Greg DalyA household name faces an uncertain future, writes Greg Daly
Only support from the hierarchy is keeping the country’s largest religious publisher afloat, according to its most recent financial statements, which reveal that last year it could not even afford to buy the necessary stock to boost sales.
Despite gross earnings of over €3million, Veritas Company Limited made a net loss last year of €1,812,341 after wages and other administrative expenses were taken into account. This follows a loss-making pattern in recent years, with the company’s net loss having risen from just €548,029 in 2011 to €1,131,936 in 2012, dropping very slightly to €1,125,754 in 2013 before climbing again to more than €1.8 million.
According to the Directors’ Report for the year ended December 31, 2014, the losses “reflect the continued economic challenges in the Irish market” and the “well-documented challenges operating in the declining Irish retail books and gifts market”. They also include, crucially, “continued investment costs arising on the establishment of the Credo programme in the USA”.
The Credo series, billed as “a comprehensive presentation of the Catholic faith for high school students that meets the needs of 21st Century learners”, and as of December 31 last adopted by 139 schools in the US, has clearly proven to be a costly venture for Veritas for some time.
The company’s financial statements for 2012 explained that “a significant portion” of that year’s loss had arisen from the establishment of the Credo programme, which required “significant investment expenditure” and would need “significant penetration into the US high school market to be successful”. Many of the costs related to the project were “front-loaded” – such that its expenses were disproportionately distributed towards its establishment rather than its continuation – and “uneven cashflow patterns in the forthcoming 12 to 18 months” were expected.
Consequences
The consequences of this remain with the company, with its directors’ report stating that “cash flow remained weak in 2014 and as a consequence starved us of the necessary cash flow to purchase from our suppliers the items needed to generate sales”.
The reports, however, signed off on May 5 of this year but only just lodged with the Companies Office, state that cash flow “is predicted to improve significantly from the mid-point in 2015 which should facilitate an improvement in sales”.
Veritas is not due to file fresh accounts for almost a year, so it remains unclear whether cash flow has, in fact, improved.
The irony of Veritas being unable to purchase necessary stock for its network of shops is that stock makes up the greater part of the company’s current assets; according to the abridged balance sheet of December 31 last, of the company’s €3,817,778 in current assets, €3,204,836 takes the form of stock.
The effects of this can be seen when Veritas’ ability to pay its debts is analysed.
The standard tool for evaluating a company’s capacity to pay off its short-term debts – those due within the next year – is the so-called ‘current ratio’ or ‘working capital ratio’. Measured by dividing the company’s current assets, as distinct from so-called ‘fixed assets’ like buildings and vehicles, by its current liabilities – typically its creditors rather than banks and others to whom long-term debts are owed – it is conventionally held as a rule of thumb that the current ratio should reveal a value of current assets roughly double that of current liabilities.
Veritas’ current liabilities, however, exceed its current assets: the current ratio for 2014 was under 0.8:1. Worryingly, Veritas’ liquidity seems to have been declining, as in 2013 its current ratio was 0.9:1, with it being 1.1:1 the previous year and 1.5:1 the year before that.
There is a strong case, however, that current ratios do not give a real picture of companies’ abilities to pay off their short-term debts as they rest on the assumption that stock can be sold and sold in a timely fashion. A more realistic test, it is held, is the so-called ‘quick ratio’ or ‘acid test’. This is calculated by deducting the stock valuation from the current assets figure and dividing the resultant figure by the company’s current assets.
As a general rule, the value of current assets without stock should cover the value of current liabilities, with a quick ratio of at least 1:1.
Veritas’ quick ratio for 2014 was 0.12:1, less than an eighth of what it would normally be expected to be. Worse, the quick ratio, highly problematic for some years, has been deteriorating: for 2011 it was 0.26:1, but in 2012 it dropped to 0.20:1, falling to 0.19 in 2013, before reaching 0.12:1 last year.
With only 12c available to pay every €1 it owes this year, it seems clear that, on the face of it, as 2014 was drawing to an end Veritas appeared incapable of paying its debts.
In November last, however, the company agreed to a revision of its lending arrangements, and following the end of the year, €1.5million of the company’s then €1.57million overdraft was restructured as a term loan, reducing the company’s imminent debts – its current liabilities – by over a third.
This arrangement was scheduled for review this month. According to the auditors’ report, Veritas is “dependent on the continued financial support of its principal bankers beyond the present renewal date in November 2015”, with this support being “necessary to fund the group’s existing plans and to support its ability to continue as a going concern”.
Following the end of 2014 a further €4million of what the accounts describe as “a long-term loan payable to a group undertaking” was converted to capital contribution. As a member of a group, Veritas has, according to the statements’ notes, availed of a financial reporting standards exemption allowing them to refrain from “disclosing related party transactions between group members”. Veritas Company Limited is part of a group under Veritas Communications, ultimately controlled by the Irish Catholic Bishops Conference.
In April 2015, shortly before the company’s auditors signed off on the accounts, an agreement was reached with The Hierarchy General Purposes Trust of the Irish Episcopal Conference for funding to be provided as a “subordinated repayable loan facility”, to assist with investments in the new catechetic programmes, notably the new Grow in Love programme.
Creditors
The loan formally identifies the bishops, who, at least according to the accounts ended last year, are owed €553,378 by Veritas, as subordinate lenders whose status is lower than Veritas’ other creditors, such that if Veritas should be liquidated or otherwise declared bankrupt, the bishops need not be repaid until other creditors have been paid off.
At least for now, the bishops appear to have thrown Veritas a much-needed lifeline. However, unless the company sees a dramatic reversal in fortunes, the long-term forecast is for choppy waters.