Quad/Graphics, Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013. Quad/Graphics is a global commercial printer and media-channel integrator. Results include Vertis from its January 16, 2013 acquisition; accordingly, year-over-year comparisons are not fully like-for-like. The business is seasonal, with historically higher sales and operating income in the second half.
Financial results and liquidity
- Revenue: Q3 net sales were $1,206.0 million, up 16.0% from $1,039.7 million. For the first nine months, sales were $3,446.3 million, up 16.3% from $2,963.5 million. Growth primarily reflected Vertis; sales in established product lines faced lower print volumes and pricing.
- Profit and margins: Q3 operating income was $44.4 million (3.7% margin), versus $59.1 million (5.7%) a year earlier. Net earnings attributable to common shareholders were $13.0 million, or $0.26 diluted per share, compared with $39.8 million, or $0.84. Nine-month operating income was $38.3 million (1.1% margin), versus $51.4 million (1.7%); common shareholders had a net loss of $28.2 million, or $0.62 per diluted share, versus earnings of $66.4 million, or $1.41. The 2012 nine-month comparison included a $35.3 million after-tax gain on the Canadian operations disposal and a $41.5 million tax benefit from tax matters.
- EBITDA: Company-reported non-GAAP EBITDA was $126.3 million (10.5% margin) in Q3, down from $142.9 million (13.7%). Nine-month EBITDA was $295.9 million (8.6%), versus $336.8 million (11.4%). These measures include reported restructuring charges and are not GAAP measures.
- Cash flow: Nine-month operating cash flow was $219.4 million, down from $232.2 million. Capital expenditures were $117.6 million, up from $85.3 million; company-defined free cash flow was $101.8 million, versus $146.9 million. Cash and cash equivalents were $20.3 million at quarter-end.
- Debt and liquidity: Total debt was $1,522.4 million, compared with $1,325.0 million at December 31, 2012; the increase primarily reflected Vertis financing. Unused revolving-credit capacity, net of letters of credit, was $498.3 million. The company reported a 2.65x leverage ratio against a 3.50x maximum and said it was in compliance with all financial covenants.
- Balance sheet: Total assets were $4,248.6 million and total liabilities were $3,087.6 million at September 30, 2013. Dividends paid were $0.30 per share in Q3; a further $0.30 quarterly dividend was declared November 5, payable December 20, 2013.
Material changes and management commentary
- Vertis added sales, services and production capacity, but management said its lower margins, acquisition-related administrative costs and integration needs weighed on margins. Management cited Vertis and other cost-reduction efforts as sources of potential synergies; integration actions also entail additional costs.
- Industry overcapacity, digital substitution and pricing pressure continued to challenge print volumes and pricing. Management also identified changing economic conditions, customer contract renewals and performance, postal costs, raw-material and energy costs, and acquisition integration as risks.
- The company announced four plant closures in 2013. Since 2010, it had announced 19 closures and reduced headcount by approximately 6,700. It recorded $82.9 million of restructuring, impairment and transaction-related charges in the first nine months and expects additional restructuring and integration charges.
- Management expected 2013 capital investment of $150 million to $175 million; $117.6 million had been spent through September. It said expected operating cash flow and available revolving-credit capacity were sufficient for operating needs, integration and restructuring, capital spending, debt service, pension obligations, investments and dividends. No specific earnings or revenue guidance is provided in the filing text.
- Other notable exposures include an estimated $76.6 million liability for multiemployer pension-plan withdrawals, subject to final determination, and unresolved World Color Press bankruptcy claims. Management cautioned that priority bankruptcy claims could exceed recorded estimates. Routine litigation was not expected by management to have a material financial impact.
Key facts for investors to verify
- How much of reported revenue growth and future synergy realization is attributable to Vertis, and how its integration affects margins and cash generation.
- Whether print-volume and pricing pressure, restructuring costs and capital spending continue to reduce operating margin and free cash flow.
- Debt reduction, covenant headroom and available revolver capacity as integration, pension and bankruptcy-related payments continue.
- The final amount and timing of multiemployer pension withdrawal liabilities and unresolved bankruptcy claims.
- Whether 2013 capital spending remains within management’s $150 million to $175 million expectation and how seasonal results affect liquidity.