Quad/Graphics, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Quad provides printing, logistics, marketing and related services in the United States and internationally. Results are seasonal, with sales and operating income generally higher in the second half and operating cash flow typically strongest in the fourth quarter.
Key financial results
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $703.1 million | $757.7 million | $1,469.6 million | $1,501.9 million |
| Operating income | $8.4 million | $14.2 million | $8.5 million | $19.6 million |
| Operating margin | 1.2% | 1.9% | 0.6% | 1.3% |
| Net earnings (loss) | $(6.1) million | $5.3 million | $(30.7) million | $4.3 million |
| Diluted earnings (loss) per share | $(0.12) | $0.10 | $(0.62) | $0.08 |
| EBITDA, non-GAAP | $40.8 million | $52.6 million | $75.0 million | $97.7 million |
| EBITDA margin, non-GAAP | 5.8% | 6.9% | 5.1% | 6.5% |
- Q2 sales declined 7.2%; product sales fell 5.7% and services fell 12.6%. Lower print volumes, paper sales and logistics revenue, as well as the Argentina divestiture, were cited as contributors.
- Q2 cost of sales declined 7.8%, and gross margin was approximately 18.9% versus 18.4% a year earlier. However, higher restructuring charges and lower volumes contributed to lower operating income.
- For the first half, sales fell 2.2% and operating income fell 56.6%. Cost savings, manufacturing productivity and print pricing partly offset lower logistics and print volumes and higher restructuring charges.
- International Q2 operating income rose to $8.3 million from $6.2 million, while U.S. Print and Related Services operating income fell to $11.8 million from $19.9 million. For the first half, International operating income increased to $16.0 million, while U.S. segment income declined to $19.1 million.
Cash flow, debt and liquidity
- First-half operating cash flow was $0.3 million, compared with cash used of $23.5 million in 2022. Capital expenditures were $45.2 million, up from $33.5 million; free cash flow, a non-GAAP measure, was negative $44.9 million versus negative $57.0 million.
- Cash was $11.3 million at June 30, 2023, down from $25.2 million at year-end 2022. Total debt and finance lease obligations were $615.4 million; net debt was $604.1 million.
- Reported total liquidity was $351.4 million, comprising $11.3 million cash and up to $340.1 million of unused revolving-credit capacity, net of $32.5 million in letters of credit. Revolver borrowings were $59.9 million under a $432.5 million facility.
- Debt leverage ratio, as defined by Quad, was 2.34x, up from 2.16x at year-end, within management’s stated 2.0x–2.5x target range. Quad said it was in compliance with debt covenants at June 30.
- Management stated that expected cash flows and current resources should be sufficient to fund operating needs and service debt and pension obligations for the next 12 months and beyond. The filing identifies a nearest significant debt maturity of $87.7 million in January 2024 and $229.8 million of maturities due in November 2026.
Outlook, risks and unusual items
- The filing provides no quantified revenue or earnings guidance. Management expects seasonality to continue, with stronger sales and operating income in the second half, and says it may implement further cost reductions.
- Macroeconomic weakness, inflation, rising interest rates, labor and supply-chain pressures, distribution delays, declining print demand, digital substitution, postal-rate changes and intense competition may affect demand, costs and margins. Management said inflationary pressures and some supply shortages could continue through fiscal 2023, with impacts not predictable.
- Restructuring, impairment and transaction-related charges were $9.6 million in Q2 and $35.6 million in the first half, versus $3.2 million and $6.8 million, respectively, a year earlier. First-half charges included $15.0 million of employee termination costs and $10.6 million of impairment charges. Quad expects additional restructuring and integration costs.
- First-half interest expense rose to $33.3 million from $20.2 million, primarily reflecting higher weighted-average rates and increased swap-related expense, partly offset by lower average debt. Quad had $319.5 million of variable-rate debt after hedging; its reported weighted-average rate was 7.3%.
- Other investor-relevant items include $26.3 million reserved for multiemployer pension withdrawal liabilities, including $3.7 million current; $11.5 million of unrecognized tax benefits; and continued share repurchases of $5.0 million in the first half. Quarterly dividends remain suspended.
- Management said litigation liabilities, if any, are not expected to materially affect the financial statements. The company reported effective disclosure controls and no material change in internal control; it also reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether second-half seasonal demand and print/logistics volumes recover sufficiently to offset the first-half decline.
- How much additional restructuring expense and cash outlay will be incurred, and whether the expected savings improve operating margins.
- Liquidity, refinancing progress and covenant headroom around the January 2024 maturity, particularly if rates remain high or earnings weaken.
- Capital spending and working-capital requirements, and the company’s ability to convert operating cash flow into positive free cash flow.
- Whether increased U.S. postal costs, labor constraints, paper availability and client migration to digital channels further pressure print demand and profitability.