Quad/Graphics, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. Quad describes itself as a marketing solutions provider combining print operations with marketing, imaging, logistics and digital services.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Net sales | $967.5 million | $998.6 million, down 3.1% |
| Operating income and margin | $7.1 million; 0.7% | $51.0 million; 5.1% |
| Net earnings (loss) | $(3.5) million; diluted EPS $(0.07) | $25.4 million; diluted EPS $0.49 |
| EBITDA and margin | $66.7 million; 6.9% | $109.0 million; 10.9% |
| Cash from operating activities | $2.2 million | $63.3 million |
| Free cash flow | $(22.0) million | $39.9 million |
| Cash and cash equivalents | $30.2 million at March 31 | $64.4 million at December 31, 2017 |
| Total debt | $1,013.8 million; debt and capital leases totaled $1,032.8 million | $945.5 million total debt at December 31, 2017 |
| Debt leverage ratio | 2.28x | 2.15x at December 31, 2017 |
Quad had $622.7 million of unused revolving-credit capacity, net of letters of credit. It reported covenant compliance: total leverage 2.21x versus a 3.75x maximum, senior secured leverage 1.69x versus a 3.50x maximum, and interest coverage 7.06x versus a 3.50x minimum. The quarterly dividend was $0.30 per share.
Material changes versus the prior comparable period
- Product sales declined 6.2% to $801.1 million, chiefly from lower print volumes and pricing amid industry overcapacity. Service sales rose 15.3% to $166.4 million, largely reflecting acquisitions and higher logistics revenue.
- Operating income fell by $43.9 million. Quad cited print-market pressure, $22.3 million of noncash expense for a special employee retirement contribution, higher restructuring and impairment charges, and a favorable $10.4 million vacation-policy item in the prior-year period. A $17.2 million property-insurance gain and cost savings partly offset these pressures.
- Restructuring, impairment and transaction-related charges increased to $24.9 million from $9.2 million, including $7.9 million of impairments and $10.6 million of employee termination charges.
- Operating cash flow decreased by $61.1 million, reflecting weaker cash from earnings and a larger use of cash from changes in operating assets and liabilities. Capital spending was $24.2 million; acquisition spending, net of acquired cash, was $73.9 million.
Outlook, commentary, risks and unusual items
- Outlook: The filing provides no specific revenue or earnings guidance. Management said cash, expected operating cash flows and available revolver capacity should fund operations, integration and restructuring, capital needs, debt service and shareholder returns. It expects seasonal results to remain stronger in the third and fourth quarters and expects additional restructuring costs.
- Strategy and industry: Quad is pursuing its “Quad 3.0” transformation toward integrated marketing services while reducing print capacity and costs. Management cited declining print demand, excess industry capacity and pricing pressure as ongoing headwinds.
- Acquisitions: Quad acquired marketing-services provider Ivie in February for $92.5 million cash paid, with a potential earn-out of up to $16.0 million. In March, it raised its ownership of digital agency Rise from 19% to 57% and began consolidating Rise. Purchase-price allocations were preliminary.
- Paper and postal risks: Proposed U.S. duties on Canadian uncoated groundwood paper could increase input costs or constrain supply; the ITC investigation was expected to conclude later in 2018. Potential postal-rate changes could also reduce demand for printed products.
- Legal and benefit contingencies: Quad continues to cooperate with the SEC, DOJ and OFAC on investigations involving potential FCPA issues in Peru and China and transactions involving Cuba; management did not anticipate a material adverse effect. A GCIU multiemployer-pension withdrawal-liability dispute remains in litigation; the recorded MEPP withdrawal-liability reserve was $25.3 million and could change with the outcome.
- Other notable items: The $22.3 million ESOP contribution was noncash. Quad reported no open foreign-exchange contracts at quarter-end and used a $250 million interest-rate swap to hedge variable-rate debt. The company noted that results are seasonal.
Important facts for investors to verify
- Whether print-volume and pricing declines continue, and whether service growth from acquisitions can improve consolidated margins.
- Cash conversion, working-capital needs, acquisition integration and debt trends; Q1 free cash flow was negative and leverage increased.
- Final valuations, performance and any earn-out obligations for Ivie and Rise, including the contribution of acquired services to results.
- Developments in the FCPA/OFAC investigations, GCIU litigation, paper-duty proceedings and postal-rate rules.
- Future restructuring charges, covenant headroom and the capacity to sustain dividends while funding investment and debt service.