Quad/Graphics, Inc. — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012; unaudited. Quad/Graphics provides commercial printing and related media and logistics services. Results are seasonal, with sales and operating income typically higher in the second half of the year.
Key financial results
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $934.2 million | $977.2 million | $1,923.8 million | $1,999.6 million |
| Gross profit / margin | $193.4 million / 20.7% | $220.6 million / 22.6% | $410.1 million / 21.3% | $459.3 million / 23.0% |
| Operating income (loss) / margin | $(9.6) million / (1.0)% | $10.9 million / 1.1% | $(7.7) million / (0.4)% | $35.7 million / 1.8% |
| Net earnings (loss) attributable to common shareholders | $(20.8) million | $(10.3) million | $26.6 million | $(17.6) million |
| EPS attributable to common shareholders | $(0.44) | $(0.22) | $0.57 | $(0.37) |
| EBITDA / margin (company-defined, non-GAAP) | $74.3 million / 8.0% | $98.8 million / 10.1% | $193.9 million / 10.1% | $201.4 million / 10.1% |
Q2 sales declined 4.4%, primarily from lower print volumes and pricing amid industry overcapacity. Product cost as a percentage of sales rose, weighing on gross margin. Lower SG&A and integration synergies partly offset these pressures, but higher restructuring and impairment charges contributed to the operating loss. Six-month net income included a $35.3 million after-tax gain on the Canadian business sale and a $31.2 million tax benefit from IRS audit settlements; it should not be read as recurring operating profitability.
Cash flow, debt and liquidity
- Six-month operating cash flow was $170.5 million, up from $116.7 million. Free cash flow, defined by the company as operating cash flow less capital expenditures, was $116.3 million versus $18.2 million.
- Capital expenditures were $54.2 million, compared with $98.5 million in the prior-year period. Cash and cash equivalents were $17.6 million at June 30, down from $25.6 million at year-end.
- Total debt was $1.307 billion, versus $1.425 billion at December 31, 2011. The company reported a $132 million reduction in debt and capital leases during the first half.
- There were no borrowings on the $850 million revolving facility at quarter-end; reported unused availability, net of letters of credit, was $816.6 million. The company was in compliance with its financial covenants: leverage ratio 2.16x against a 3.50x maximum, interest coverage 7.30x against a 3.25x minimum, and fixed-charge coverage 3.52x against a 1.50x minimum.
Material changes and management outlook
- Quad completed the sale of its Canadian operations to Transcontinental on March 1, 2012, in exchange for Transcontinental’s Mexican operations plus cash. The sale generated the $35.3 million after-tax gain; Canadian results are reported as discontinued operations.
- The company invested $18.1 million for a minority interest in India-based Manipal Technologies in March 2012.
- Management said World Color Press integration was substantially complete. It reported $242 million of cumulative synergy savings by June 30, estimated annual savings above $275 million, and expected the remaining savings to be substantially realized by year-end 2012. It expected total one-time costs to achieve the savings to be below $225 million.
- Management anticipated continued volume and pricing pressure through 2012 and the usual stronger third- and fourth-quarter seasonality. It planned $125–$150 million of capital investment for 2012 and expected additional restructuring charges. These are management expectations, not guarantees.
- During the first half, the company announced closure of its Jonesboro, Arkansas plant and two Mexico City plants. Since 2010, it had announced 15 plant closures and reduced headcount by approximately 5,800.
Risks, contingencies and unusual items
- Restructuring, impairment and transaction-related charges were $37.7 million in Q2 and $75.9 million for the first half, compared with $21.6 million and $50.3 million, respectively, in 2011. First-half charges included $14.1 million of impairment charges.
- The estimated multiemployer pension withdrawal liability was $94.6 million, subject to final determination with plan administrators. The company also noted that World Color Press bankruptcy claims remain unresolved; recorded priority claims could be materially higher than estimated.
- Key stated risks include printing-industry overcapacity and price competition, declining print demand from digital alternatives, customer and input-cost pressures, pension obligations, integration and restructuring execution, foreign operations, and potential covenant noncompliance if financial performance weakens.
- The company stated that it was not aware of material changes to the risk factors in its 2011 Form 10-K. Disclosure controls and procedures were reported effective.
Important facts for investors to verify
- Whether print volume, pricing and gross margins stabilize, particularly given continued industry overcapacity.
- Whether the stated synergy savings are achieved by year-end and whether actual restructuring and integration costs remain within management’s estimate.
- Underlying recurring earnings and cash generation after separating the Canadian disposal gain, IRS tax benefit, working-capital effects and other unusual items.
- Final multiemployer pension withdrawal liability and resolution of bankruptcy claims, including any effect on cash needs.
- Debt, covenant headroom, and the company’s ability to fund capital spending and dividends while maintaining liquidity.