Quad/Graphics, Inc. — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. The filing also presents unaudited fourth-quarter results. Unless indicated otherwise, financial figures are in U.S. dollars and millions.
Business context
Quad/Graphics is a commercial printer and media-channel integrator, providing print, media, mailing, distribution and logistics services in the United States, Latin America and Europe. In 2012, approximately 88% of sales came from the U.S. Print and Related Services segment and 12% from International. The Canadian operations were sold on March 1, 2012 and are reported as discontinued operations.
Key financial metrics
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Net sales | $4,094.0 | $4,324.6 |
| Operating income from continuing operations | $106.5 | $156.9 |
| Operating margin | 2.6% | 3.6% |
| Net earnings (loss) attributable to common shareholders | $87.4 | $(46.9) |
| Diluted earnings (loss) per share | $1.78 | $(1.00) |
| Company-reported EBITDA, a non-GAAP measure | $478.5 | $431.7 |
| Company-reported EBITDA margin, a non-GAAP measure | 11.7% | 10.0% |
Net cash provided by operating activities was $354.2, versus $371.1 in 2011. Free cash flow, defined by the company as operating cash flow less property, plant and equipment purchases, was $250.7, versus $202.8. Capital expenditures were $103.5.
At year-end, cash and cash equivalents were $16.9; total debt was $1,325.0, plus capital lease obligations. The company reported $754.7 of unused revolving-credit capacity, net of letters of credit. Its covenant leverage ratio was 2.37x, against a maximum of 3.50x; it reported compliance with all financial covenants. Total assets were $4,098.9 and current assets and liabilities were $990.0 and $752.8, respectively.
Fourth quarter: Net sales were $1,130.5, operating income from continuing operations was $55.1, and net earnings attributable to common shareholders were $21.0 ($0.39 diluted EPS). In Q4 2011, these were $1,215.6, $65.1 and a $6.9 net loss ($0.15 loss per diluted share), respectively.
Changes versus prior comparable periods
- Full-year sales fell $230.6, or 5.3%, reflecting lower print volumes and pricing amid industry overcapacity and lower paper and byproduct sales. Product sales declined 4.9%; service sales declined 8.7%.
- Operating income from continuing operations declined $50.4, and operating margin contracted by 1.0 percentage point. Cost reductions and World Color Press synergies partly offset the revenue and margin pressure.
- Common-shareholder earnings improved from a loss to a profit, but the comparison included material tax and discontinued-operation items. The 2012 result included a $34.0 after-tax gain on the Canadian disposal and a $31.5 income tax benefit; the filing cites reversals of prior tax provisions, including a $30.0 IRS settlement. Do not interpret the earnings change as solely an improvement in recurring operations.
- Debt and capital leases declined by approximately $120 during 2012. Free cash flow increased $47.9, primarily because capital expenditures were $64.8 lower, partly offset by lower operating cash flow.
Outlook, management commentary and notable items
- Management expected 2013 capital expenditures of $150–$175 and a continuation of the usual pattern of higher sales and operating income in the third and fourth quarters. The quarterly dividend was increased from $0.25 to $0.30 per share beginning in 2013.
- Quad/Graphics completed its acquisition of substantially all Vertis assets on January 16, 2013, for $267.4, financed with cash and revolving-credit borrowings. The company presented unaudited 2012 pro forma combined sales of $5,166.7 and net earnings from continuing operations attributable to common shareholders of $59.0; these are pro forma, not 2012 reported results, and exclude expected synergies and integration costs. Purchase-price allocation remained preliminary.
- World Color Press integration was substantially complete: management reported $285 in annual synergy savings, with $272 recognized through 2012 and $13 expected in 2013. Costs to achieve those savings totaled approximately $215. The company anticipated further restructuring and integration costs, including in connection with Vertis.
- 2012 restructuring, impairment and transaction-related charges were $118.3, including $44.6 of integration costs, $27.2 of employee termination charges and $23.0 of impairments. The company had announced 16 plant closures since 2010 and reduced headcount by approximately 6,300.
- Key risks include secular substitution of digital media for print, excess industry capacity and pricing pressure, economic and advertising weakness, client concentration or nonperformance, postal-rate and service changes, raw-material, labor and energy costs, and execution risks integrating acquisitions. Pension and other postretirement obligations, multiemployer-plan withdrawal liabilities, debt covenants, foreign exchange and interest-rate exposure, and environmental or legacy bankruptcy claims are also relevant.
- Underfunded U.S. pension and postretirement liabilities were approximately $291 at year-end; estimated 2013 contributions to qualified defined-benefit plans were $43.2. The estimated U.S. multiemployer withdrawal liability was $87.4, subject to final determination. The filing reported no material adverse effect expected from ordinary-course litigation, but notes that bankruptcy claim estimates could be exceeded.
Important facts for investors to verify
- Whether sales volumes, pricing and operating margins stabilize, and how much of reported EBITDA and earnings reflects recurring operations versus non-GAAP adjustments, tax benefits and disposal gains.
- Vertis integration costs, realized synergies, customer retention, final working-capital settlement and final purchase-price allocation.
- Debt reduction, liquidity and covenant headroom after financing the Vertis acquisition, alongside scheduled debt service and capital spending.
- Final multiemployer withdrawal liability and pension funding needs, including the effect of discount rates and asset returns.
- Whether announced cost savings and the higher dividend can be sustained amid continuing print-industry contraction and planned restructuring.
The financial statements received an unqualified audit opinion, and the auditor also reported effective internal control over financial reporting as of December 31, 2012.