Quad/Graphics, Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. All financial figures are in millions of dollars except per-share amounts. Results include Vertis from its January 16, 2013 acquisition; comparisons are therefore not fully like-for-like.
Business context and key financial metrics
Quad is a commercial printer and media-channel services provider, reporting United States Print and Related Services, International, and Corporate segments. Its business is seasonal, with historically higher sales and operating income in the second half of the year.
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $1,110.8 | $934.2 | $2,240.3 | $1,923.8 |
| Operating loss | $(5.2) | $(9.6) | $(6.1) | $(7.7) |
| Net earnings (loss) attributable to Quad common shareholders | $(27.2) | $(20.8) | $(41.2) | $26.6 |
| Diluted EPS | $(0.59) | $(0.44) | $(0.89) | $0.57 |
| EBITDA and margin (non-GAAP) | $81.4; 7.3% | $74.3; 8.0% | $169.6; 7.6% | $193.9; 10.1% |
| Net cash provided by operating activities | Not separately presented for Q2 | $216.9 | $170.5 | |
| Free cash flow (non-GAAP) | Not separately presented for Q2 | $147.2 | $116.3 |
Q2 gross profit was $217.0 million, or approximately 19.5% of sales, versus $193.4 million, or 20.7%, a year earlier. For the first half, gross profit was $436.7 million, approximately 19.5% of sales, versus $410.1 million, or 21.3%.
At June 30, cash and cash equivalents were $11.7 million; current assets were $1,050.4 million and current liabilities $863.4 million. Total debt was $1,445.7 million, including $136.7 million current, compared with $1,325.0 million at year-end 2012. Unused revolving credit capacity, net of letters of credit, was $604.4 million. Capital expenditures were $69.7 million in the first half.
Material changes versus prior comparable periods
- Q2 sales rose 18.9% and first-half sales rose 16.5%, primarily from Vertis. Management also cited lower print volumes, lower pricing, and lower paper sales in legacy product lines.
- Despite higher sales, margins weakened: management attributed this to Vertis’ lower gross margins and continued industry pricing pressure. Q2 EBITDA increased in dollars but declined as a share of sales; first-half EBITDA fell from $193.9 million to $169.6 million.
- First-half common-shareholder results shifted from earnings of $26.6 million to a loss of $41.2 million. The 2012 comparison included a $35.3 million after-tax gain on the Canadian operations disposal and a $31.2 million IRS audit-related tax benefit; neither recurred in 2013.
- First-half restructuring, impairment and transaction-related charges declined to $55.1 million from $75.9 million. Charges included $15.1 million of integration costs and $9.7 million of impairments in 2013.
- Operating cash flow increased by $46.4 million and free cash flow by $30.9 million year over year. Management said working-capital cash flows benefited substantially from replenishing Vertis accounts payable and accrued liabilities after the acquisition.
Outlook, commentary, risks and contingencies
- No numerical earnings or revenue guidance is provided. Management expects higher seasonal sales and operating income in the second half, with 2013 seasonality increased by Vertis’ retail-insert business.
- Management planned $150 million to $175 million of 2013 capital projects. It expects further restructuring and integration charges and described an integration goal of approximately one dollar of cost for each dollar of synergy savings achieved.
- Vertis was acquired for $265.4 million; the acquisition was funded with cash and revolving-credit borrowings. The purchase-price allocation remained preliminary and could change materially when valuation is finalized.
- Key business risks include excess printing capacity and pricing pressure, digital substitution, demand and economic changes, client and contract risks, and successful Vertis integration. Cost inflation, postal changes, raw-material availability, and foreign-market risks may also affect results.
- The company was in compliance with debt covenants at June 30. Its reported leverage ratio was 2.49x against a 3.50x maximum; interest coverage was 7.36x against a 3.50x minimum. Management cautioned that future compliance is not assured.
- The estimated multiemployer pension withdrawal liability was $80.2 million and may change as final amounts are determined. Bankruptcy-claim estimates may also rise: remaining restricted cash for Class 3 claims was $56.2 million, with $18.3 million of estimated notes to be issued; final allowed claims remain uncertain.
- Management said ordinary-course litigation was not expected to have a material financial-statement impact and believed the company was materially compliant with environmental requirements. No material changes to previously disclosed risk factors were reported. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether Vertis integration delivers expected synergies and whether final acquisition valuation changes reported asset values or future amortization.
- How much sales and cash-flow improvement reflects sustainable legacy performance versus acquisition effects and working-capital timing; track print volumes, pricing, and margins.
- Debt levels, covenant headroom, revolver availability, and the capacity to fund capital spending, dividends, pension obligations, and restructuring.
- Final multiemployer pension withdrawal liability and resolution of outstanding World Color Press bankruptcy claims.
- Progress and cash costs of plant closures and restructuring, alongside the planned capital-spending range and second-half seasonal outlook.