Quad/Graphics, Inc. — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. The filing also reports unaudited fourth-quarter results. Amounts are in U.S. dollars; financial figures are in millions unless stated otherwise.
Business context and reporting period
Quad/Graphics is a global print and media-solutions provider, with printing, logistics, digital, data and creative services. Its two reporting segments are United States Print and Related Services (about 91% of 2014 sales) and International (about 9%). The business is seasonal, with sales and operating income typically higher in the third and fourth quarters.
Quad acquired Brown Printing in May 2014 for $100 million and UniGraphic in February 2014. Results include acquired businesses only from their acquisition dates, limiting direct year-over-year comparability.
Key financial metrics
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Net sales | $4,862.4 | $4,795.9 |
| Operating income | $141.3; 2.9% margin | $142.2; 3.0% margin |
| Net earnings attributable to common shareholders | $18.6 | $32.5 |
| Diluted earnings per share | $0.38 | $0.65 |
| EBITDA and EBITDA margin (non-GAAP) | $468.1; 9.6% | $481.8; 10.0% |
| Cash from operating activities | $293.2 | $441.1 |
| Free cash flow (non-GAAP) | $154.0 | $291.6 |
Fourth quarter: Net sales were $1,424.2 million versus $1,349.6 million in Q4 2013; operating income was $76.2 million versus $103.9 million; net earnings attributable to common shareholders were $25.8 million versus $60.7 million; diluted EPS was $0.53 versus $1.24.
Balance sheet and liquidity: At year-end, cash was $9.6 million, total assets $4,077.2 million, and total debt and capital-lease obligations $1,425.6 million. The company had $754.1 million of unused revolving-credit capacity, net of letters of credit. Its debt leverage ratio, a non-GAAP measure, was 2.60x, above management’s stated 2.0x–2.5x target range. The company reported compliance with debt covenants.
Capital expenditures were $139.2 million. The quarterly dividend was $0.30 per share, or $1.20 for the year.
Material changes versus prior periods
- Sales rose 1.4%, but common-shareholder earnings fell to $18.6 million from $32.5 million. Operating income was nearly flat, while EBITDA declined 2.8% and EBITDA margin fell 0.4 percentage points.
- Management attributed pressure mainly to ongoing print-volume and pricing declines, excess industry capacity, lower-margin Brown Printing operations and nonrecurring favorable gains recorded in 2013. Acquisitions added sales and earnings; employee-related cost reductions partly offset operating pressure.
- Operating cash flow fell $147.9 million and free cash flow fell $137.6 million. The comparison was affected by an estimated $90 million one-time working-capital benefit in 2013 and increased 2014 cash use for working capital, particularly receivables.
- Debt and capital leases increased $18.8 million, primarily reflecting acquisitions and strategic investments, partly offset by debt repayment from operating cash generation. The April 2014 refinancing extended maturities and included $1.6 billion in secured facilities and $300 million of 7.0% senior unsecured notes due 2022.
Outlook, commentary, risks and unusual items
- No specific revenue or earnings guidance is provided. Management expected 2015 capital expenditures of $145 million–$165 million and anticipated further restructuring and integration costs as it consolidates capacity and integrates acquisitions.
- Quad announced a three-year book-platform transformation, including investment in more than 20 high-speed digital web presses. It also completed the $29.5 million Marin’s acquisition in February 2015. Its planned Courier acquisition was terminated; Quad received a $10 million termination fee.
- Restructuring, impairment and transaction-related charges were $67.3 million in 2014, including $30.6 million of employee termination costs, $14.4 million of impairments and $11.2 million of integration costs. Management said additional charges were expected.
- Interest expense increased to $92.9 million, and the company recorded a $7.2 million loss on debt extinguishment related primarily to refinancing. A $6.8 million tax valuation allowance for certain Mexican operations also affected results.
- Key risks include structural decline and pricing pressure in print, digital substitution, customer retention and credit risk, postal-rate and service changes, raw-material and labor costs, acquisition integration, foreign-currency and international exposure, variable-rate debt, and substantial capital needs. About 55% of borrowings were variable-rate.
- Retirement obligations are material: U.S. single-employer pension underfunding was approximately $163 million; the estimated multiemployer-plan withdrawal liability was $59 million and remained subject to arbitration and final determination. A lower pension discount rate contributed to the increase in pension obligations.
- Goodwill was $775.5 million and no goodwill impairment was recorded. The annual test found estimated fair value more than 10% above carrying value for each reporting unit with goodwill, but future operating weakness could still trigger impairment.
- The company’s Class B shares carry ten votes each; the Quadracci family retained about 80% of voting power, limiting Class A holders’ influence. The filing also notes a limited active trading market for Class A shares.
Important facts for investors to verify
- Whether print volumes and pricing stabilize, and whether Brown Printing integration delivers expected efficiencies without further margin dilution.
- Whether operating cash flow and free cash flow recover, particularly as working capital normalizes and integration spending continues.
- Debt reduction progress, leverage versus management’s target, covenant headroom and exposure to variable interest rates.
- Final multiemployer pension withdrawal liability, arbitration outcomes, required payments and the effect of pension assumptions on funded status.
- Actual 2015 capital spending and execution, returns and costs of the digital book investment, and any additional restructuring charges.
- Whether postal-rate changes, customer shifts to digital media, foreign-exchange movements or client credit issues materially affect demand and results.