Quad/Graphics, Inc. — FY 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. This is an annual filing; it includes quarterly data but does not present a standalone fourth-quarter narrative. Quad/Graphics provides commercial printing, media and logistics services. Comparisons with 2010 are affected by the July 2010 World Color Press acquisition and the classification of most Canadian operations as discontinued operations.
Financial performance and liquidity
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Net sales | $4,324.6 million | $3,185.8 million |
| Operating income, continuing operations | $156.9 million; 3.6% margin | $61.6 million; 1.9% margin |
| Adjusted EBITDA measure reported by company | $431.7 million; 10.0% margin | $333.4 million; 10.5% margin |
| Net loss attributable to common shareholders | $46.9 million; diluted loss per share $1.00 | $250.1 million; diluted loss per share $6.67 |
| Cash from operating activities | $371.1 million | $152.8 million |
| Capital expenditures / free cash flow | $168.3 million / $202.8 million | $112.6 million / $40.2 million |
| Total debt | $1,424.9 million | $1,521.0 million |
| Cash and cash equivalents at year-end | $25.6 million | $20.5 million |
EBITDA and free cash flow are non-GAAP measures as defined by the company. Sales rose 35.7%, primarily because 2011 included a full year of World Color Press results; management also cited lower pricing and volumes from industry overcapacity. EBITDA increased, but its margin declined from 10.5% to 10.0%, reflecting the acquired business’s lower relative margins and pricing pressure. Operating income improved despite $114.0 million of restructuring, impairment and transaction-related charges.
The company reported $730.1 million of unused revolving-credit capacity at year-end. Its leverage ratio was 2.27x against a 3.50x maximum covenant; interest coverage was 6.63x against a 3.25x minimum. It reported compliance with debt covenants. Approximately 55% of borrowings were variable-rate. Interest expense was $108.0 million.
Material changes and unusual items
- Operating income increased by $95.3 million year over year; management attributed the improvement mainly to World Color Press and integration synergies. North America operating margin edged down to 7.1% from 7.2%; the International segment’s operating loss narrowed to $19.4 million from $53.2 million.
- Continuing-operations net loss was $8.0 million. The $46.9 million total loss attributable to shareholders also includes a $38.6 million after-tax loss from discontinued Canadian operations.
- 2011 included a $34.0 million loss on debt extinguishment related to the July refinancing. The prior-year loss included a $200.5 million tax expense associated with conversion to C-corporation status, materially affecting year-over-year net-income comparability.
- Canadian discontinued operations recorded $45.1 million of restructuring, impairment and transaction-related costs, including a $17.9 million pension curtailment loss and a $13.9 million goodwill impairment. The Canadian sale to Transcontinental was expected to close before March 31, 2012, following Canadian Competition Bureau authorization.
- Since the World Color Press acquisition, the company had achieved approximately $196 million of synergy savings through December 31, 2011, with more than $250 million of annualized savings targeted by the end of the 24-month integration period. It had eliminated about 4,500 net positions and closed 12 plants; integration costs were estimated at $195–$240 million, with potential to exceed that range.
Outlook, risks and contingencies
Management expected continued volume and pricing pressure into 2012 and said it would focus on financial flexibility and cost efficiency. It planned $125–$150 million of capital spending in 2012, versus $168.3 million in 2011. The company raised its quarterly dividend to $0.25 per share in 2012; its 2011 dividend was $0.60 per share. These are management plans and expectations, not guarantees.
- Industry and demand: Excess printing capacity, intense competition, declining print demand from electronic media, economic weakness, and postal-rate or service changes may pressure sales, prices and margins.
- Costs and execution: Paper availability and prices, energy, labor and freight costs; the pace and cost of restructuring; and the ability to realize integration synergies are important uncertainties.
- Pensions: The filing reports substantial pension and postretirement obligations. It expected approximately $52 million of 2012 contributions to U.S. defined-benefit plans. The estimated U.S. multiemployer-plan withdrawal liability was $83.5 million, with the final amount not yet determined.
- Debt and liquidity: Variable rates, debt covenants, required debt service and refinancing terms could constrain operations. The company was compliant at year-end, but future compliance was not assured.
- Other exposures: Goodwill and other long-lived assets are sensitive to forecasts and market assumptions; customer nonpayment, foreign-exchange movements, labor disruptions, environmental and privacy regulation, and unresolved World Color Press bankruptcy claims could also affect results.
- Governance: Class B shares carry ten votes per share; the filing says the class B shares represented approximately 80% of total voting power as of February 24, 2012. Quad/Graphics qualified as a controlled company under NYSE rules.
Deloitte & Touche issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.
Most important facts for investors to verify
- How much of revenue and operating-income growth reflects acquisition scope versus underlying volume, pricing and organic performance.
- Whether the company achieves its synergy target on schedule and within the estimated integration-cost range.
- The final Canadian transaction terms and closing, including transfer of Canadian pension and postretirement obligations.
- The final multiemployer withdrawal liability, required pension contributions and any changes in plan funding assumptions.
- Debt balances, variable-rate exposure, covenant headroom and available revolver capacity as cash uses and restructuring commitments evolve.
- Whether the 2012 capital-spending and dividend plans remain consistent with cash generation, deleveraging and operating conditions.