Quad/Graphics, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2014. Quad/Graphics provides commercial printing and related media, logistics, and other services, primarily through its U.S. Print and Related Services segment.
Key financial results
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Net sales | $1,099.0 million | $1,110.8 million | $2,201.8 million | $2,240.3 million |
| Operating income (loss) | $0.5 million | $(5.2) million | $11.5 million | $(6.1) million |
| Net loss attributable to common shareholders | $(22.8) million | $(27.2) million | $(31.6) million | $(41.2) million |
| Diluted loss per share | $(0.48) | $(0.59) | $(0.67) | $(0.89) |
| EBITDA and EBITDA margin (non-GAAP) | $76.4 million; 7.0% | $81.4 million; 7.3% | $171.1 million; 7.8% | $169.6 million; 7.6% |
- Q2 product sales fell 2.3%, while services sales rose 7.1%; first-half product sales fell 2.6% and services rose 4.2%. Management cited printing-industry volume and pricing pressure, lower paper sales, and foreign exchange effects; Brown Printing partly offset product-sales declines.
- Cash from operations was $78.9 million in the first half, versus $216.9 million a year earlier. Capital expenditures were $83.6 million, resulting in negative free cash flow of $4.7 million, compared with positive $147.2 million in the prior-year period.
- At June 30, cash was $17.4 million and total debt was $1,560.5 million; debt and capital leases totaled $1,582.4 million. The company reported $767.0 million of unused revolving-credit capacity, net of letters of credit.
- Debt leverage ratio, a company-defined non-GAAP measure, was 2.69x, above management’s target range of 2.0x–2.5x and up from 2.44x at year-end 2013. The company reported compliance with its financial covenants.
- Quarterly dividend declared and paid was $0.30 per share. A further $0.30 dividend was declared August 5, payable September 19, 2014.
Material changes and notable items
- Quad completed its $100 million Brown Printing acquisition on May 30, 2014, financed with cash and revolver borrowings. Brown’s results are included from the acquisition date. UniGraphic was acquired in February for a net purchase price of $12.4 million.
- On April 28, Quad completed $1.9 billion of debt financing, refinancing and extending its facilities and issuing $300 million of 7.0% senior notes due 2022. Q2 interest expense rose $2.2 million year over year; the company also recorded a non-recurring $6.0 million debt-extinguishment loss.
- First-half restructuring, impairment, and transaction charges were $31.8 million, down from $55.1 million. The company announced four plant closures during the half and said additional restructuring and integration charges are expected.
- Q2 operating income improved from a loss to a small profit, but operating income excluding restructuring-related charges declined year over year, reflecting pricing and volume pressures and the non-recurrence of favorable 2013 settlements. U.S. segment operating margin fell to 1.5% from 2.6%.
- Results are seasonal: sales and operating income, excluding restructuring-related charges, typically improve in the third and fourth quarters, and management expects this pattern to continue.
Outlook, risks, and contingencies
- Management planned $160–$175 million of 2014 capital investment; $84 million was invested in the first half. It said expected cash flows and available revolver capacity were sufficient for operating needs, integration and restructuring, capital expenditures, debt service, pension obligations, growth investment, and dividends.
- Key risks include commercial-printing overcapacity and price competition, digital substitution, customer demand and contract-renewal risk, postal-rate increases, input and energy costs, acquisition integration, foreign-market exposures, and substantial ongoing capital needs. The U.S. Postal Service implemented a temporary 6.0% exigent postage increase in January 2014.
- Quad reserved $65.8 million for multiemployer pension-plan withdrawal liabilities and was in arbitration over the final amount; the estimate could change. World Color Press bankruptcy claims remain subject to court resolution; priority cash claims could exceed recorded estimates. Restricted cash of $48.6 million was held for Class 3 claims.
- The filing describes ordinary-course litigation and environmental matters; management did not expect them to materially affect the financial statements. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether Brown Printing integration and expected synergies support earnings and cash generation after initial integration costs.
- Whether cash conversion recovers from the sharp year-over-year decline and capital expenditures remain within the stated 2014 plan.
- Debt levels, leverage relative to management’s target, interest costs, covenant headroom, and continued access to revolving capacity.
- The final multiemployer pension withdrawal liability and resolution of World Color Press bankruptcy claims.
- Whether pricing, print volumes, restructuring costs, and the declared dividend remain sustainable amid industry and postal-cost pressures.