Quad/Graphics, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; unaudited. Quad/Graphics provides commercial printing and related media and logistics services. Results include Vertis from its January 16, 2013 acquisition; the prior-year quarter includes Canadian operations sold in March 2012.
Financial performance
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Net sales | $1,129.5 million | $989.6 million |
| Operating income (loss) | $(0.9) million | $1.9 million |
| Net income (loss) attributable to common shareholders | $(14.0) million | $47.4 million |
| Diluted EPS | $(0.31) | $1.01 |
| EBITDA and EBITDA margin (non-GAAP) | $88.2 million; 7.8% | $119.6 million; 12.1% |
| Cash from operating activities | $121.4 million | $110.6 million |
| Free cash flow (non-GAAP) | $93.1 million | $89.0 million |
Sales increased 14.1%, reflecting the Vertis acquisition, while legacy print volumes and pricing faced pressure. Product and service sales rose 12.3% and 28.5%, respectively. Operating costs rose faster than sales; product cost as a share of sales increased to 70.9% from 69.4%, and service cost as a share rose to 9.6% from 8.7%. Management attributed margin pressure partly to Vertis’s lower gross margins and industry pricing pressure.
Q1 2013 included a $25.9 million restructuring, impairment and transaction-related charge. The prior-year comparison was affected by a $35.3 million after-tax gain on the Canadian business disposal and a $31.2 million tax benefit related primarily to IRS audit settlements; neither recurred in Q1 2013. Q1 2012 also included a $3.2 million loss from discontinued operations.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $24.2 million at March 31, 2013, versus $16.9 million at December 31, 2012. Operating cash flow included favorable working-capital movements, including payables and accrued liabilities replenished after the Vertis acquisition.
- Capital expenditures were $28.3 million; management reported 2013 capital spending intentions of $150–$175 million.
- Total debt was $1,485.1 million, up from $1,325.0 million at year-end, primarily reflecting Vertis financing. Long-term debt was $1,366.8 million; debt fair value was approximately $1.5 billion.
- Unused capacity under revolving credit facilities, net of letters of credit, was $587.8 million. Restricted cash was $56.3 million, designated for bankruptcy claim settlements.
- The company reported compliance with debt covenants. Rolling leverage was 2.50x against a 3.50x maximum; interest coverage was 7.62x against a 3.50x minimum. These measures use debt-agreement definitions.
Material changes, outlook and risks
- Quad/Graphics acquired substantially all Vertis assets for $267.4 million, financed with cash and revolving borrowings. The purchase-price allocation was preliminary; final valuation and post-closing adjustments could materially affect it. Vertis standalone results were not practicable to disclose because operations were combined.
- Management expects increased seasonality in 2013, with stronger sales and operating income typically in the second half; Vertis’s retail-insert business adds to this seasonal pattern. No specific earnings or revenue guidance is provided in the filing.
- Management is integrating Vertis and pursuing synergies, while cautioning that integration and restructuring entail additional costs. Its stated integration goal is to keep costs below one dollar per dollar of synergy savings achieved.
- Restructuring since 2010 had involved 18 announced plant closures and approximately 6,500 headcount reductions by March 31, 2013. Additional restructuring charges are expected. Three further plant closures were announced during the quarter.
- Key risks include industry overcapacity and pricing pressure, digital substitution, cost and demand volatility, contract renewals and customer performance, acquisition integration, postal changes, raw-material and energy costs, and the possibility of covenant noncompliance. Management said market capitalization remaining below carrying value for a sustained period could prompt a goodwill impairment test.
- Contingencies include unresolved World Color Press bankruptcy claims and multiemployer pension withdrawal liabilities. The company estimated $83.8 million of total MEPP withdrawal liability, subject to final determination; bankruptcy claim amounts could exceed estimates, and the claims process may take considerable time. Management did not expect ordinary-course litigation or environmental matters to have a material impact.
Important facts for investors to verify
- Whether Vertis integration delivers anticipated synergies and improves margins, given its lower gross margins and the preliminary acquisition accounting.
- Whether print pricing, volumes and repair costs continue to weigh on U.S. segment performance.
- The sustainability of operating cash flow and working-capital benefits, alongside planned capital spending and higher acquisition-related debt.
- Final MEPP withdrawal liability and bankruptcy claim outcomes, including potential cash needs and additional expense.
- Debt covenant headroom, available revolver capacity and the company’s ability to fund restructuring, pensions, dividends and other obligations.