Quad/Graphics, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. Figures are in U.S. dollars; financial statements are unaudited. Quad/Graphics provides print, media, logistics and related services, principally through its United States Print and Related Services and International segments.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change / context |
|---|---|---|---|
| Net sales | $1,108.0 million | $1,102.8 million | Up 0.5%; acquisitions and service growth offset pressure in established print products. |
| Operating income (loss) | $(11.8) million | $11.0 million | Operating margin was (1.1)% versus 1.0%; includes $23.3 million goodwill impairment. |
| Net loss attributable to common shareholders | $(35.2) million | $(8.8) million | Loss per diluted share was $(0.74), compared with $(0.19). |
| EBITDA and EBITDA margin | $67.6 million; 6.1% | $94.7 million; 8.6% | Non-GAAP; decline reflected goodwill impairment and ongoing print volume and pricing pressure. |
| Interest expense | $22.5 million | $20.9 million | Increase attributed to higher borrowing rates and debt levels. |
| Operating cash flow | $64.2 million | $33.0 million | Improved primarily from working-capital changes and a $10.0 million Courier termination receipt. |
| Capital expenditures / free cash flow | $42.3 million / $21.9 million | $45.8 million / $(12.8) million | Free cash flow is non-GAAP and defined as operating cash flow less capital expenditures. |
| Total debt | $1,441.6 million | $1,411.7 million at Dec. 31, 2014 | Debt and capital leases totaled $1,456.4 million at quarter-end. |
Cash and cash equivalents were $24.5 million, versus $9.6 million at year-end 2014. Current assets were $1,076.0 million and current liabilities were $757.0 million. The company reported $714.1 million of unused revolving-credit capacity, net of letters of credit. Its non-GAAP debt leverage ratio was 2.71x, above management’s stated 2.0x–2.5x target range but within its covenant limits. The company reported compliance with all financial covenants.
Material changes and operating segments
- U.S. Print and Related Services sales rose, supported by acquisitions and services, but segment operating income declined to $17.7 million from $22.3 million; margin fell to 1.8% from 2.3%.
- International sales declined 16.1% to $98.7 million, reflecting foreign-exchange effects and lower Latin American volumes. The segment recorded a $27.5 million operating loss, including the $23.3 million goodwill impairment.
- Product sales decreased 0.4%; management cited $34.1 million lower sales in established core and specialty print lines and $13.3 million of adverse foreign-exchange impact, partly offset by $43.2 million from acquisitions. Services sales increased 5.8%.
- The company acquired Marin’s International on February 3 for $29.1 million, including $10.1 million of acquired cash. In April, after quarter-end, it completed the $60.2 million Copac acquisition, including $0.9 million of acquired cash.
Outlook, risks and unusual items
- No specific earnings or revenue guidance is provided in this filing. Management expects its seasonal pattern to continue: sales and operating income are generally higher in the third and fourth quarters, while operating cash flow is typically strongest in the fourth quarter.
- Management planned $145 million–$165 million of capital investment in 2015; $42 million had been invested in Q1. Four high-speed digital web presses had been installed as part of a planned book-platform transformation.
- Argentina subsidiaries began bankruptcy restructuring proceedings amid inflation, currency devaluation, political uncertainty, lower print volumes and labor challenges. The resulting interim assessment eliminated the International segment’s remaining goodwill through a $23.3 million non-cash impairment.
- The quarter’s restructuring and impairment charges were $10.1 million. They included $6.3 million of asset impairments and costs associated with plant closures, including the announced Queretaro, Mexico closure. Management expects further restructuring and integration costs.
- A $10.0 million non-recurring gain from Courier’s termination of its acquisition agreement reduced reported transaction-related charges. Cash flow also benefited from the termination payment and improved receivables collections; these items are not necessarily recurring.
- Risks include secular substitution of print by digital media, excess printing capacity and pricing pressure, postal-rate changes, input and labor costs, foreign-exchange and international operating risks, customer credit, acquisition integration, and significant capital needs.
- Contingencies include disputed multiemployer pension withdrawal liabilities: $55.4 million was reserved, while final amounts and payment duration remain subject to resolution with plan trustees. The company also notes that final bankruptcy claims could exceed recorded estimates. Management said ordinary-course litigation was not expected to have a material financial impact.
Most important facts for investors to verify
- Whether core print volumes and pricing stabilize, and whether service and acquired-business growth can offset continued declines.
- The sustainability of operating cash flow and free cash flow after the one-time Courier receipt and working-capital effects.
- Argentina restructuring outcomes, further impairment exposure, currency developments and the effect on the International business.
- Debt reduction, leverage relative to management’s target, covenant headroom and the funding impact of Copac and planned capital spending.
- Final multiemployer pension withdrawal liability and remaining bankruptcy claims, as well as expected restructuring and integration cash costs.