Quad/Graphics, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparisons are with Q1 2016 unless noted. Quad/Graphics provides commercial printing and related marketing, distribution and logistics services. Results are seasonal, with sales and operating income typically higher in the third and fourth quarters.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $998.6 million | $1,042.5 million | Down 4.2% |
| Operating income / margin | $53.6 million / 5.4% | $13.0 million / 1.2% | Up $40.6 million |
| Net earnings | $25.4 million | $3.8 million | Up $21.6 million |
| Diluted EPS | $0.49 | $0.08 | Up $0.41 |
| EBITDA and margin (non-GAAP) | $109.0 million / 10.9% | $104.3 million / 10.0% | Up $4.7 million |
| Cash from operations | $63.3 million | $112.6 million | Down $49.3 million |
| Free cash flow (non-GAAP) | $39.9 million | $86.4 million | Down $46.5 million |
Product sales declined 4.8%, mainly from lower core print volume and pricing, reduced pass-through paper sales and foreign-exchange effects. Service sales decreased 0.6%. The U.S. Print and Related Services segment generated $62.5 million of operating income on $902.2 million of sales; International generated $4.8 million on $96.4 million of sales.
Operating income benefited from lower restructuring and impairment charges, reduced depreciation and amortization, a $15.4 million vacation-reserve reduction following a policy change, and lower legal expenses. These benefits were partly offset by print volume and pricing pressure and the nonrecurrence of a $10.4 million vendor-receivable recovery recorded in 2016. Q1 2016 also included a $14.1 million debt-extinguishment gain, while Q1 2017 included a $2.6 million loss, affecting the year-over-year net earnings comparison.
Cash, debt and liquidity
- Cash and cash equivalents were $6.5 million at March 31, 2017, versus $9.0 million at December 31, 2016. Current assets were $835.3 million and current liabilities were $674.8 million.
- Total debt was $1,078.0 million; debt plus capital lease obligations was $1,102.8 million, down $28.0 million from year-end. The company reported a 2.29x debt leverage ratio, within management’s stated 2.0x–2.5x target range.
- Unused capacity on the revolving credit facility was $684.8 million, net of letters of credit. Management said operating cash flows and this capacity should support operating needs, restructuring, capital expenditures, debt and pension obligations, investment and shareholder returns.
- Operating cash flow fell primarily because working-capital changes provided less benefit and employee-related liability payments increased. Capital expenditures were $23.4 million. Cash dividends paid were $16.8 million; the declared dividend remained $0.30 per share.
- In February 2017, Quad amended its secured credit facility, reducing the revolving facility to $725 million and Term Loan A to $375 million and extending their maturities to January 2021. It also entered a five-year $250 million interest-rate swap, fixing the applicable rate at 3.89% including the debt spread.
Outlook, risks and unusual items
- No quantified revenue, earnings or cash-flow guidance is provided. Management expects seasonal patterns to continue and expects additional restructuring charges as it reduces excess capacity and aligns costs.
- Key business risks include declining print demand and digital substitution, industry overcapacity and pricing pressure, client retention and performance, labor, paper, energy and freight costs, postal-rate or service changes, and international operating and currency risks.
- The company self-reported potential Foreign Corrupt Practices Act issues involving Peru operations and certain China sales to the SEC and Department of Justice, is cooperating with both, and is enhancing compliance. Management did not anticipate a material adverse effect on business or financial condition at the filing date.
- Quad reserved $42.7 million for multiemployer pension withdrawal liabilities. Litigation over the GCIU withdrawal amount remained unresolved; in April 2017 a federal district court overturned an arbitration decision in one dispute, and the company intended to appeal. The estimate may change with the outcome.
- Remaining World Color Press bankruptcy claims may require payments above current estimates. Management said ordinary-course litigation was not expected to materially affect the financial statements; environmental compliance was also not expected to have a material financial impact.
- Revenue recognition standard adoption was planned for Q1 2018. The company was assessing whether some contracts would qualify for recognition over time rather than at a point in time and said the adoption impact could be significant.
Most important facts for investors to verify
- Whether print volume and pricing pressure continues, and whether cost savings can offset sales declines without relying on reserve reductions or other nonrecurring benefits.
- Whether operating cash flow and free cash flow recover after the Q1 decline, taking seasonality and working-capital needs into account.
- Debt reduction, revolver availability, covenant headroom and interest-rate exposure; the company reported compliance with its financial covenants at quarter-end.
- Developments and potential financial consequences of the FCPA investigation, GCIU pension litigation and remaining bankruptcy claims.
- The eventual effect of the new revenue-recognition standard, including any transition adjustment or change in reported revenue timing.