Book value, January 1st, 2017 | 15,189 | 1,879 | 0 | 8,189 | 1,945 | 1,984 | 29,186 |
| Acquisition | 118 | 978 | 1,097 | ||||
| Investment | 0 | 0 | 271 | 3,082 | 1,399 | 4,472 | |
| Transfer | 0 | 0 | 3,007 | -3,007 | |||
| Amortization | 0 | 0 | -27 | -3,460 | -648 | -4,135 | |
| Book value, December 31st, 2017 | 15,307 | 2,858 | 244 | 7,737 | 2,020 | 2,735 | 30,901 |
| January 1st, 2017 | |||||||
| Cost | 15,181 | 1,879 | 0 | 34,063 | 1,945 | 9,736 | 62,812 |
| Accumulated amortization | 0 | 0 | 0 | -25,874 | -7,752 | -33,626 | |
| Net book amount | 15,181 | 1,879 | 0 | 8,189 | 1,945 | 1,984 | 29,186 |
| December 31st, 2017 | |||||||
| Cost | 15,307 | 2,858 | 271 | 37,071 | 2,020 | 11,135 | 68,661 |
| Accumulated amortization | 0 | 0 | -27 | -29,334 | -8,399 | -37,760 | |
| Net book amount | 15,307 | 2,858 | 244 | 7,737 | 2,020 | 2,735 | 30,901 |
| 2016 | Publishing rights |
Goodwill | License | Capi talized Content |
Con tent WIP |
Infor mation Systems |
Total |
| Book value, January 1st, 2016 | 15,181 | 1,879 | 0 | 0 | 0 | 1,664 | 18,724 |
| Reclassed from inventories | 0 | 0 | 0 | 7,592 | 2,226 | 0 | 9,818 |
| Acquisition | 69 | 0 | 0 | 0 | 0 | 69 | |
| Investment | 0 | 0 | 0 | 3,465 | 976 | 4,441 | |
| Transfers | 3,746 | -3,746 | |||||
| Divestment | -61 | 0 | 0 | 0 | 0 | -61 | |
| Amortization | 0 | 0 | 0 | -3,148 | -656 | -3,804 | |
| Book value, December 31st, 2016 | 15,189 | 1,879 | 0 | 8,189 | 1,945 | 1,984 | 29,186 |
| January 1st, 2016 | |||||||
| Cost | 15,181 | 1,879 | 0 | 0 | 0 | 8,760 | 25,820 |
| Accumulated amortization | 0 | 0 | 0 | 0 | 0 | -7,096 | -7,096 |
| Net book amount | 15,181 | 1,879 | 0 | 0 | 0 | 1,664 | 18,724 |
| December 31st, 2016 | |||||||
| Cost | 15,189 | 1,879 | 0 | 34,063 | 1,945 | 9,736 | 62,812 |
| Accumulated amortization | 0 | 0 | 0 | -25,874 | 0 | -7,752 | -33,626 |
| Net book amount | 15,189 | 1,879 | 0 | 8,189 | 1,945 | 1,984 | 29,186 |
| December 31, 2017 | December 31, 2016 | ownership | |
|---|---|---|---|
| Brill USA, Inc. Boston, USA | 808 | 799 | 100% |
| Brill Asia Pte Ltd, Singapore | 0 | 17 | 100% |
| Brill Deutschland GmbH, Germany | 113 | 25 | 100% |
| Sense Publishers BV, the Netherlands | 649 | 0 | 100% |
| Loans to consolidated subsidiaries | 1,100 | 0 | |
| 2,670 | 841 |
| Brill USA Inc., (US) |
Brill Asia Pte, (SG) |
Brill Deutschland GMBH, (GE) |
Sense Publishers bv, (NL) |
Loans to consolidated subsidiaries |
Total | |
|---|---|---|---|---|---|---|
| Net carrying amount as of 1 January | 799 | 17 | 25 | 0 | 0 | 841 |
| 2017 | ||||||
| Investments | 0 | 0 | 0 | 594 | 1,1oo | 1,694 |
| Profit 2017 | 109 | -1 | 88 | 55 | 0 | 251 |
| Revaluation foreign currency | -100 | -16 | 0 | 0 | 0 | -116 |
| Net carrying amount as of 31 December 2017 |
808 | 0 | 113 | 649 | 1,100 | 2,670 |
| Net carrying amount as of 1 January 2016 |
558 | 0 | 0 | 0 | 0 | 558 |
| Initial share capital | 0 | 0 | 25 | 25 | ||
| Profit 2016 | 263 | 19 | 282 | |||
| Revaluation foreign currency | -22 | -2 | -24 | |||
| Net carrying amount as of 31 December 2016 |
799 | 17 | 25 | 0 | 0 | 841 |
Trade and other debtors are short-term in nature, non-interest bearing and have payment terms of 30-90 days in general, depending on the country of origin of the trade debtor. For an aging analysis and changes in the provision for bad debt, refer to Note 8 to the consolidated financial statements.
| December 31, 2017 | December 31, 2016 | |
|---|---|---|
| Trade debtors | 5,978 | 5,977 |
| Intercompany receivables | 755 | |
| Other receivables | 1,441 | 2,088 |
| 8,174 | 8,065 |
As per ultimo 2017, cash and cash equivalents were EUR 3,056 thousand (ultimo 2016: EUR 6,067 thousand). The funds are freely available to Brill.
| December 31, 2017 | December 31, 2016 | |
|---|---|---|
| Trade creditors | 3,269 | 3,146 |
| Intercompany liabilities | 623 | 587 |
| Accruals | 2,342 | 1,808 |
| Other short term liabilities | 1,954 | 1,802 |
| 8,187 | 7,343 |
For further information, refer to Note 12a of the consolidated financial statements.
A rental agreement is in existence for our offices located in Leiden with duration until September 2023. A bank guarantee of EUR 115 thousand was issued in support of this agreement. Furthermore, the company has operational leasing contracts for company cars with a duration of four years. Financial liabilities for leasing and rent are:
| As per December 31st, 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | >2022 |
|---|---|---|---|---|---|---|
| Company cars | 59 | 31 | 5 | 0 | 0 | 0 |
| Rent | 330 | 340 | 350 | 361 | 372 | 287 |
| 389 | 371 | 355 | 361 | 372 | 287 | |
| As per December 31st, 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | >2021 |
| Company cars | 60 | 53 | 28 | 5 | 0 | 0 |
| Rent | 328 | 338 | 348 | 359 | 370 | 675 |
| 388 | 391 | 376 | 364 | 370 | 675 |
| 2017 | 2016 | |
|---|---|---|
| Audit of annual financial statements | 295 | 117 |
| Other audit procedures | 0 | 0 |
| Tax services | 0 | 0 |
| Other non – audit services | 0 | 0 |
| 295 | 117 |
These audit fees relate to fees paid to PricewaterhouseCoopers Accountants NV (PwC) in the Netherlands. PwC is not used outside the Netherlands, nor is PwC used for any consulting engagements.
Management proposes an ordinary cash dividend of EUR 1.32 and an extraordinary distribution from the reserves of EUR 3.00 per (certificate of) ordinary share of EUR 0.60 nominally. Refer to separate chapter 'Shareholder information'. If the Annual General Meeting accepts the dividend proposal, the 2017 profit in the amount of EUR 2,260 thousand will be appropriated as follows:
| Profit appropriation proposal | 2017 |
|---|---|
| Ordinary dividend on ordinary shares Retained Earnings |
2,260 0 |
| Net profit | 2,260 |
For disclosures regarding the following items, please refer to the notes to the consolidated financial statements as listed below:
-Inventories – Note 7
-Equity – Note 10
-Interest bearing debt – Note 11
-Financial instruments – Note 13
-Financial risk management – Note 14
-Events after balance date – Note 22
Leiden, April 4, 2018
Supervisory Board Steven Perrick Catherine Lucet Robin Hoytema van Konijnenburg
Managing Director Herman A. Pabbruwe
Profit appropriation takes place pursuant to article 30 of the Articles of Association which stipulates that profit shall be distributed as follows:
Since July 1997, Koninklijke Brill NV has been listed on Euronext Amsterdam. The register of shareholders of Koninklijke Brill NV is managed by:
SGG Management (Netherlands) BV Claude Debussylaan 24 1082 MD Amsterdam T +31 20 52 22 555
SGG also acts as administrator of the Stichting Administratiekantoor Koninklijke Brill. Registered shareholders can send changes of address notifications and questions on shareholding or dividend payments to the above-mentioned trust office.
In the context of the Financial Supervision Act, the following holders of share certificates, on December 31, 2017, have reported an interest of 3% or more to the Dutch Authority Financial Markets:
| Filings | Size | Declaration date |
|---|---|---|
| Mont Cervin Sàrl | 22% | 22 June, 2012 |
| Axxion SA | 6% | 20 July, 2016 |
| Teslin participaties | 6% | 22 February, 2013 |
| J.P. van Slooten | 5% | 13 July, 2016 |
| Brokat Media Support BV | 5% | 18 December, 2012 |
| Stichting Administratiekantoor Arkelhave Capital | 5% | 16 December, 2016 |
| Stichting John en Marine Van Vlissingen Foundation | 5% | 11 August, 2015 |
| GVB Capital Management | 3% | 26 June, 2012 |
| Add Value Fund NV | 3% | 18 July, 2012 |
The number ofshares outstanding with a nominal value of EUR 0.60was1,874,444 on December 31, 2017 (on December 31, 2016 1,874,444). Of the total number of shares outstanding as of December 31, 2017, 1,834,463 certificates were issued and 39,981 registered shares were recorded in the share register.
Herman A. Pabbruwe 8,311 shares (Managing Director)
The Managing Director, before his appointment and for his own account and risk, acquired share (certificates) in Brill via his bank with the consent of the Supervisory Board. It has been agreed with the Supervisory Board that the Managing Director will not dispose of or encumber these certificates, possibly increased by stock dividend for which a standard instruction has been given, during his active employment.
To: the general meeting and supervisory board of Koninklijke Brill N.V.
In our opinion:
We have audited the accompanying financial statements 2017 of Koninklijke Brill N.V., Leiden ('the Company'). The financial statements include the consolidated financial statements of Koninklijke Brill N.V. and its subsidiaries (together: 'the Group') and the company financial statements.
The consolidated financial statements comprise:
The company financial statements comprise:
The financial reporting framework that has been applied in the preparation of the financial statements is EU-IFRS and the relevant provisions of Part 9 of Book 2 of the Dutch Civil Code for the consolidated financial statements and Part 9 of Book 2 of the Dutch Civil Code for the company financial statements.
We conducted our audit in accordance with Dutch law, including the Dutch Standards on Auditing. Our responsibilities under those standards are further described in the section 'Our responsibilities for the audit of the financial statements' of our report.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
We are independent of Koninklijke Brill N.V. ('Brill' or 'the Company') in accordance with the European Regulation on specific requirements regarding statutory audit of public interest entities, the 'Wet toezicht accountantsorganisaties'(Wta, Audit firms supervision act), the 'Verordening inzake de onafhankelijkheid van accountants bij assuranceopdrachten' (ViO – Code of Ethics for Professional Accountants, a regulation with respect to independence) and other relevant independence requirements in the Netherlands.
Furthermore, we have complied with the 'Verordening gedrags- en beroepsregels accountants' (VGBA – Code of Ethics for Professional Accountants, a regulation with respect to rules of professional conduct).
Brill is an international scholarly publisher. The Group is comprised of several components and therefore we considered our group audit scope and approach as set out in the section 'The scope of our group audit'. We paid specific attention to the areas of focus driven by the operations of the Group, as set out below. Last year, the Company reported internal control deficiencies in their director's report. As part of our planning procedures we assessed the progress made by the Company in addressing these internal control deficiencies and we concluded that a substantive audit approach is still necessary rather than a controlsbased audit approach based on the status of the progress made.
In addition, the Company identified in 2017 misstatements in its prior year reporting that also resulted from internal control deficiencies. One misstatement relates to the excessive book returns caused by erroneous over-ordering by a key US client. Another misstatement relates to the completeness of the liability for royalty expenses. Both matters have been further explained by the Company in its director's report. We considered Brill's deficiencies in their internal control framework to be a key audit matter, because of the limited progress made by the Company in addressing the existing internal control deficiencies.
In 2017 the Company completed the acquisitions of the publishing houses Schöning & Fink and Sense Publishers. The accounting of these transactions as business combinations is complex and requires significant management judgement regarding the valuation aspects and also required considerable time and attention in our audit. Therefore, we considered the accounting for business combinations to be a key audit matter.
As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the financial statements. In particular, we considered where the Managing Director made important judgements; for example, in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. In paragraph 2.6 of the financial statements the company describes the areas of judgment in applying accounting policies and the key sources of estimation uncertainty. Given the significant estimation uncertainty and the related higher inherent risks of material misstatement in the valuation of the publishing rights, goodwill and capitalised content related costs, we considered this to be key audit matter.
The Group made use of third parties (i.e. agents) in conducting sales transactions. During 2017 Brill took action to address the completeness of the third party revenue, however, no formal controls are implemented yet. The Group's revenue recognition is fully dependent on the sales information provided by these third parties. In our audit approach we paid special attention to the completeness of these third party revenues. Therefore we considered the completeness of third party revenue to be a key audit matter. For more details on the above refer to the section 'Key audit matters' of this report.
As in all of our audits, we also addressed the risk of management override of internal controls, including evaluating whether there was evidence of bias by the Managing Director that may represent a risk of material misstatement due to fraud.
We ensured that the audit teams both at group and at component levels included the appropriate skills and competences which are needed for the audit of an internationally operating publishing company. We therefore included specialists in the area of IT and valuations and hedge accounting experts in our team.
The outline of our audit approach was as follows:
The scope of our audit is influenced by the application of materiality which is further explained in the section 'Our responsibilities for the audit of the financial statements'.
Based on our professional judgment, we determined certain quantitative thresholds for materiality, including the overall materiality for the financial statements as a whole as set out in the table below. These, together with qualitative considerations, helped us to determine the nature, timing and extent of our audit procedures on the individual financial statement line items and disclosures and to evaluate the effect of identified misstatements, both individually and in aggregate, on the financial statements as a whole and on our opinion.
| Overall group materiality | €155,000 (2016: €190,650). |
|---|---|
| Basis for determining | We used our professional judgment to determine overall materiality. As a basis |
| materiality | for our judgment we used 5% of profit before tax. |
| Rationale for benchmark | We used profit before tax as the primary benchmark, a generally accepted |
| applied | auditing practice, based on our analysis of the common information needs of |
| users of the financial statements. On this basis we believe that profit before tax | |
| is an important metric for the financial performance of the company. | |
| Component materiality | The component materiality used for the financially significant component Brill |
| The Netherlands equals € 155,000. |
We also take misstatements and/or possible misstatements into account that, in our judgement, are material for qualitative reasons.
We agreed with the supervisory board that we would report to them misstatements identified during our audit above € 7,770 (2016: € 9,500) as well as misstatements below that amount that, in our view, warranted reporting for qualitative reasons.
Koninklijke Brill N.V. is the parent company of a group of entities. The financial information of this group is included in the consolidated financial statements of Koninklijke Brill N.V.
We tailored the scope of our audit to ensure that we performed sufficient work to be able to give an opinion on the financial statements as a whole, taking into account the management structure of the Group, the nature of operations of its components, the accounting processes and controls, and the markets in which the components of the Group operate. In establishing the overall group audit strategy and plan, we determined the type of work required to be performed at the component level by the group engagement team or component auditor. Also, we considered in our scoping of the group audit the activities carried out under direction of the Company and those activities carried out by external service providers.
In our group audit scoping the group consists of four components:
The group audit primarily focused on the component Brill The Netherlands, as this component is individually financially significant to the group. The components Brill USA and Brill Germany were selected for audit procedures to achieve appropriate coverage on financial line items in the consolidated financial statements. The accounting records of these components were available at the head office in The Netherlands and were audited by the group team.
For Brill USA we instructed the component auditor of Brill USA to perform specified procedures in the USA. These specified procedures included attending the inventory count and performing test counts at the premises of the external service provider. We received a report of specified procedures from the component auditor of Brill USA and we assessed the results.
In total, in performing these procedures, we achieved the following coverage on the financial line items:
| Revenue | 100% |
|---|---|
| Total assets | 95% |
| Profit before tax | 99% |
The remaining component Brill Asia did not represent more than 1% of total group revenue or total group assets. For Brill Asia we performed analytical procedures to corroborate our assessment that there were no significant risks of material misstatements within those components.
We identified an external service organization in the UK and the USA, providing significant services for the Group including invoicing, account handling, credit control, warehousing & stock control and reporting. We obtained an understanding of the nature and significance of the services provided by the external service organization, and of the controls in operation at the service organization (and sub-service organization).
Prior to obtaining an ISAE 3402 type 2 report we assessed the professional competence, objectivity and independence of the auditor of the service organization. We evaluated the ISAE 3402 type 2 report prepared by the auditor of the service organization. We also held meetings and conference calls with the management of the service organization and its auditor to evaluate the sufficiency and appropriateness of the evidence provided by the report.
Where the work was performed by a component auditor or the auditor of an external service organization, we determined the level of involvement we needed to have in their audit work to be able to conclude whether sufficient appropriate audit evidence had been obtained as a basis for our opinion on the consolidated financial statements as a whole.
The group consolidation, financial statement disclosures and complex items were audited by the group engagement team at the head office in Leiden. These complex items included the accounting for business combinations, hedge transactions, impairment assessments of intangible fixed assets with indefinite useful life and the amortization of capitalized content costs.
By performing the procedures above at the group level, combined with additional procedures at component level, we have been able to obtain sufficient and appropriate audit evidence on the Group's financial information, as a whole, to provide a basis for our opinion on the financial statements.
Key audit matters are those matters that, in our professional judgement, were of most significance in the audit of the financial statements. We have communicated the key audit matters to the supervisory board. The key audit matters are not a comprehensive reflection of all matters that were identified by our audit and that we discussed. In this section, we described the key audit matters and included a summary of the audit procedures we performed on those matters.
The key audit matters 'Significant assumptions in the valuation of assets' and 'Completeness of third party sales' are similar in nature to the key audit matters we reported in 2016 and in line with the nature of the company's business and its environment. Last year's key audit matter on the 'Impact of (IT General) control
deficiencies on the audit' is succeeded by the 'Deficiencies in internal control framework', because we chose a substantive audit approach rather than a controls-based approach from the very start of the audit. The key audit matter 'Accounting for business combinations and fair value of the intangible assets' is new this year following the acquisitions in 2017.
The key audit matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon. We did not provide separate opinions on these matters or on specific elements of the financial statements. Any comments or observations we made on the results of our procedures should be read in this context.
| Key audit matter | How our audit addressed the matter |
|---|---|
The internal control deficiencies and related impact are included in paragraphs 'Introduction by the Managing Director' and 'Risk management and internal control in 2017' in the director's report of the annual report
In 2017 the Company started to follow up on internal control deficiencies reported by us in prior years. As part of our examination of internal controls we noted that (significant) control deficiencies were not solved during 2017 and that the internal control framework was not strengthened sufficiently to mitigate the risks of a material misstatement to an acceptable level.
In addition, in 2017 the Company was confronted with two misstatements originating from 2016 which resulted from internal control deficiencies. First, the company was confronted with excessive book returns caused by a malfunctioning of the exchange of information in the EDI interface between the service organization and a key US client. This resulted in erroneous over-ordering by the key US client, which has been identified by the Company in the first half of 2017. Secondly, Brill had an omission in the completeness of the liability for royalty expenses, because the calculation of the royalty expenses was not correctly based on the percentages in the underlying contract.
The Company concluded that the financial impact on 2016 figures is not material and therefore there was no need to account for these misstatements as prior year errors in accordance with IAS 8.
We evaluated internal controls in key business processes and assessed the actions taken by the company during 2017. We communicated the deficiencies and progress made to the Managing Director and the Supervisory Board.
Based on the deficiencies noted, we chose a substantive audit approach rather than a controlsbased audit approach. Our substantive audit procedures were designed and performed to address the control deficiencies known and to obtain sufficient and appropriate evidence. These procedures included, amongst other procedures, testing significant samples of revenue transactions and verification of logging files from the main financial systems.
As part of our substantive testing we also addressed the excessive book returns. We assessed the initial analysis provided by Brill's management, which included a root cause analysis and impact assessment which includes impact on 2016 figures. We then compared management's analysis with the impact assessment obtained from the external service organization. As part of these procedures, we performed inquiries of the management of the service organization and its auditor.
We found that management's assessment was in agreement with the assessment prepared by the external service organization and appropriately addressed in preparing the 2017 figures.
Consequently, the financial impact was included in the 2017 figures. Also, the Company evaluated the impact of these internal control deficiencies for 2017 figures and where considered necessary remediation actions were taken.
Due to the significance of the identified internal control deficiencies and impact on the design of our audit we consider this to be a key audit matter.
We addressed the completeness of the liability for royalty expenses by performing the following substantive testing:
Our procedures did not identify material exceptions and we consider management's analysis regarding the financial impact for period up to 2016 to be reasonable.
[reference to note 3 in the annual report] The acquisitions of Sense and Schöning & Fink were finalised in 2017. Following these acquisitions integration and alignment of processes took place. The company completed the purchase price allocation for Schöning & Fink with the assistance of external experts. For Sense a provisional purchase price allocation has been accounted for.
As part of the purchase price allocations two significant intangible assets have been identified for € 638 thousand: the publishing rights and the brand name. These intangible assets have been valued using the multi-period excess earnings method (MEEM) and the following significant assumptions are applied: the discount rate, growth rate, sales volumes in business plan. The remaining purchase price is accounted for as goodwill for an amount of € 1,088 thousand.
As part of our substantive audit procedures we tested the acquisitions based on supporting documentation such as the underlying agreements. In close cooperation with our valuation experts we assessed the purchase price allocations and the fair value calculations of the intangible assets identified. We challenged assumptions made by the management by using external benchmarks.
Our valuation experts assessed management's calculation of the discount rate and whether the discount rate used is consistent with observable market data. We found that the discount rate used by management was within an acceptable range. We reconciled growth percentages used to the strategic plan 2018-2020 of the management and compared these to historical growth percentages and sector information.
Given the significance of the acquisition transactions and the complexity of accounting for business combinations, and the significant management assumptions in the valuation of the intangible assets identified, we consider this to be a key audit matter.
[reference to note 5 in the annual report] The valuation of indefinite-lived intangible assets and content are based on significant assumptions of management. Following a reclassification, the intangible assets also include capitalised content costs that are amortized using a diminishing balance method based on the estimated consumption pattern.
The indefinite lived intangible assets (mainly consisting of goodwill and publishing rights) represent a total balance of € 18,831 thousand and the content represents a total balance of € 9,754 thousand (including work in progress) as of 31 December 2017.
The Company is required to test indefinite-lived intangible assets for impairment at least annually. The Company manages the Group based on five operating segments: ARC, HIS, LAW, MIA and S&F. These segments correspond to cash generating units (CGUs) at the lowest level for which independent cash flows exist. The impairment tests were important for our audit, because the cash flows used in the impairment tests were based on significant assumptions made by management. These assumptions were related to the discount rate used, growth rates, market developments and the company's future plans.
The valuation of the intangible assets was important for our audit, because the balance is material and the valuation and amortization charge for content is based on significant assumptions.
Finally we assessed the adequacy of the disclosures for the business combinations in the notes to the financial statements.
Based on the audit procedures performed, we found management's estimates and judgment used in the fair value calculations to be supported by available evidence.
We obtained the impairment tests prepared by management. We challenged the assumptions and estimates used in the impairments tests, including the determination of CGUs. We reconciled growth percentages used to the strategic plan 2018-2020 of management and compared these to historical growth percentages and sector information. Our valuation experts assessed management's calculation of the discount rate and whether the discount rate used is consistent with observable market data. We also performed look-back procedures and sensitivity analyses of value in use for different discount rates and terminal growth rates.
Our procedures did not identify material exceptions and we considered management's key assumptions to be within a reasonable range of our own expectations.
We also assessed the adequacy of the Company's disclosures.
For the reclassification of capitalized content costs, we assessed that the classification of content as intangible asset in line with the changed accounting policies and we assessed the adequacy of the disclosure in note 2.4 regarding this accounting change . In addition, we evaluated the consistency and appropriateness of the accounting policy with respect to content and amortization of content. We tested capitalized content costs on a sample basis by agreeing selected capitalized content costs to supporting documents. We recalculated the amortization of content and agreed the inputs of the calculation to the
underlying estimated consumption patterns. We assessed the quality of the estimated patterns and critically challenged management on assumptions made regarding useful life of content and its pattern of economic benefits.
Our procedures did not identify material exceptions
Our procedures included, amongst others, the assessment of the internally prepared analysis on the completeness of the revenues as presented by the third parties. We assessed the reasonableness of the assumptions made by management in their analysis compared to developments in the market and we performed lookback procedures. Also, we tested by sample that confirmations of third parties obtained by the client reconcile with
these confirmations.
We reported on the progress in the formalisation and effectiveness of internal controls with respect to completeness of third party sales to the Managing Director and the supervisory board.
A significant part (€ 4.2 million) of the sales was
During 2017, the company took further action to address the completeness of the third party revenue as part of their internal control
framework, however, the internal controls were not (yet) formalised and implemented in 2017.
Completeness of third party sales [reference to note 15 in the annual report]
conducted via third parties (agents).
The Group's revenue recognition is dependent on the sales information provided by these third parties. Also, in 2017 Brill's management prepared an analysis on the completeness of the third party revenue streams.
Our procedures did not identify material exceptions and considered management's assumptions within the analysis to be within a reasonable.
underlying records and verified the authenticity of
Given the size of the third party sales and the lack of internal controls we considered the completeness of third party revenues as a key audit matter.
In addition to the financial statements and our auditor's report thereon, the annual report contains other information that consists of:
Based on the procedures performed as set out below, we conclude that the other information:
We have read the other information. Based on our knowledge and understanding obtained in our audit of the financial statements or otherwise, we have considered whether the other information contains material misstatements.
By performing our procedures, we comply with the requirements of Part 9 of Book 2 of the Dutch Civil Code and the Dutch Standard 720. The scope of such procedures was substantially less than the scope of those performed in our audit of the financial statements.
The Managing Director is responsible for the preparation of the other information, including the directors' report and the other information in accordance with Part 9 of Book 2 of the Dutch Civil Code.
We were appointed as auditors of Koninklijke Brill N.V. on 13 May 2015 by the supervisory board following the passing of a resolution by the shareholders at the annual meeting held on 13 May 2015 and the appointment has been renewed annually by shareholders representing a total period of uninterrupted engagement appointment of 3 years.
To the best of our knowledge and belief, we have not provided prohibited non-audit services as referred to in Article 5(1) of the European Regulation on specific requirements regarding statutory audit of public interest entities.
We have not provided any services in addition to the audit to the company and its controlled entities, for the period to which our statutory audit relates.
As part of the preparation of the financial statements, the Managing Director is responsible for assessing the company's ability to continue as a going concern. Based on the financial reporting frameworks mentioned, Managing Director should prepare the financial statements using the going-concern basis of accounting unless the Managing Director either intends to liquidate the company or to cease operations, or has no realistic alternative but to do so. The Managing Director should disclose events and circumstances that may cast significant doubt on the company's ability to continue as a going concern in the financial statements.
The supervisory board is responsible for overseeing the company's financial reporting process.
Our responsibility is to plan and perform an audit engagement in a manner that allows us to obtain sufficient and appropriate audit evidence to provide a basis for our opinion. Our audit opinion aims to provide reasonable assurance about whether the financial statements are free from material misstatement. Reasonable assurance is a high but not absolute level of assurance which makes it possible that we may not
detect all misstatements. Misstatements may arise due to fraud or error. They are considered to be material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements.
Materiality affects the nature, timing and extent of our audit procedures and the evaluation of the effect of identified misstatements on our opinion.
A more detailed description of our responsibilities is set out in the appendix to our report.
Utrecht, April 4, 2018 PricewaterhouseCoopers Accountants N.V.
drs. J.W. Middelweerd RA
In addition to what is included in our auditor's report we have further set out in this appendix our responsibilities for the audit of the financial statements and explained what an audit involves.
We have exercised professional judgement and have maintained professional scepticism throughout the audit in accordance with Dutch Standards on Auditing, ethical requirements and independence requirements. Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error. Our audit consisted, among other things of the following:
Considering our ultimate responsibility for the opinion on the company's consolidated financial statements we are responsible for the direction, supervision and performance of the group audit. In this context, we have determined the nature and extent of the audit procedures for components of the group to ensure that we performed enough work to be able to give an opinion on the financial statements as a whole. Determining factors are the geographic structure of the group, the significance and/or risk profile of group entities or activities, the accounting processes and controls, and the industry in which the group operates. On this basis, we selected group entities for which an audit or review of financial information or specific balances was considered necessary.
We communicate with the supervisory board regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. In this respect we also issue an additional report to the supervisory board in accordance with Article 11 of the EU Regulation on specific requirements regarding statutory audit of publicinterest entities. The information included in this additional report is consistent with our audit opinion in this auditor's report.
We provide the supervisory board with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.
From the matters communicated with the supervisory board, we determine those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor's report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, not communicating the matter is in the public interest.
Of the total number of outstanding shares as at December 31, 2017 (nominal value of EUR 0.60), 1,834,463 bearer depositary receipts were issued and 39,981 registered shares were included in the shareholders' register. The bearer depositary receipts are represented by a single depositary receipt certificate. The work associatedwith the administration of the sharesis performed by SGGManagement(Netherlands)NV (Claude Debussylaan 24, 1082 MD in Amsterdam), the trust office's administrator. The costs of administration amounted to EUR 64.7 thousand in 2017 (EUR 108.7 thousand in 2016 – note final figures, updated from last year's preliminary figures). The trust office's chairman receives a remuneration of EUR 9 thousand on an annual basis and the othertwo boardmembers each receive a remuneration of EUR 7.5 thousand on an annual basis.
The Board convened a meeting of holders of depository receipts for shares Brill, which was held on February 16, 2017, in Amsterdam. In this meeting, the Board discussed with the holders of depository receipts its proposal for a new voting policy to refrain from voting, unless explicitly mandated to do so by holders of depository receipts ofshares. This policy appliesto ordinary voting situations and may be adapted in the case ofspecialsituations. In relation thereto, the general meeting of Brill has been requested to vote on a renewed agreement for the issuance of preference shares.
In the year under review, the Board met two times physically. During its first meeting on February 16, 2017, which took place shortly after the meeting of holders of depository receipts for shares, the Board discussed the proposal that was made to the meeting of holders of depository receiptsfor the new policy to refrain from the exercise of the voting rights to the shares held by the trust office in Brill for which no voting proxies were received or for which the trust office did not receive any voting instructions. The Board unanimously approved this new policy and resolved that this new policy be started once the general meeting of Brill approved the renewed agreement for the issuance of preference shares. Further, the Board unanimously resolved to increase the remuneration, starting as from the financial year 2017, to EUR 9 thousand for the chairman and EUR 7.5 thousand for each of the other two board members. Finally, the Board unanimously resolved to appoint Mr. Marco Nieuwe Weme as chairman of the Board starting at the end of the meeting of holders of depository receipts for shares in Brill. During the Board meeting held on April 13, 2017, the 2016 annual report and financial statements, the company's strategy and its implementation and the general course of events within the company were discussed. In addition, the agenda for the General Meeting of Shareholders was discussed and the way in which the Board would vote in the meeting was decided. The decision was made to refrain from voting in relation to all motions tabled.
In the company's General Meeting of Shareholders which took place on May 16, 2017, 98% of the company's issued capital was represented. The trust office granted authorization to holders of 59.3% of all depositary receipts to vote independently on the shares for which they held the depositary receipts. The trust office refrained from exercising the right to vote on the shares for which no voting instruction was issued. For the depositary receipts of shares for which the trust office received a voting instruction (3.2% of depositary receipts), the trust office casted a vote in the meeting.
At December 31, 2017, the composition of the trust office's board was as follows:
| Name | Appointed | In office until | Position |
|---|---|---|---|
| Marco P. Nieuwe Weme, Prof. LL.M. | 2016 | 2020 | Chairman |
| Joost C. Kuiper, LL.M. | 2014 | 2018 | Member |
| Yvonne C.M.T. van Rooy, LL.M. | 2016 | 2020 | Member |
The trust office's Board does not adhere to the principle of the current Dutch Corporate Governance Code regarding the protective nature of the depositary receipts. The trust office's Board adopts this stance, because it believes proper protection against any hostility is of vital importance to a company like Brill in terms ofsize and special position.
The trust office will always issue voting proxies to depositary receipt holders or accept binding voting instructions from them for meetings of shareholders, except in the situations referred to in Section 118a, subsection 2, of Book 2 of the Dutch Civil Code. The same procedure will apply to any revocation of a proxy that has already been issued. In accordance with its voting policy, the trust office refrains from voting, unless explicitly mandated to do so by holders of depository receipts ofshares. This policy appliesto ordinary voting situations and may be adapted in the case of special situations.
The Board is prepared to give depositary receipt holders the opportunity to make recommendations in the event of board vacancies. The Board will not take such recommendations into account when making decisions, however, if, in the opinion of the Board, a nominated candidate does not believe in the importance of the protective function of the depositary receipts as described above. Further, the Board will use the most practical working procedure possible with respect to any recommendations. This means that, each year, the trust office's report will give notice of any vacancy that will arise in the subsequent year so that depositary receipt holders can make any recommendations known outside meetings.
The Board observes the current Dutch Corporate Governance Code with the exception, however, of the way in which it exercises its right to vote. Contrary to the Dutch Corporate Governance Code, the following provision is observed: 'The trust office shall exercise the rights attached to the shares in such a manner as to ensure that the interests of the company and its business and all parties involved are safeguarded to the greatest extent possible.' The Board believes that its position with respect to maintaining the protective nature of the depositary receipts for shares means that the interest of depositary receipt holders cannot be the sole or dominant interest when votes are cast. In normal circumstances, the Board is of course always prepared to listen to depositary receipt holders and take the opinions that they have expressed into account. This also means that the Board will attend the company's shareholders' meetings and, if required and applicable, make a statement regarding intended voting behavior. Except in the event of special circumstances, the Board does not intend to convene meetings of depositary receipt holders.
The Board of Stichting Administratiekantoor Koninklijke Brill, the trust office, hereby declares that, in its opinion, the requirements that apply to the independence of the trust office as referred to in Section 5:71, subsection 1 under d, of the Financial Supervision Act have been met.
Leiden, April 4, 2018
Stichting Administratiekantoor Koninklijke Brill The Board
The purpose of Stichting Luchtmans, a foundation named after the founder of the Company, is to serve the interests of the company and those of companies affiliated with it in a group, as well as those of businesses maintained by the company and/or by companies affiliated with it in a group, in such a way as to ensure that the interests of the company and the group companies and businesses referred to, as well as the interests of all parties involved, are safeguarded to the greatest extent possible and factors that could adversely affect the independence and/or the continuity and/or the identity of the company and the group companies and businesses referred to are resisted to the greatest extent possible. Stichting Luchtmans endeavors to achieve its objectives by acquiring and managing cumulative preference shares in the capital of the company and by exercising the rights attached to those shares, particularly the right to vote conferred by those shares.
Stichting Luchtmans has been granted a call option that gives it the right, in the event of hostile action or imminent hostile action against the company, to take a number of cumulative preference shares equal to, at most, 100% of the shares and depositary receipts issued at the time at which the option is exercised less one share. When the option is exercised, only 25% of the total nominal amount must be paid. The exercise price is equal to the nominal value. Stichting Luchtmans and the company have agreed that the option may be exercised up to 100% of the issued capital if and as long as shares and depositary receipts are listed on the Euronext Amsterdam NV exchange.
At the end of 2017, the composition of the foundation's board was as follows:
| Name | Appointed | Current term until | Position |
|---|---|---|---|
| Piet G.J. van Sterkenburg | 2006 | 2018 | Chairman |
| Herman P. Spruijt | 2001 | 2020 | Vice chairman |
| Joris P. Backer, LL.M. | 2008 | 2020 | Secretary/treasurer |
| Rudy P. Voogd, LL.M. | 2005 | 2017 | Member |
| Tanja Bender | 2017 | 2020 | Member |
The Board of the foundation aims to meet at least once a year. One meeting in person took place in 2017 (April 19). In this meeting, the company's 2016 results, the implementation of the strategy, financing, acquisitions, market developments, and the general course of events within the company were discussed. Mr. Spruijt and Mr. Backer were reappointed for a three-year term. A telephone conference took place on 12 July in which the Managing Director informed the Board about the progress made in the on-going consultation of stake holders leading to the proposal to approve a new option agreement between the company and the Stichting. This agreement was indeed signed on 23 June 2017, following the affirmative vote in the AGM.
Mr. Rudy Voogd retired from the board at the expiration of his last term. The Board and the company have expressed their debt of gratitude to Mr. Voogd for his support and expert advice during twelve years of service.
The Board of Stichting Luchtmans hereby declares that, in its opinion, the requirements that apply to the independence of the directors of Stichting Luchtmans as referred to in Section 5:71, subsection 1 under c, of the Financial Supervision Act have been met.
Leiden, April 4, 2018
Stichting Luchtmans, The Board
Publication of Results First Half Year 2018 August 23, 2018 after stock market close
Trading Update Third Quarter 2018 November 15, 2018 after stock market close
Announcements of Results 2018 March 14,2019 after stock market close
Publication Annual Report 2018 on corporate website (brill.com) April 4, 2019
Trading Update First Quarter 2019 April 18, 2019 after stock market close
May 16, 2019 (2.00 PM at Brill premises)
Brill will be happy to provide (potential) shareholders and other stakeholders with relevant information to the best of its ability. Copies of (semi-) annual reports can be found at brill.com, under: About / Investor Relations. In addition, information may be requested via the following address.
KONINKLIJKE BRILL NV Investor Relations P.O. Box 9000 2300 PA Leiden The Netherlands
T + 31 71 53 53 500 E [email protected] brill.com
This annual report is available in PDF format on brill.com under About / Investor Relations.
Also a brochure will be published containing a summary of the consolidated Financial Statements, the Managing Director's Report and a special article.
The brochure 'Brill in 2017' will also be available on brill.com under About / Investor Relations.
Design and lay-out André van de Waal Coördesign, Leiden
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