Quad/Graphics, Inc. — FY 2016 Form 10-K
Business context and reporting period
Quad/Graphics is a global marketing services provider with a substantial commercial printing business. Its reportable segments are United States Print and Related Services and International. The filing covers the fiscal year ended December 31, 2016; fourth-quarter figures are also shown below. The U.S. segment generated approximately 91% of annual sales. No acquisitions were completed in 2016.
Key financial metrics
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Net sales | $4,329.5 million | $4,597.1 million |
| Operating income (loss) | $122.4 million | $(830.0) million |
| Operating margin | 2.8% | (18.1)% |
| Net earnings (loss) attributable to common shareholders | $44.9 million | $(641.9) million |
| Diluted EPS | $0.90 | $(13.40) |
| EBITDA, non-GAAP | $412.2 million; 9.5% margin | $(511.0) million; (11.1)% margin |
| Cash from operating activities | $352.5 million | $348.1 million |
| Free cash flow, non-GAAP | $246.4 million | $215.1 million |
Fourth-quarter 2016 sales were $1,198.3 million, operating income was $62.3 million, net earnings attributable to common shareholders were $37.5 million, and diluted EPS was $0.73. In Q4 2015, the corresponding figures were $1,313.6 million, $(20.3) million, $(9.4) million, and $(0.20).
At year-end, total debt and capital lease obligations were $1,130.8 million, down $218.5 million year over year; cash was $9.0 million. The company reported a 2.36x debt leverage ratio, compared with 2.88x in 2015, and $698.5 million of available liquidity after applying its most restrictive covenant borrowing limits. Current assets were $902.6 million and current liabilities were $774.6 million. Interest expense was $77.2 million. The annual dividend remained $1.20 per share ($0.30 quarterly).
Material changes versus the prior comparable period
- Sales declined 5.8%. Core print and specialty print sales fell amid industry volume and pricing pressure; lower pass-through paper sales and foreign exchange also weighed on revenue. Acquisition-related sales partly offset the decline.
- Operating results improved substantially, but the comparison is heavily affected by 2015’s $808.3 million non-cash goodwill impairment. Restructuring, impairment and transaction-related charges were $80.6 million in 2016 versus $164.9 million in 2015. Excluding these charges and goodwill impairment, management said operating income increased $59.8 million, primarily from cost reductions, lower depreciation and amortization, a vendor receivable collection, and acquisition earnings; lower print volume and pricing offset part of the improvement.
- Operating cash flow increased $4.4 million. Capital expenditures fell to $106.1 million from $133.0 million, supporting higher free cash flow.
- The company reduced debt through repayments and repurchases, including $56.5 million of senior unsecured notes and $60.1 million of senior notes. A $14.1 million net gain on debt extinguishment was recorded.
Outlook, management commentary, risks and unusual items
Management emphasizes transforming the company into a multichannel marketing services provider while strengthening its print platform, cutting costs, improving productivity and reducing debt and pension obligations. It completed a $100 million sustainable cost-reduction program ahead of schedule, and announced four additional plant closures for the first quarter of 2017. The filing provides no specific 2017 revenue, earnings or cash-flow guidance. Management expects seasonality to continue, with stronger sales and operating income in the third and fourth quarters and typically highest operating cash flow and free cash flow in the fourth quarter.
- Core risks include ongoing print substitution by digital media, industry overcapacity and pricing pressure, customer retention and credit exposure, postal rates and service changes, raw-material and labor costs, and the ability to execute cost reductions and the marketing-services strategy.
- Pension obligations remain material: U.S. single-employer plans were underfunded by $114.2 million, and the company recorded an estimated $48.1 million multiemployer-plan withdrawal liability. The amount and payment schedule for the GCIU liability remain in litigation; the GCC settlement provides for scheduled payments through February 2024.
- The company self-reported potential Foreign Corrupt Practices Act issues concerning Peru operations and certain China transactions to the SEC and DOJ and is cooperating with their inquiries. It said it did not then anticipate a material adverse effect, but the outcome was uncertain.
- After year-end, the company amended its secured credit facility, reducing the revolving facility and Term Loan A and extending their maturities to January 4, 2021. It also entered a $250 million interest-rate swap, effective February 28, 2017, fixing the specified variable-rate exposure at 3.89% including the loan spread.
- Other notable exposure includes variable-rate borrowing, covenant restrictions, foreign currency movements, and potential asset impairment. The company reported compliance with debt covenants at year-end.
Important facts for investors to verify
- Track organic sales, print volumes and pricing separately from acquisition effects and pass-through paper sales.
- Assess whether cost savings and improved margins persist despite falling sales, and distinguish recurring performance from restructuring costs and debt-extinguishment gains.
- Review debt maturities, covenant headroom, liquidity and the effects of the February 2017 credit amendment and interest-rate swap.
- Monitor the GCIU withdrawal-liability litigation, pension funding assumptions and required contributions.
- Follow the SEC and DOJ FCPA inquiry and any resulting costs, penalties or compliance obligations.
- Evaluate whether digital and marketing-services investments generate profitable growth and offset continued pressure on traditional print.