Quad/Graphics, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2011. Amounts are in millions except per-share data. The company provides commercial printing and related services. Comparability with 2010 is affected by the July 2, 2010 World Color Press acquisition; Canadian operations being sold to Transcontinental are presented as discontinued operations.
Financial results
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $1,109.4 | $1,129.1 | $3,109.0 | $1,927.0 |
| Operating income (loss), continuing operations | $56.1 | $(2.4) | $91.8 | $(22.1) |
| Operating margin | 5.1% | (0.2)% | 3.0% | (1.1)% |
| Net loss attributable to common shareholders | $(22.4) | $(232.5) | $(40.0) | $(276.7) |
| Loss per share | $(0.48) | $(5.01) | $(0.85) | $(8.07) |
| EBITDA and margin (non-GAAP) | $90.9; 8.2% | $81.7; 7.2% | $292.3; 9.4% | $163.7; 8.5% |
Q3 sales fell 1.7%, mainly on lower print volumes and pricing. Operating income improved as integration synergies, lower incentive compensation and reduced restructuring charges more than offset volume, pricing and productivity pressures. Q3 restructuring, impairment and transaction-related charges were $31.8, compared with $69.4 a year earlier. Nine-month sales rose 61.3%, primarily reflecting the World Color Press acquisition; pro forma nine-month sales were $3,109.0 in 2011 versus $3,139.9 in 2010.
The Q3 2011 net loss included a $34.0 debt-extinguishment loss and $16.8 loss from discontinued operations, including a $13.9 Canadian-operation goodwill impairment. Q3 2010 results included a one-time $200.5 tax expense from the company’s change to C corporation status, substantially affecting the comparison.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $162.9, versus cash used of $17.1 in 2010. Capital expenditures were $134.3; investing cash outflow was $154.5.
- Cash was $15.8 at September 30, 2011. Total debt was $1,588.3, including $83.1 classified as short-term/current; long-term debt was $1,505.2. Cash and debt figures exclude capital lease obligations.
- The July refinancing replaced the prior $1.23 billion facility with a $1.5 billion agreement, including an $850.0 revolving facility. The company reported $591 of unused revolving capacity and estimated annual cash-interest savings of $16–$20 at then-current borrowing levels.
- Rolling-twelve-month covenant ratios were 2.45 leverage (maximum 3.50), 6.42 interest coverage (minimum 3.00) and 3.22 fixed-charge coverage (minimum 1.50). The company reported compliance at September 30.
- Quarterly dividends of $0.20 per share were paid in June and September. A $100.0 share-repurchase authorization was approved; 0.4 million shares had been repurchased for $7.4 through September 30.
Outlook, developments and risks
- Management expected seasonal strength in the second half, but cautioned that first-nine-month results were not a reliable full-year predictor. No specific earnings guidance was provided.
- Management targeted more than $225 of annual World Color Press synergies by the end of the 24-month integration period in June 2012; approximately $167 had been achieved through September 30. Estimated integration costs were $195–$240, with potential to exceed that range if synergies exceed $225. The company expected 2011 capital spending of $165–$175.
- The acquisition of Transcontinental’s Mexican operations closed September 8. The exchange included the pending sale of most Canadian operations, which remained subject to Canadian regulatory clearances as of November 14, 2011. Transcontinental is to assume pension and post-retirement obligations for the Canadian employees covered by the transaction.
- Industry overcapacity, pricing pressure, weaker print volumes and substitution by digital and mobile media are key business risks. Other risks include raw-material, energy and freight costs; execution and cost of integration; foreign-exchange and interest-rate exposure; pension obligations; and potential covenant noncompliance.
- Bankruptcy claim amounts remain estimates: priority cash claims could exceed recorded liabilities. The company had funded a trust for maximum potential Class 3 unsecured-note payments, but final allowed claims could require additional liability and expense.
- Management reported effective disclosure controls. It also noted that market capitalization had fallen below book value; its interim U.S. and Latin American goodwill review found no impairment, while the Canadian disposal triggered the $13.9 impairment charge.
Investor facts to verify
- Progress toward the $225-plus annual synergy target, remaining integration costs and the announced plant closures.
- Completion and final terms of the Canadian sale, including regulatory approval and the resulting pension and debt effects.
- Print volumes, pricing, productivity and cash generation amid industry overcapacity and digital substitution.
- Available revolver capacity, covenant headroom, refinancing savings and the company’s ability to sustain dividends and repurchases.
- Final bankruptcy claims, pension and post-retirement obligations, and assumptions used in future goodwill impairment assessments.