Quad/Graphics, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; comparisons are with Q1 2011 unless otherwise noted. Quad/Graphics provides commercial printing and related media and logistics services. Results are seasonal, with sales and operating income typically higher in the second half of the year.
Financial performance
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Net sales | $989.6 million | $1,022.4 million |
| Operating income from continuing operations | $1.9 million; 0.2% margin | $24.8 million; 2.4% margin |
| Net earnings from continuing operations | $15.4 million | $3.0 million |
| Net earnings (loss) attributable to common shareholders | $47.4 million; diluted EPS $1.01 | $(7.3) million; diluted EPS $(0.15) |
| Net cash from operating activities | $110.6 million | $36.7 million |
| Free cash flow | $89.0 million | $(3.8) million |
- Sales fell 3.2%; product sales declined 3.3% and services declined 2.6%. Management cited lower volumes, pricing pressure from industry overcapacity, and lower paper/byproduct sales.
- Operating income fell $22.9 million. Lower revenue and margin pressure, plus $9.5 million more restructuring, impairment and transaction-related charges, outweighed synergy savings and lower depreciation and amortization.
- Reported net income included a $35.3 million after-tax gain from the Canadian business sale and a $31.2 million tax benefit from IRS audit settlements. The total tax benefit was $33.8 million. Thus, headline earnings and EPS were materially affected by unusual items.
- Reported EBITDA was $119.6 million, or 12.1% of sales, versus $102.6 million, or 10.0%, in Q1 2011. This non-GAAP measure included the Canadian disposal gain; it should not be read as a like-for-like improvement in underlying operations.
Cash, debt and liquidity
- At March 31, cash and cash equivalents were $27.1 million. Total debt was $1,347.6 million, including $95.0 million classified as short-term/current; long-term debt was $1,252.6 million.
- Operating cash flow rose $73.9 million, principally from lower working-capital cash use and lower restructuring payments. Capital expenditures were $21.6 million, versus $40.5 million; management reported 2012 Q1 investment of approximately $22 million.
- Financing activities used $112.8 million, including net debt repayments and $11.7 million of cash dividends. The company reduced debt and capital leases by $89.6 million during the quarter.
- No borrowings were outstanding on the $850 million revolving facility at quarter-end; peak borrowings during the quarter were $104.9 million. The company reported $815.6 million of available liquidity, including expected future operating cash flows and unused revolver capacity, net of letters of credit.
- The company was in compliance with debt covenants. Rolling 12-month leverage was 2.18x against a 3.50x maximum; interest coverage was 6.96x against a 3.25x minimum.
Material developments and outlook
- The sale of Canadian operations to Transcontinental closed March 1, 2012, generating the $35.3 million after-tax gain. The transaction exchanged the Canadian business for Transcontinental’s Mexican operations, acquired in September 2011, with $5.4 million cash also paid by Quad/Graphics.
- Quad/Graphics invested $18.1 million for a minority interest in India-based Manipal Technologies on March 28, expanding its reach into Asia.
- Management expected printing-industry volume and pricing pressure to continue through 2012 and anticipated the usual seasonal sales pattern. It targeted $125–$150 million of capital investment in 2012.
- Management expected World Color Press integration to be completed by year-end 2012. It estimated annual synergy savings above $250 million at completion, had achieved approximately $221 million through March 31, and expected integration costs of $195–$240 million. The filing cautions that savings may not be fully achieved and costs may exceed estimates.
- Restructuring continued: 14 plant closures had been announced since 2010, with approximately 5,500 employees reduced; Q1 2012 included announced closures in Jonesboro, Arkansas, and Mexico City. The company expected additional restructuring costs in 2012.
- A quarterly dividend of $0.25 per share was declared in February and paid in March; another $0.25 dividend was declared May 9 for payment June 22. No shares were repurchased in Q1.
Risks, contingencies and unusual items
- Key disclosed risks include excess printing capacity and price competition, electronic-media substitution, changing demand and economic conditions, customer-contract renewal and credit risk, raw-material and energy costs, integration execution, and debt-covenant compliance.
- Estimated multiemployer pension-plan withdrawal liability was $97.6 million and could change as negotiations with plan administrators continue. Pension and postretirement obligations remain significant.
- World Color Press bankruptcy claims remain unresolved. Recorded priority claims were $16.9 million; estimated unsecured notes to be issued were $31.3 million, with potential principal up to $75 million. The company noted priority cash claims could ultimately exceed estimates.
- The company had $24.2 million of firm commitments to purchase press and finishing equipment. Management did not expect ordinary-course litigation liabilities to materially affect the financial statements.
Important facts for investors to verify
- Underlying operating trends excluding the Canadian disposal gain, IRS settlement benefit, and restructuring and integration charges.
- Whether sales, pricing and operating margins stabilize amid industry overcapacity and electronic-media substitution.
- Progress toward stated synergy savings and integration completion, including total realized costs and any additional restructuring charges.
- Cash generation, debt reduction, and covenant headroom, especially as pension, restructuring and bankruptcy-related payments continue.
- Final multiemployer pension withdrawal liabilities and resolution of remaining World Color Press claims.