Quad/Graphics, Inc. — Q1 2023 Form 10-Q
Business context and reporting period
Quad is a global marketing experience company providing print, logistics, marketing and related services. This unaudited report covers the three months ended March 31, 2023, compared with the same period in 2022. Results are seasonal: sales and operating income are typically higher in the third and fourth quarters, and operating cash flow is typically strongest in the fourth quarter.
Financial performance and liquidity
- Revenue: Net sales were $766.5 million, up 3.0% from $744.2 million. Product sales rose 4.6% to $607.9 million, while services sales declined 2.9% to $158.6 million.
- Profitability: Operating income was $0.1 million, versus $5.4 million; operating margin was approximately zero, versus 0.7%. Net loss was $24.6 million, or $0.50 per diluted share, compared with a $1.0 million loss, or $0.02 per share.
- EBITDA: Company-defined, non-GAAP EBITDA was $34.2 million (4.5% margin), down from $45.1 million (6.1%). The filing attributes the decline primarily to higher restructuring, impairment and transaction-related charges.
- Cash flow: Operating cash flow was negative $50.6 million, versus negative $16.9 million. Capital expenditures were $28.7 million, producing non-GAAP free cash flow of negative $79.3 million, compared with negative $36.0 million.
- Cash, debt and liquidity: Cash was $8.7 million at quarter-end, down from $25.2 million at December 31, 2022. Debt and finance lease obligations totaled $640.2 million; net debt was $631.5 million. The company reported $330.1 million of total liquidity, including $321.4 million of unused revolving-credit capacity. Its non-GAAP net debt leverage ratio was 2.39x, up from 2.16x at year-end.
- Balance sheet: Total assets were $1,626.9 million and shareholders’ equity was $154.5 million at March 31, 2023. Current liabilities exceeded current assets.
Material changes versus Q1 2022
- Higher print pricing and volume, paper sales and favorable currency effects supported product revenue; lower logistics volumes reduced service revenue. Argentina divestiture reduced sales.
- Product costs increased with paper costs and print volumes, while service costs declined, partly reflecting lower freight costs and cost reductions. SG&A rose 12.8%, primarily due to employee-related and selling costs.
- Restructuring, impairment and transaction-related charges increased to $26.0 million from $3.6 million. These included $13.1 million of employee termination charges and $9.5 million of impairment charges, primarily for machinery and equipment no longer used following facility consolidations and capacity reductions.
- Interest expense rose to $16.3 million from $9.3 million, primarily reflecting higher borrowing rates and increased interest-rate-swap expense. Income tax expense was $8.8 million despite a pretax loss; the filing cites non-deductible expenses, foreign branch income, valuation allowances and an anticipated audit settlement.
- International operating income improved to $7.7 million from $3.7 million, while U.S. Print and Related Services operating income declined to $7.3 million from $11.8 million, including the effect of substantially higher restructuring and impairment charges.
Outlook, commentary and risks
- The filing provides no specific revenue or earnings guidance. Management said expected future operating cash flows and existing liquidity resources should be sufficient to fund operations and debt and pension requirements for the next 12 months and beyond.
- Quad expects further restructuring charges as it removes excess manufacturing capacity and aligns costs; management may implement additional cost reductions as conditions require. The company’s nearest significant debt maturity was identified as $87.7 million in January 2024.
- Management cited weaker demand, inflation, higher interest rates, labor and raw-material costs, supply-chain and distribution challenges, and recession concerns. It expects inflationary cost pressures and some supply-chain shortages could continue through 2023, while noting their eventual impact is uncertain.
- Structural risks include print-industry overcapacity and digital substitution, postal rate increases and delivery changes, client demand and credit risk, labor availability, and covenant compliance. The company was in compliance with its financial covenants at quarter-end; it cautioned that future compliance is not assured.
- Other items to monitor include a $27.3 million reserve for multiemployer pension withdrawal liabilities and open tax audits. Management does not expect ordinary-course litigation to materially affect the financial statements. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether print pricing and volume gains can offset structural demand pressures, cost inflation and postal-related volume risks.
- Whether working-capital outflows and capital spending moderate, allowing free cash flow to recover and debt to decline.
- Progress, cash costs and expected savings from restructuring and facility consolidations, including the risk of further impairment charges.
- Debt maturity and refinancing plans, borrowing costs, liquidity availability and covenant headroom.
- The assumptions behind the unusual tax expense and the outcomes of tax audits; also monitor pension withdrawal-liability payments.