Quad/Graphics, Inc. (NYSE: QUAD) — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; fourth-quarter figures are also summarized below. Unless noted, amounts are in millions of dollars.
Business context
Quad/Graphics provides print, logistics and integrated marketing services, with operations in the United States and internationally. The U.S. Print and Related Services segment generated approximately 91% of 2017 sales; International generated 9%. Management is shifting toward a broader marketing-solutions platform while consolidating print capacity amid secular declines in print demand, industry overcapacity and pricing pressure.
Financial performance and liquidity
| Metric | 2017 | 2016 |
|---|---|---|
| Net sales | $4,131.4 | $4,329.5 |
| Operating income | $164.9 | $122.4 |
| Operating margin | 4.0% | 2.8% |
| Net earnings | $107.2 | $44.9 |
| Diluted earnings per share | $2.07 | $0.90 |
| EBITDA (non-GAAP) | $394.8 | $412.2 |
| EBITDA margin (non-GAAP) | 9.6% | 9.5% |
| Cash provided by operations | $344.0 | $352.5 |
| Free cash flow (non-GAAP) | $258.1 | $246.4 |
- Sales declined 4.6%; product sales fell 5.1%, primarily from lower print volume and pricing and lower pass-through paper sales. Services sales declined 1.6%.
- Operating income increased 34.7%, while EBITDA decreased 4.2%. Lower depreciation and amortization, reduced restructuring charges, cost savings and a vacation-reserve reduction supported reported operating income; lower print volume and pricing weighed on results.
- Net earnings included a $28.8 million net tax benefit from the 2017 Tax Act and a $21.0 million tax benefit from releasing valuation allowances, among other tax effects. The filing’s 2017 effective tax rate was negative 17.5%.
- Operating cash flow was $344.0 million; capital expenditures were $85.9 million, producing $258.1 million of free cash flow. Free cash flow rose despite lower operating cash flow, mainly because capital expenditures declined.
- At year-end, cash was $64.3 million and unused revolving-credit capacity was $686.1 million, net of letters of credit. Total debt and capital lease obligations were $964.8 million, down $166 million year over year. Debt leverage ratio was 2.10x versus 2.36x; management’s target range was 2.0x–2.5x.
- Current liabilities were $745.9 million and current assets were $908.5 million. The company reported $917.2 million of long-term debt and capital leases, excluding current portions.
- Annual dividends were $1.20 per share. The company repurchased $3.8 million of shares in 2017.
Fourth-quarter results
Fourth-quarter 2017 sales were $1,164.2 million versus $1,198.3 million in fourth-quarter 2016. Operating income was $29.2 million versus $62.3 million, while net earnings were $55.3 million versus $37.5 million and diluted EPS was $1.06 versus $0.73. The filing attributes the operating-income decline chiefly to higher restructuring charges and lower print volume and pricing; the annual tax benefits materially affected full-year earnings.
Material changes, outlook and key risks
- Quad continued facility consolidation and cost reductions: 41 plant closures had been announced since 2010, with headcount reduced by approximately 11,800. Four closures were announced in 2017, including Dallas, which ceased operations in the first quarter of 2018. Management expects additional restructuring and integration costs.
- Management emphasized investment in digital printing, personalization, packaging, books and integrated marketing services. No quantified 2018 earnings or sales guidance is provided in the filing.
- In February 2018, after year-end, Quad completed the $92.5 million cash acquisition of Ivie & Associates, with a potential earn-out of up to $16 million. The company also declared a $0.30 quarterly dividend.
- Major business risks include ongoing print-volume and pricing declines, digital substitution, excess capacity, postal-rate or service changes, paper availability and cost, labor and energy costs, client retention and credit risk, and execution risks in the marketing-services transformation.
- Uncertainties include litigation with GCIU trustees over multiemployer pension withdrawal liability; the recorded aggregate estimate was $28.2 million, and the final amount and payment duration were unresolved. The company also disclosed a self-reported FCPA investigation involving Peru and certain China transactions, and transactions involving Cuba under review; Quad said it was cooperating and did not anticipate a material adverse effect at that time.
- U.S. pension plans were underfunded by $84.1 million at year-end. A $250 million interest-rate swap fixed the rate on part of variable-rate debt. The company reported compliance with debt covenants at year-end and debt maturities concentrated in 2021–2022.
- Quad adopted the new revenue-recognition standard on January 1, 2018 using the modified retrospective method; the opening accumulated-deficit adjustment was a $3.2 million decrease. Auditors gave unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether core print volume and pricing declines continue, and whether growth in marketing, digital, packaging and other services can offset them.
- How much of reported earnings improvement reflects sustainable operating performance versus tax benefits, lower amortization, reserve changes and other unusual items.
- Future restructuring cash costs and realized savings from announced plant closures and capacity reductions.
- The outcome and cash impact of GCIU withdrawal-liability litigation, and any developments in the FCPA and Cuba-related reviews.
- Debt reduction, cash conversion and covenant headroom, particularly around the 2021–2022 maturities, alongside dividend and acquisition spending.