Quad/Graphics, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. Quad/Graphics provides commercial printing and related marketing, logistics and digital services. Results are seasonal, with higher sales and operating income generally in the third and fourth quarters.
Financial results
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Net sales | $1,042.5 million | $1,088.0 million |
| Operating income (loss) | $13.0 million | $(11.8) million |
| Operating margin | 1.2% | (1.1)% |
| Net earnings (loss) | $3.8 million | $(35.2) million |
| Diluted EPS | $0.08 | $(0.74) |
| EBITDA and EBITDA margin | $104.3 million; 10.0% | $67.6 million; 6.2% |
| Cash from operating activities | $112.6 million | $64.2 million |
| Capital expenditures | $26.2 million | $42.3 million |
| Free cash flow | $86.4 million | $21.9 million |
Gross profit was $239.0 million, or 22.9% of sales, compared with $212.6 million, or 19.5%, in Q1 2015. Interest expense was $20.7 million, down from $22.5 million. The company recorded a $14.1 million gain on debt extinguishment. Dividends declared were $0.30 per share, unchanged year over year.
Balance sheet and liquidity
- At March 31, cash and cash equivalents were $10.3 million; current assets were $894.1 million and current liabilities were $727.4 million.
- Total debt was $1,260.1 million; debt and capital lease obligations together were $1,273.9 million. Shareholders’ equity was $414.8 million.
- Management reported $695.3 million of unused revolver capacity, net of letters of credit, and $549.3 million of usable liquidity after covenant constraints.
- The company’s non-GAAP Debt Leverage Ratio was 2.62x, down from 2.88x at year-end 2015. Covenant total leverage was 2.63x against a 3.75x maximum; senior secured leverage was 2.14x against a 3.50x maximum; interest coverage was 5.98x against a 3.50x minimum. The company reported compliance with all financial covenants.
Changes versus Q1 2015
- Sales declined 4.2%. Product sales fell 3.5% and services sales fell 7.9%; lower print volumes and pricing, lower pass-through paper sales, and foreign exchange effects were partly offset by acquired businesses.
- Operating results improved despite lower sales, reflecting lower labor costs and productivity improvements, collection of a $10.4 million vendor receivable written off in Q4 2015, and acquisition contributions. SG&A rose $9.3 million, while restructuring, impairment and transaction-related charges increased to $28.9 million from $10.1 million.
- Q1 2016 included no goodwill impairment; Q1 2015 included a $23.3 million non-cash impairment charge. The prior-year period also benefited from a $10.0 million non-recurring gain tied to the terminated Courier acquisition agreement.
- Operating cash flow rose $48.4 million, primarily from improved working capital and higher cash from earnings. Capital spending decreased $16.1 million.
Management commentary, outlook and risks
- Management said the previously announced $100 million sustainable cost-reduction program was completed ahead of schedule, with savings beginning January 1, 2016. It intends to continue reducing costs and expects additional restructuring charges.
- During Q1, the company announced closures of its Atglen, Pennsylvania and Lenexa, Kansas plants. It recorded $16.7 million of impairment charges, including $12.1 million related to Atglen. Since 2010, it has announced 33 plant closures and reduced headcount by approximately 10,900.
- No numerical earnings or sales guidance is provided in the filing. Management cited continued pressure from declining print demand, industry overcapacity and pricing competition, digital substitution, economic conditions, postal-rate changes, input costs, and the need to maintain cost efficiency and invest in technology.
- The USPS temporary 4.3% exigent postage surcharge expired April 10, 2016, reducing postal prices; the USPS was appealing to continue the surcharge as part of the permanent base rate.
- In April 2016, the company self-reported potential Foreign Corrupt Practices Act issues related to Peru operations to the SEC and DOJ and began an investigation with external advisers. It said it was cooperating and did not then anticipate a material adverse effect; the investigation and potential consequences remain uncertain.
- Multiemployer pension withdrawal liabilities remain subject to litigation and arbitration. The company reserved $44.4 million, but the final amount may change. Remaining World Color Press bankruptcy claims could also require additional payments beyond recorded estimates.
- Management identified typical risks including customer nonpayment, foreign currency and interest-rate exposure, covenant restrictions, and further asset impairments. It reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether lower print volumes and pricing continue to offset productivity gains, acquisition contributions and cost reductions.
- Progress on restructuring, including facility closures, cash costs and whether planned savings are realized.
- Cash generation and working-capital trends, especially given seasonal cash-flow patterns and low reported cash balances.
- Debt reduction, leverage and covenant headroom, along with the company’s ability to sustain dividends and repurchases.
- Developments in the Peru FCPA investigation, pension withdrawal litigation and unresolved bankruptcy claims.