Quad/Graphics, Inc. — FY 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. This is an annual filing, not a standalone Q4 report; selected Q4 figures are included below. Quad/Graphics provides commercial printing and related marketing, logistics, data, creative and digital services. The U.S. segment generated approximately 92% of 2015 sales; International generated approximately 8%.
Key financial results
| Metric | FY 2015 | FY 2014 | Change |
|---|---|---|---|
| Net sales | $4,677.7 million | $4,862.4 million | Down 3.8% |
| Operating income (loss) | $(830.0) million | $141.3 million | Includes $808.3 million goodwill impairment in 2015 |
| Operating margin | (17.7)% | 2.9% | Reported margin includes impairment and restructuring charges |
| Net income (loss) attributable to common shareholders | $(641.9) million | $18.6 million | 2015 diluted loss per share was $13.40 |
| EBITDA, as reported | $(511.0) million | $468.1 million | Non-GAAP; significantly affected by impairment and restructuring charges |
| Net cash from operating activities | $348.1 million | $293.2 million | Up $54.9 million |
| Free cash flow | $215.1 million | $154.0 million | Non-GAAP; operating cash flow less capital expenditures |
| Capital expenditures | $133.0 million | $139.2 million | Down $6.2 million |
Q4 2015 selected results: Sales were $1,334.7 million versus $1,424.2 million in Q4 2014; operating loss was $20.3 million versus operating income of $76.2 million; net loss attributable to common shareholders was $9.4 million versus earnings of $25.8 million.
Margins and operating trends: Product sales declined 4.0% and service sales declined 2.6%. Management attributed pressure primarily to lower print volumes and pricing, foreign exchange, and industry overcapacity. Excluding restructuring, impairment and transaction-related charges and goodwill impairment, operating income declined $65.4 million year over year.
Liquidity and debt
- At December 31, 2015, cash was $10.8 million and current assets and liabilities were $991.3 million and $807.4 million, respectively.
- Debt and capital lease obligations totaled $1,349.3 million on the company’s leverage calculation; the balance sheet reported total debt of $1,334.5 million, plus capital leases.
- Unused revolving-credit capacity was $730.9 million, net of $48.3 million of letters of credit; $70.8 million was drawn on the $850 million revolver.
- The company reported a 2.92x non-GAAP Debt Leverage Ratio, up from 2.57x, and above management’s stated 2.0x–2.5x target range. Its separate credit-agreement total leverage ratio was 2.89x; the company said it complied with all debt covenants at year-end.
- Debt maturities include the revolving facility and Term Loan A in April 2019, Term Loan B in April 2021, and $300 million of 7.0% senior unsecured notes due May 2022. The filing reports that $27.4 million of those notes were repurchased after year-end through February 18, 2016, for $18.5 million.
- Variable-rate borrowings represented 57% of borrowings. Interest expense was $88.4 million, down from $92.9 million.
Material changes, outlook and unusual items
- The company recorded an $808.3 million non-cash goodwill impairment, including $778.3 million in the U.S. segment and $30.0 million International. The impairment reflected lower expectations for revenue, profitability and cash flows amid volume and pricing pressures; no goodwill remained on the year-end balance sheet.
- Restructuring, impairment and transaction-related charges totaled $164.9 million, compared with $67.3 million in 2014. These included $42.1 million of employee termination charges and $95.3 million of impairment charges. Additional restructuring and integration costs were expected.
- 2015 acquisitions—Marin’s, Copac and Specialty—expanded point-of-sale displays and packaging capabilities. Acquisition-related investing cash outflow was $143.4 million.
- Management said a $100 million sustainable cost-reduction program was completed ahead of schedule in January 2016. It was expected to reduce the cost base by $100 million starting January 1, 2016; the company also intended to continue cost reductions. No quantified revenue, earnings or cash-flow guidance was provided.
- Argentina subsidiaries began bankruptcy restructuring proceedings in March 2015 amid economic deterioration, currency devaluation, falling print volumes and labor challenges. The company reported $67.4 million of 2015 Argentina sales and $22.1 million of assets.
- The company’s estimated U.S. multiemployer pension withdrawal liability was $47.6 million at year-end, subject to arbitration and litigation; the final amount and payment schedule remained uncertain. Underfunded single-employer pension liabilities were approximately $138 million.
- Postal-rate uncertainty remained a risk: a temporary 4.3% USPS surcharge was scheduled to end in April 2016, but the USPS sought to continue it, and legislation was pending. Management warned that higher postage could reduce print volumes.
- Operating cash flow benefited from working-capital improvements and a $10 million Courier termination payment. In 2014, Quad/Graphics had announced an agreement to acquire Courier; Courier terminated it and paid the fee.
- The company disclosed a voluntary OFAC self-report concerning a pre-acquisition Marin’s distribution agreement that included Iran. Quad/Graphics said no Iran-related transactions occurred after acquisition, amended the agreement, and OFAC closed the matter with a cautionary letter and no civil or criminal liability.
- Deloitte & Touche issued an unqualified opinion on the financial statements and reported effective internal control over financial reporting.
Important facts for investors to verify
- Whether the announced $100 million annualized cost reductions are realized, sustained and sufficient to offset continued price and volume declines.
- Underlying earnings and cash generation excluding the goodwill impairment and restructuring charges, using reconciliations for the company’s non-GAAP measures.
- Debt leverage, covenant headroom and refinancing needs, particularly the 2019 maturities, alongside the low year-end cash balance.
- The final multiemployer pension withdrawal liability and outcome of the GCIU and GCC proceedings, as well as funding requirements for single-employer plans.
- Developments in Argentina restructuring and the impact of USPS surcharge and rate-setting decisions on customer mailing volumes.
- Integration results and returns from the 2015 acquisitions, plus the company’s ability to maintain its dividend and balance-sheet flexibility.