Quad/Graphics, Inc. — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013; quarterly figures below compare fourth-quarter 2013 with fourth-quarter 2012. Quad is a global commercial printer and provider of media and logistics services. The Vertis acquisition closed January 16, 2013, and its results are included from that date.
Key financial results
| Metric | 2013 | 2012 | Change / context |
|---|---|---|---|
| Net sales | $4,795.9 million | $4,094.0 million | Up 17.1%, primarily from Vertis; legacy print volumes and pricing remained pressured. |
| Operating income | $142.2 million | $106.5 million | Operating margin increased to 3.0% from 2.6%; both periods include restructuring and related charges. |
| Net earnings attributable to common shareholders | $32.5 million | $87.4 million | Diluted EPS was $0.65 versus $1.78. |
| Adjusted EBITDA (non-GAAP) | $481.8 million | $478.5 million | EBITDA margin fell to 10.0% from 11.7%, reflecting Vertis’s lower margins and continued print pricing pressure. |
| Cash from operating activities | $441.1 million | $354.2 million | Increase was substantially affected by restored Vertis working-capital levels, including an estimated $90 million increase in payables and accrued liabilities. |
| Free cash flow (non-GAAP) | $291.6 million | $250.7 million | After $149.5 million of capital expenditures. |
| Debt and capital leases | $1,406.8 million | $1,350.7 million | Debt leverage ratio was 2.44x, up from 2.39x; management’s target range was 2.0x–2.5x. |
| Cash and available revolving capacity | $13.1 million cash; $596.2 million available | — | Availability is net of outstanding letters of credit. |
Fourth-quarter performance
- Net sales were $1,349.6 million versus $1,130.5 million.
- Operating income was $103.9 million versus $55.1 million.
- Net earnings attributable to common shareholders were $60.7 million versus $21.0 million; diluted EPS was $1.24 versus $0.39.
- Results are seasonal: the company generally earns more operating income in the second half, and Vertis increased this pattern.
Material changes and notable items
- Vertis contributed to higher sales, but increased costs and its lower gross margins weighed on profitability. The company also acquired Novia CareClinics and Proteus Packaging/Transpak during 2013.
- Full-year 2013 earnings were lower than 2012 despite higher operating income. 2012 included a $34.0 million after-tax gain on the Canadian business disposal and a $43.5 million tax benefit related to tax audits and statute expirations; those benefits did not recur.
- Restructuring, impairment and transaction-related charges were $95.3 million in 2013, versus $118.3 million in 2012. The company expects additional restructuring and integration costs. Since 2010, it had announced 21 plant closures, including two announced in January 2014, and reduced headcount by approximately 6,800.
- Investing cash outflow was $430.6 million, including acquisition spending; financing cash outflow was $10.2 million. Debt and capital leases increased by $56.1 million during the year, primarily reflecting acquisition funding.
Outlook, risks and contingencies
- Capital spending: Management expected 2014 capital expenditures of $150–$175 million, compared with $149.5 million in 2013. No specific 2014 revenue or earnings guidance is provided in the filing.
- Industry and demand: Excess capacity, intense competition, declining print demand and digital substitution continue to pressure prices and volumes. A temporary 6.0% USPS postage increase took effect January 26, 2014; management warned that higher postage could reduce client mail volumes.
- Debt and liquidity: The company reported compliance with debt covenants at year-end. The $850 million revolving facility and Term Loan A mature July 25, 2017; Term Loan B matures July 25, 2018. Approximately 63% of borrowings carried variable rates.
- Pensions: U.S. pension and other postretirement underfunding was approximately $111 million; expected 2014 pension contributions were about $40 million. A separate estimated $73 million multiemployer-plan withdrawal liability remains subject to final determination and could change.
- Other exposures: Risks include acquisition integration, customer contract renewal and creditworthiness, raw-material and labor costs, foreign currency and political conditions, environmental and legal matters, and potential impairment of significant goodwill and fixed assets. The company estimated goodwill of $773.1 million and property, plant and equipment of $1,925.5 million at year-end; no continuing-operations goodwill impairment was recorded in 2013.
- Governance and controls: Class B shares held by the Quadracci family and affiliates represented approximately 81% of voting power. The auditor gave an unqualified opinion on the financial statements and internal control, but the Vertis business units—representing about 20% of 2013 sales—were excluded from the internal-control assessment and audit.
Important facts for investors to verify
- How much of the 2013 operating cash-flow and free-cash-flow increase is sustainable after the Vertis working-capital normalization benefit?
- Whether Vertis integration delivers expected synergies and improves margins as restructuring costs continue.
- The final amount and payment schedule for the estimated $73 million MEPP withdrawal liability, and the level of future pension contributions.
- Debt reduction, covenant headroom and refinancing exposure ahead of 2017 maturities, particularly given variable-rate debt.
- Whether print pricing and volumes, postal-rate increases and digital substitution further affect demand and profitability.