Quad/Graphics, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023; comparisons are with the corresponding 2022 periods. Quad describes itself as a global marketing experience company, with United States Print and Related Services and International segments. The filing notes that results and cash flows are seasonal, with the fourth quarter typically strongest for operating cash flow.
Financial results and liquidity
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $700.2M | $829.9M | $2,169.8M | $2,331.8M |
| Operating income | $13.7M | $25.2M | $22.2M | $44.8M |
| Operating margin | 2.0% | 3.0% | 1.0% | 1.9% |
| Net earnings (loss) | $(2.7)M | $13.7M | $(33.4)M | $18.0M |
| Diluted earnings (loss) per share | $(0.06) | $0.27 | $(0.68) | $0.34 |
| EBITDA (non-GAAP) | $46.2M | $63.2M | $121.2M | $160.9M |
| EBITDA margin (non-GAAP) | 6.6% | 7.6% | 5.6% | 6.9% |
- Revenue and profit: Q3 sales fell 15.6%; nine-month sales fell 6.9%. Lower print volumes and paper sales were major factors; logistics and marketing/medical services sales also declined. Nine-month net loss included substantial restructuring and impairment charges and higher interest expense.
- Cash flow: Nine-month operating cash flow was $41.1M, versus cash used of $30.3M in 2022. Capital expenditures were $59.5M, producing negative Free Cash Flow of $18.4M, improved from negative $79.8M. Cash declined to $11.0M from $25.2M at year-end 2022.
- Debt and liquidity: Debt and finance lease obligations totaled $594.7M, versus $570.2M at December 31, 2022; net debt was $583.7M. The non-GAAP Debt Leverage Ratio was 2.36x, up from 2.16x. Management’s target range is 2.0x–2.5x. Total liquidity was $357.9M, including $346.9M of unused revolving capacity and $11.0M cash; under the most restrictive debt covenants, liquidity was $342.2M. Quad reported compliance with financial covenants at quarter-end.
- Balance sheet and obligations: Total assets were $1,569.3M and shareholders’ equity was $143.4M. The company had $25.1M of multiemployer pension withdrawal liability reserved. It reported $87.7M of debt maturities in January 2024 and $229.8M not due until November 2026.
Changes versus the prior comparable periods
- Q3 operating income declined 45.6% and nine-month operating income declined 50.4%; operating margins contracted in both periods.
- Q3 product sales decreased 16.1% and service sales 13.9%. For the first nine months, product sales decreased 6.1% and service sales 9.9%.
- Nine-month restructuring, impairment and transaction-related charges rose to $46.8M from $12.4M. These included $15.8M of impairment charges, including $4.4M related to a terminated software project, and elevated employee termination and facility-related costs.
- Interest expense increased to $17.7M in Q3 from $12.1M and to $51.0M for nine months from $32.3M, primarily reflecting higher borrowing rates and interest-rate-swap impacts.
- International segment nine-month operating income improved to $20.2M from $15.5M, while U.S. Print and Related Services operating income fell to $38.0M from $65.0M.
Outlook, commentary and risks
- The filing provides no clear numerical full-year earnings or revenue guidance. Management said it may take additional cost-reduction measures and expected inflationary cost pressures and certain supply-chain shortages to continue through fiscal 2023.
- Management attributed pressure to weaker demand, declining print volumes, industry overcapacity and pricing competition, along with inflation, labor availability, raw-material costs, supply-chain and distribution challenges, and rising interest rates. It cited productivity improvements and cost-reduction initiatives as partial offsets.
- Quad expects further restructuring charges related to capacity reduction and cost alignment. The filing also records continuing share repurchases; $5.2M was spent in Q3 and $79.8M remained authorized at September 30. Dividends had been suspended since 2020.
- Key risks include further print substitution by digital media, postal-rate increases or service changes, client demand and contract performance, labor and input costs, cyber incidents, foreign-currency and international risks, and debt covenant compliance. Management said its expected cash flows and current liquidity should be sufficient for operations and debt and pension requirements, while cautioning covenant compliance cannot be assured in future periods.
- The company reported open tax audits and $11.5M of unrecognized tax benefits. Tax expense for the nine months was $5.9M despite a pretax loss, with valuation allowances and audit-related items contributing to the tax result. Management does not expect ordinary-course litigation or environmental matters to have a material financial impact.
Important facts for investors to verify
- Whether sales and print volumes stabilize, particularly in the U.S. segment, and whether service offerings can offset print declines.
- Whether cost savings and productivity gains can offset lower volumes, restructuring costs and inflation; monitor the timing and amount of additional restructuring charges.
- Cash conversion and seasonal working-capital movements, given negative nine-month Free Cash Flow and planned capital expenditures.
- Debt maturities, borrowing costs, available revolving capacity and covenant headroom; distinguish management’s non-GAAP leverage ratio from lender covenant ratios.
- The resolution and financial effects of tax audits, valuation allowances, pension withdrawal obligations and other contingencies.