Quad/Graphics, Inc. — 2018 Form 10-K Summary
Business context and reporting period
Quad reported for the fiscal year ended December 31, 2018; the filing also provides unaudited fourth-quarter results. The company combines commercial printing, logistics and expanding marketing services, with most revenue generated in U.S. Print and Related Services. Its stated strategy is to evolve into an integrated, data-driven marketing solutions provider while reducing print capacity and costs.
Financial performance and liquidity
| Metric | 2018 | 2017 |
|---|---|---|
| Net sales | $4,193.7 million | $4,131.4 million |
| Operating income / margin | $58.0 million / 1.4% | $155.3 million / 3.8% |
| Net earnings attributable to Quad common shareholders | $8.5 million | $107.2 million |
| Diluted EPS | $0.16 | $2.07 |
| EBITDA / EBITDA margin (non-GAAP) | $302.7 million / 7.2% | $394.8 million / 9.6% |
| Cash from operating activities | $260.6 million | $344.0 million |
| Free cash flow (non-GAAP) | $164.3 million | $258.1 million |
Sales rose 1.5% as service revenue increased 33.0%, including contributions from Ivie and Rise, while product sales fell 3.9% amid print-volume and pricing pressure. Interest expense was $73.3 million. At year-end, cash was $69.5 million; debt and capital lease obligations totaled $940.9 million. The company had $690.9 million of unused revolving capacity, net of letters of credit. Its non-GAAP Debt Leverage Ratio was 2.25x, up from 2.15x, within management’s stated 2.0x–2.5x target range. The company paid $1.20 per share in dividends for the year.
Fourth-quarter sales were $1,181.6 million, versus $1,164.2 million a year earlier. Quad recorded a $10.6 million operating loss and a $20.8 million net loss attributable to common shareholders, compared with operating income of $27.4 million and net earnings of $55.3 million in fourth-quarter 2017; diluted EPS was $(0.42), versus $1.06.
Material changes versus the prior period
- Full-year operating income fell 62.7%, and diluted EPS declined to $0.16 from $2.07. EBITDA decreased $92.1 million; management cited lower print volume and pricing, higher restructuring charges, and a $22.3 million noncash employee retirement contribution. Cost savings, acquired service earnings and insurance and Peru tax-settlement gains partly offset the decline.
- Restructuring, impairment and transaction-related charges increased to $103.6 million from $60.4 million. They included a $32.1 million increase in multiemployer pension withdrawal liability, employee termination costs, asset impairments and LSC-related transaction costs.
- Operating cash flow decreased $83.4 million and free cash flow decreased $93.8 million, reflecting lower cash from earnings and higher capital expenditures. Capital expenditures were $96.3 million.
- Quad acquired Ivie for $90.0 million cash (with potential earn-out payments) and obtained a controlling interest in Rise during 2018. It acquired Periscope for a preliminary net purchase price of $121.1 million on January 3, 2019.
Outlook, risks and unusual items
The filing gives no quantified company-wide earnings or revenue guidance. Management expects continued print-industry pressure and further restructuring and integration costs, while pursuing growth in integrated marketing services, cost productivity and capacity consolidation. Results are seasonal: sales and operating income typically rise in the third and fourth quarters, and fourth-quarter operating cash flow and free cash flow are typically strongest.
Quad agreed to acquire LSC in an all-stock transaction valued at approximately $1.3 billion, including refinancing LSC debt and assumption of other obligations; closing was expected in mid-2019 subject to shareholder and regulatory approvals. The DOJ issued a Second Request, extending its review. Quad identified approximately $135 million of annualized net synergies expected within 24 months, with approximately $135 million of estimated integration costs. The transaction could materially increase debt and involves execution, regulatory, litigation, dilution and integration risks. A $45 million reverse termination fee may apply in specified circumstances.
Other material risks include secular declines and excess capacity in print, pricing pressure, postal-rate and service changes, paper, energy, labor and freight costs, customer retention, acquisitions, pension funding and debt covenants. The GCIU withdrawal-liability dispute remains unresolved; the recorded total multiemployer withdrawal liability was $50.9 million, and the final amount is uncertain. Quad also disclosed ongoing government investigations related to potential FCPA issues in Peru and China, transactions involving Cuba, and a Peruvian antitrust investigation; management said it did not anticipate a material adverse effect from these matters. The company reported effective internal control over financial reporting, but the assessment excluded Ivie and Rise. Deloitte issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Track print-volume, pricing and margin trends, and whether service growth offsets print declines without further erosion in cash generation.
- Assess the LSC transaction’s final approvals, financing, pro forma leverage, share issuance, synergy delivery and integration costs; also monitor Periscope integration.
- Review pension and MEPP withdrawal-liability developments, including the GCIU litigation and cash-payment schedule.
- Monitor liquidity, covenant headroom and debt maturities, particularly the 2021 secured-facility maturities and the 2022 unsecured notes; consider the January 2019 credit amendment.
- Follow the Peru, China and Cuba investigations and related legal or regulatory developments, as well as postal reform and rate changes.
- Note that EBITDA, free cash flow and leverage ratio are non-GAAP measures; compare them with the GAAP results and the company’s stated calculation definitions.