Quad/Graphics, Inc. (NYSE: QUAD) — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; comparisons are with Q1 2023. Quad describes itself as a global marketing experience company, with U.S. Print and Related Services and International segments. Results are seasonal: sales and operating income generally run higher in the second half, and operating cash flow is typically strongest in Q4.
Financial results and liquidity
| Metric | Q1 2024 | Q1 2023 / comparison |
|---|---|---|
| Net sales | $654.8 million | $766.5 million; down 14.6% |
| Operating income (loss) | $(10.7) million; margin (1.6%) | $0.1 million; approximately 0% margin |
| Net loss | $(28.1) million; diluted loss per share $(0.60) | $(24.6) million; diluted loss per share $(0.50) |
| EBITDA and EBITDA margin (non-GAAP) | $18.1 million; 2.8% | $34.2 million; 4.5% |
| Cash used in operating activities | $(52.2) million | $(50.6) million |
| Free cash flow (non-GAAP) | $(70.1) million | $(79.3) million |
Product sales fell 16.6% to $507.2 million, principally from lower paper sales and reduced print volumes. Services sales fell 6.9% to $147.6 million, mainly due to lower marketing and medical services. The U.S. segment recorded a $1.3 million operating loss versus $7.3 million income; International operating income was $3.4 million versus $7.7 million.
Cash and cash equivalents were $10.2 million at March 31, down from $52.9 million at year-end. Reported total liquidity was $239.2 million, including $229.0 million of available revolving capacity net of letters of credit; liquidity under the most restrictive debt covenants was $205.9 million. Debt and finance lease obligations totaled $553.8 million, versus $522.7 million at year-end. The company’s non-GAAP Debt Leverage Ratio was 2.43x, up from 2.01x and above management’s 1.75x–2.25x target range. Quad said it was compliant with its financial covenants at quarter-end and expects current resources and cash flows to support operations and debt and pension requirements for the next 12 months and beyond.
Material changes and management commentary
- Sales declined $111.7 million year over year. Lower print volumes and paper sales were the main drivers; cost of sales, SG&A, and depreciation and amortization also declined, but not enough to offset revenue pressure and higher special charges.
- Restructuring, impairment and transaction-related charges rose to $32.5 million from $26.0 million. These included $13.7 million of employee termination charges and $12.6 million of impairments, including assets affected by facility consolidations and capacity reductions. Management expects additional restructuring charges.
- Capital expenditures were $17.9 million, down from $28.7 million; this contributed to the smaller free-cash-flow deficit despite higher cash used in operations.
- Quad repaid $87.7 million of maturing Term Loan A principal in January, using revolving-credit liquidity and cash; it also added $25.0 million of Term Loan A principal under a January credit-facility amendment and entered into two press financings totaling $27.8 million. The revolving facility capacity was reduced to $342.5 million.
- The Board reinstated a $0.05-per-share quarterly dividend in February; a further $0.05 dividend was declared in April for payment in June. Management says capital allocation balances debt reduction, business investment and shareholder returns.
Outlook, risks and contingencies
The filing gives no specific numerical revenue or earnings guidance. Management expects industry challenges to continue through 2024, including print-demand declines, postal-rate increases, digital substitution, competitive overcapacity, high interest rates, and paper, labor, energy and freight cost or availability pressures. USPS announced an average 7.8% rate increase for July 2024; management warns that postage increases may reduce client mail volumes. The company is pursuing manufacturing consolidation, productivity improvements and cost reductions while investing in its marketing-experience platform.
Key risks include continued print-volume and pricing pressure, ability to reduce costs quickly enough, client contract performance and renewals, commodity and interest-rate exposure, foreign currency movements, cybersecurity incidents, and debt covenant compliance. Quad reported $23.1 million of multiemployer pension withdrawal liabilities. Management said ordinary-course litigation is not expected to materially affect the financial statements and believes it is materially compliant with environmental requirements. Income tax expense was $2.4 million despite a pretax loss; the filing cites valuation allowances and other tax items, and reports $16.9 million of unrecognized tax benefits.
Most important facts for investors to verify
- Whether lower print volumes and paper-related sales continue to pressure revenue, segment profitability and EBITDA.
- Cash generation, seasonal working-capital needs, available borrowing capacity, and the increase in net debt and leverage.
- Progress and cash costs of restructuring, including further facility consolidation and impairment charges.
- Ongoing covenant headroom and the sustainability of the reinstated dividend alongside debt reduction and investment needs.
- The filing says there were no Q1 share repurchases, while its issuer-purchase table reports 345,186 shares transferred to the company for employee tax withholding; distinguish these withheld shares from open-market repurchases.