Quad/Graphics says leverage will rise, then return to targeted range

By Devika Patel

Knoxville, Tenn., May 1 – Quad/Graphics Inc. expects that leverage will increase due to recent acquisition activity, but management believes leverage will be back within the company’s targeted range within two years of completing a $1.4 billion acquisition this year.

In November, the company agreed to acquire Periscope for $132.5 million in an all-cash deal, which was completed in January. The company plans to acquire LSC Communications in an all-stock transaction valued at $1.4 billion in mid-2019.

“We completed an amendment and extension of our credit facility during the quarter which provides us with the liquidity and structural flexibility for the pending acquisition of LSC Communications and maintains our strong and flexible balance sheet,” executive vice president and chief financial officer Dave Honan said on the company’s first quarter ended March 31 earnings conference call on Wednesday.

“The amendment increased our existing debt capital structure by $725 million and extended maturities of the revolving credit facility and term loan A through 2024 and the term loan B through 2026.

The company’s leverage is expected to go up due to acquisitions, but management believes that Quad/Graphics will be back in its targeted leverage range of 2x to 2.5x within two years of completing its planned acquisition of LSC Communications.

“At times, we may operate outside our long-term targeted leverage range of 2x to 2.5x depending on the timing of compelling strategic investment opportunities such as the January 2019 acquisition of Periscope,” Honan said.

“Therefore, our current priorities for the use of cash will be debt reduction until we’re back in our long-term leverage target range.

“Additionally, the pending all-stock acquisition of LSC will also increase leverage.

“However, we do expect to be back within the 2x to 2.5x targeted leverage range within two years of completing the LSE acquisition.

“This is consistent with our history of deleveraging back into long-term targeted leverage range within two years of completing a significant acquisition,” he said.

The company completed an interest rate swap, resulting in 66% of capital structure carrying a fixed interest rate.

“During the quarter, we entered into a five-year $130 million interest rate swap to convert variable rates into fixed-rate debt.

“Including the impact of the swap, our debt capital structure is now 66% fixed and 34% floating, with a blended interest rate of 6.4% as of March 31.

“We estimate that our current blended interest rate of 6.4% will decrease to approximately 5.7% upon completion of the LSE acquisition, as the delayed-draw term loan A will then fully fund at a lower interest rate.

The company has no significant debt maturities until May 2022, Honan said.

Cash and cash equivalents were $10.4 million as of March 31, 2019, compared to $69.5 million as of Dec. 31, 2018.

Available liquidity under the company’s $800 million revolver was $516 million as of March 31.

Long-term debt was $1,074,500,000 as of March 31, 2019, compared to $882.6 million as of Dec. 31, 2018.

At the end of the first quarter, the company’s leverage ratio was 2.99x.

Quad/Graphics is a Sussex, Wis.-based printer and media channel integrator.

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