Quad/Graphics, Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Quad/Graphics provides commercial printing, marketing, logistics and related services through its U.S. Print and Related Services and International segments. Figures below are in millions of dollars except per-share data.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $1,032.3 | $1,060.0 | $2,074.8 | $2,148.0 |
| Operating income (loss) | $13.3 | $(25.8) | $26.3 | $(37.6) |
| Operating margin | 1.3% | (2.4)% | 1.3% | (1.8)% |
| Net loss | $(7.7) | $(45.1) | $(3.9) | $(80.3) |
| Basic and diluted loss per share | $(0.16) | $(0.94) | $(0.08) | $(1.68) |
| EBITDA, non-GAAP | $89.5 | $56.1 | $193.8 | $123.7 |
| EBITDA margin, non-GAAP | 8.7% | 5.3% | 9.3% | 5.8% |
- Sales declined 2.6% in Q2 and 3.4% year to date. Lower print volumes and pricing in established product lines, lower pass-through paper sales, and currency effects outweighed acquisition-related sales growth. Services sales also declined.
- Operating performance improved amid continued sales pressure. Management cited productivity and cost reductions, lower depreciation, and acquired-business earnings; results also benefited from substantially lower restructuring and impairment charges than in 2015. SG&A increased, including higher incentive compensation.
- Six-month net loss and EBITDA comparisons were affected by unusual items: 2015 included a $23.3 goodwill impairment and higher restructuring charges; 2016 included a $14.1 gain on debt extinguishment. EBITDA is a company-defined non-GAAP measure and is not equivalent to operating cash flow.
- Cash flow: First-half operating cash flow was $219.6, versus $123.4 a year earlier. Capital expenditures were $40.6 versus $83.3; company-defined free cash flow was $179.0 versus $40.1.
- Liquidity and debt: Cash was $8.7 at June 30. Total debt was $1,182.4; debt and capital lease obligations totaled $1,195.9, down $153.4 from year-end 2015. Management reported $644.0 of available liquidity after applying the most restrictive covenant limits. The company reported covenant compliance; covenant total leverage was 2.45x against a 3.75x maximum, and interest coverage was 6.27x against a 3.50x minimum.
- Other balance-sheet items: Total assets were $2,583.3, total liabilities $2,187.9, and shareholders’ equity $395.4. The company declared $0.30 per share in quarterly dividends and paid $29.5 in cash dividends during the first half.
Material changes and management commentary
- Compared with the prior-year periods, revenue remained under pressure, but operating income turned positive and losses narrowed. Management attributed improvement primarily to operating efficiencies and cost reductions, while noting persistent print volume and pricing declines.
- The company said it completed a $100 million sustainable cost-reduction program ahead of schedule, with the savings effective from January 1, 2016, and expected further cost reductions. It had announced 33 plant closures and reduced headcount by approximately 11,000 since 2010; closures of Atglen, Pennsylvania and Lenexa, Kansas were announced in the first half of 2016.
- Quad/Graphics cited continued industry overcapacity, digital substitution, competitive pricing pressure, and seasonality. It expects sales and operating income to be higher in the third and fourth quarters; fourth-quarter operating cash flow is typically strongest as working capital needs decline. No specific full-year earnings or revenue guidance is provided in the filing.
- Management’s stated target debt leverage ratio was 2.0x–2.5x; the reported ratio was 2.43x at June 30. The company said cash flows and available liquidity should support operations, restructuring, capital spending, debt service, pension obligations, dividends and potential share repurchases.
Risks, contingencies and unusual items
- In April 2016, the company self-reported potential Foreign Corrupt Practices Act issues related to Peru operations to the SEC and Department of Justice. It is investigating with external advisers, cooperating with authorities and evaluating compliance enhancements. Management did not anticipate a material adverse effect at the time of filing; the ultimate outcome is uncertain.
- The company is litigating the amount and duration of multiemployer pension withdrawal liabilities. It had reserved $41.8, but the final amount may change depending on litigation outcomes.
- Remaining World Color Press bankruptcy claims could require payments above recorded estimates; the timing and ultimate allowed claims remain uncertain.
- The company expects additional restructuring charges. It also disclosed a $6.5 non-cash pension settlement charge expected in Q3 2016 following lump-sum pension payments.
- Other cited risks include secular print declines and pricing pressure, customer nonpayment, postal rate or service changes, labor, energy and raw-material costs, foreign exchange exposure, and debt covenant restrictions. The USPS’s temporary 4.3% exigent postage increase expired April 10, 2016; reinstatement was subject to an appeal.
Key investor verification points
- Assess whether operating gains and higher EBITDA can persist as core print sales and pricing continue to decline; separate recurring performance from restructuring, impairment and debt-extinguishment effects.
- Verify cash-flow quality and whether working-capital improvements are sustainable, alongside low reported cash and reliance on revolving credit availability.
- Monitor debt reduction, covenant headroom, interest costs, and the company’s ability to maintain dividends and repurchases within financing restrictions.
- Track outcomes of the Peru FCPA investigation, multiemployer pension litigation, and remaining bankruptcy claims, including any change to reserves or cash requirements.
- Check whether announced restructuring savings are realized and weigh further closure costs and the disclosed Q3 pension settlement charge.