Quad/Graphics, Inc. — Q2 2015 Form 10-Q
Business context and period: Quad is a global provider of commercial printing and related media, logistics, data and creative services. This unaudited filing covers the quarter and six months ended June 30, 2015, compared with the same 2014 periods. Results are seasonal: sales and operating income typically rise in the third and fourth quarters.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $1,079.0m | $1,099.0m | $2,187.0m | $2,201.8m |
| Operating income (loss) | $(25.8)m | $0.5m | $(37.6)m | $11.5m |
| Net loss attributable to common shareholders | $(45.1)m | $(22.8)m | $(80.3)m | $(31.6)m |
| Diluted loss per share | $(0.94) | $(0.48) | $(1.68) | $(0.67) |
| EBITDA and margin (non-GAAP) | $56.1m; 5.2% | $76.4m; 7.0% | $123.7m; 5.7% | $171.1m; 7.8% |
| Net cash from operating activities | Not separately presented here | $123.4m | $78.9m | |
| Free cash flow (non-GAAP) | Not separately presented here | $40.1m | $(4.7)m |
- Q2 sales declined 1.8%; product sales fell 1.8% and service sales fell 2.1%. For the first half, sales declined 0.7%: product sales fell 1.1%, partly offset by 1.8% service growth.
- Q2 operating margin was negative 2.4%, versus approximately breakeven a year earlier; first-half margin was negative 1.7%, versus 0.5%. First-half cost of sales remained 81.1% of sales.
- SG&A rose 10.0% in Q2 and 7.9% in the first half. Reported operating results included elevated restructuring and impairment charges.
- First-half operating cash flow rose $44.5m year over year, primarily from improved working-capital movements and a $10m cash receipt related to the terminated Courier acquisition. Capital expenditures were $83.3m; free cash flow is the company-defined non-GAAP measure of operating cash flow less capital expenditures.
- At June 30, cash was $13.6m, restricted cash $30.7m, and total debt $1,467.3m. Debt and capital lease obligations totaled $1,480.8m, up $75.2m from year-end, mainly to fund acquisitions. The $850m revolving facility had $157.3m drawn; $640.6m was available after letters of credit.
- Current assets were $1,061.8m and current liabilities $752.0m. Shareholders’ equity was $1,026.0m, down from $1,152.5m at December 31, 2014.
Material changes and unusual items
- International results weakened sharply: first-half segment sales declined 16%, including foreign-exchange impacts and lower Latin American volumes. The segment reported a $55.4m operating loss, including $23.3m of goodwill impairment and $27.4m of restructuring, impairment and transaction-related charges.
- Argentina subsidiaries began bankruptcy restructuring proceedings in March amid inflation, currency devaluation, political uncertainty, falling print volumes and labor challenges. The company recorded a $23.3m noncash goodwill impairment, eliminating the International segment’s goodwill.
- Q2 charges included a $16.7m impairment of the Chile equity-method investment. Quad sold that investment on July 31, 2015, for $10.5m.
- First-half restructuring, impairment and transaction-related charges totaled $44.4m. This included a $10m nonrecurring gain after Courier terminated its acquisition agreement; additional restructuring and integration costs are expected.
- Quad acquired Marin’s for a net $19m and Copac for a net $59.3m during the first half. The acquisitions contributed to sales but were funded in part with additional borrowing. Six digital web presses in a planned book-platform investment had been installed by June 30.
- Quad declared a quarterly dividend of $0.30 per share in August, payable September 18, 2015. Dividends declared in the first half totaled $0.60 per share.
Outlook, liquidity, risks and contingencies
- No specific revenue or earnings guidance is provided in the supplied filing text. Management planned $145m–$165m of 2015 capital investment; $83m had been invested in the first half.
- Management said operating cash flow and available revolver capacity were expected to fund operations, integration and restructuring, capital expenditures, debt service, pension obligations, acquisitions and dividends. Its desired Debt Leverage Ratio target was 2.0x–2.5x; the reported ratio was 2.82x, up from 2.57x at year-end, reflecting higher borrowings and lower adjusted EBITDA.
- The company was in compliance with financial covenants at June 30: total leverage 2.77x against a 3.75x maximum; senior secured leverage 2.22x against a 3.50x maximum; interest coverage 6.09x against a 3.50x minimum. Management cautioned future compliance is not assured.
- Key business risks include secular decline in print demand, industry overcapacity and pricing pressure, digital substitution, postal and input-cost changes, customer contract and credit risks, acquisition integration, foreign exchange and international political/economic conditions, and ongoing capital needs.
- Quad had reserved $52.9m for multiemployer pension withdrawal liabilities and was litigating with plan trustees over the final amount and payment duration. Bankruptcy claim payments could also exceed current estimates. Management said ordinary-course litigation was not expected to materially affect the financial statements.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether print-volume and pricing pressure, especially in Latin America, continues to erode underlying operating performance and EBITDA.
- The cash and earnings effects of Argentina’s restructuring, the Chile investment sale, and any remaining impairment exposure.
- Whether acquisition contributions and planned cost savings offset integration expenses and added debt from Marin’s and Copac.
- Debt leverage, covenant headroom, revolver availability, and the company’s ability to sustain capital spending and the $0.30 quarterly dividend.
- The recurring cash-generation picture after separating working-capital changes and the one-time Courier termination receipt from operating cash flow.
- Final multiemployer pension withdrawal liabilities and remaining bankruptcy claims, which may differ from recorded estimates.