Quad/Graphics, Inc. — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014. Quad/Graphics provides commercial printing, media and logistics services, with U.S. operations representing about 91% of Q3 sales. Results include Brown Printing from its May 30 acquisition date; comparisons are also affected by other acquisitions and restructuring. Figures are in millions except per-share data.
Key financial results
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $1,236.4 | $1,206.0 | $3,438.2 | $3,446.3 |
| Operating income | $53.6 | $44.4 | $65.1 | $38.3 |
| Operating margin | 4.3% | 3.7% | 1.9% | 1.1% |
| Net earnings (loss) attributable to common shareholders | $24.4 | $13.0 | $(7.2) | $(28.2) |
| Diluted EPS | $0.50 | $0.26 | $(0.16) | $(0.62) |
| EBITDA and EBITDA margin (non-GAAP) | $136.9; 11.1% | $126.3; 10.5% | $308.0; 9.0% | $295.9; 8.6% |
Q3 sales rose 2.5%, driven by Brown Printing and stronger services revenue, partly offset by industry volume and pricing pressure, lower paper sales and unfavorable foreign exchange. Operating income improved as restructuring-related charges fell to $14.1 from $27.8. However, management said operating income excluding those charges declined $4.5, primarily due to ongoing volume and pricing pressure. Q3 tax expense was unusually low at $3.1, mainly reflecting an $11.5 decrease in unrecognized tax benefits from statute expirations.
For the first nine months, sales were nearly flat, while operating income rose as restructuring charges decreased to $45.9 from $82.9. The company still recorded a net loss; results included $6.0 of debt-extinguishment loss and higher interest expense. Prior-year results also included favorable gains that did not recur.
Cash flow, debt and liquidity
- Operating cash flow for the first nine months was $74.8, down from $219.4. The filing attributes the decline mainly to working-capital changes, including the prior-year benefit from normalization after the Vertis acquisition and higher seasonal receivables and inventory.
- Capital expenditures were $113.1; defined non-GAAP free cash flow was negative $38.3, versus positive $101.8 a year earlier. Cash and equivalents were $18.8 at September 30.
- Total debt was $1,608.0, compared with $1,393.3 at year-end 2013; debt and capital lease obligations were $1,622.3. The company reported $686.0 of unused revolving-credit capacity, net of letters of credit.
- Management’s non-GAAP Debt Leverage Ratio was 2.81x, up from 2.44x at year-end and above its stated 2.0x–2.5x target range. Covenant leverage ratios were 2.76x total and 2.26x senior secured; the company reported compliance with all financial covenants.
- Current assets were $1,249.6 and current liabilities $863.1. The April 2014 refinancing included a $1.6 billion senior secured facility and $300 million of 7.0% senior notes due 2022.
Outlook, risks and unusual items
- No specific earnings or sales guidance is provided. Management expects seasonal strength in the third and fourth quarters to continue, reflecting back-to-school and holiday-related print demand. It estimated 2014 capital investment of $160–$175 million.
- Management expects further restructuring and integration costs. Since 2010, the company announced 23 plant closures and reduced headcount by about 8,200; four additional plant closures were announced during the first nine months of 2014.
- Key risks include printing-industry overcapacity and pricing pressure, digital substitution, postal-rate changes, raw-material and energy costs, contract renewals and customer credit, acquisition integration, international operations, and substantial capital needs.
- Brown Printing was acquired for $100 million; UniGraphic was also acquired in 2014. The company said Brown’s standalone post-acquisition results could not practicably be disclosed because it was integrated into existing operations.
- Potential obligations remain uncertain: withdrawal-liability estimates for underfunded multiemployer pension plans totaled $62.2, with final amounts subject to arbitration; bankruptcy claims could also exceed recorded estimates. Management did not expect ordinary-course litigation or environmental matters to have a material impact.
- After quarter-end, Quad redeemed $108.8 of notes for $109.6 on October 10, using its revolver; it expects a $0.8 loss plus fees in Q4. A $0.30-per-share dividend was declared November 5.
Important facts for investors to verify
- Whether Brown Printing integration and cost savings offset persistent industry pricing and volume pressure.
- Whether operating cash flow recovers from seasonal working-capital demands and negative year-to-date free cash flow.
- Debt reduction progress, leverage relative to management’s target, covenant headroom and the effect of variable interest rates.
- Final multiemployer pension withdrawal liabilities and resolution of World Color Press bankruptcy claims.
- Actual restructuring costs, capital spending and dividend capacity as management continues acquisitions and integration.