Quad/Graphics, Inc. — FY2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. This is an annual filing; the supplied text does not provide standalone fourth-quarter results. Financial comparisons below are FY2022 versus FY2021.
Business context
Quad describes itself as a global marketing experience company, combining print and distribution with marketing strategy, data and analytics, technology, media, creative, content and managed services. Its reportable segments are United States Print and Related Services and International. Print remains the larger business: the U.S. segment generated approximately 87% of consolidated sales in 2022. The company served approximately 2,900 clients; its ten largest accounted for about 19% of sales, with no single client above 5%.
Financial performance and liquidity
| Metric | FY2022 | FY2021 |
|---|---|---|
| Net sales | $3,217.0 million | $2,960.4 million |
| Operating income / margin | $53.5 million / 1.7% | $92.8 million / 3.1% |
| Net earnings | $9.3 million | $37.8 million |
| Diluted EPS | $0.18 | $0.71 |
| EBITDA / margin (non-GAAP) | $207.4 million / 6.4% | $264.2 million / 8.9% |
| Cash from operating activities | $154.6 million | $136.5 million |
| Capital expenditures | $60.3 million | $50.0 million |
| Free cash flow (non-GAAP) | $94.3 million | $86.5 million |
- Sales increased 8.7%. Product sales rose 12.5%, driven by paper sales and higher print pricing and volume; service sales fell 3.4%, partly reflecting the 2021 divestiture of the third-party logistics business.
- Cost of sales increased to 81.4% of sales from 80.8%, implying gross margin declined to 18.6% from 19.2%. Higher paper, material, freight and labor costs and restructuring charges weighed on profitability.
- At year-end, cash was $25.2 million, down from $179.9 million. Total debt and finance lease obligations were $570.2 million, versus $803.7 million a year earlier. Net debt was $545.0 million; the company’s non-GAAP Debt Leverage Ratio was 2.16x, down from 2.39x and within management’s stated 2.0x–2.5x target range.
- Total liquidity was $425.0 million, including $25.2 million cash and $399.8 million available on the revolving facility after letters of credit. Liquidity under the most restrictive debt covenants was $398.0 million. The revolver had no borrowings outstanding at year-end.
- Current assets were $704.5 million and current liabilities were $795.4 million. The company reported total assets of $1,701.8 million and shareholders’ equity of $172.9 million.
Material changes and unusual items
- Operating income fell 42.3% and net earnings fell to $9.3 million from $37.8 million, despite higher sales. EBITDA declined $56.8 million.
- FY2022 included $44.8 million of restructuring, impairment and transaction-related charges, compared with $18.9 million in FY2021. The 2022 total included a $23.1 million loss on the sale of the Argentina print business. Additional restructuring and integration costs are expected as Quad removes excess capacity and aligns its cost structure.
- FY2021 benefited from $24.5 million in gains on sale-leaseback transactions and a $13.4 million property-insurance gain, neither of which recurred in 2022. FY2021 also included a $32.1 million impairment of the Plural investment; Quad sold that investment in January 2022.
- Quad repaid $209.1 million of 7.0% senior unsecured notes at maturity in May 2022, using cash and revolving-facility liquidity. It repurchased 3.1 million Class A shares for approximately $10.0 million, including commissions; no shares were repurchased in 2021.
- Quarterly dividends have been suspended since the second quarter of 2020. Management says it remains committed to dividends over the long term, subject to operating conditions and debt-facility restrictions.
Outlook, risks and contingencies
- No specific numerical earnings or sales guidance is provided in the supplied filing text. Management expects inflationary cost pressures, some supply-chain shortages and distribution challenges could continue through 2023, and says it will seek to pass price increases to clients. It believes expected operating cash flows and available liquidity are sufficient for operating needs and debt and pension obligations.
- Key risks include secular print declines and digital substitution; excess industry capacity and pricing pressure; paper, energy, labor and freight costs or shortages; postal-rate increases and delivery delays; recessionary conditions and lower advertising spending; and the execution risks of expanding marketing services while restructuring print operations.
- Approximately 75% of borrowings were variable-rate at year-end. Quad was in compliance with all financial covenants as of December 31, 2022, but warns that weaker performance or higher costs could put future compliance at risk. Senior secured credit maturities are split between January 2024 and November 2026; the filing also reports $399.8 million of available revolving capacity.
- Net underfunded pension and multiemployer withdrawal obligations totaled $64.6 million at year-end. The U.S. single-employer defined-benefit plans were underfunded by $36.3 million; recorded multiemployer withdrawal liability was $28.3 million. The filing notes that the GCIU multiemployer plan was classified as critical and declining and projected to become insolvent in 2033.
- Other risks include client credit losses, cybersecurity and data privacy, environmental and legal matters, and possible impairment of long-lived assets. Management reported no goodwill impairment in 2022. The company reported an unqualified audit opinion and effective internal controls; the independent auditor identified workers’ compensation claim accruals as a critical audit matter.
- Class B shares carry ten votes per share. The Quadracci family voting trust controlled approximately 72% of total voting power as of January 31, 2023, limiting Class A shareholders’ influence over board elections and corporate decisions.
Important facts for investors to verify
- How much of the sales increase reflects paper-price pass-through versus underlying print volume and growth in marketing services.
- Whether pricing and cost actions can stabilize operating margin and EBITDA amid inflation, labor constraints and declining structural print demand.
- The company’s cash conversion, working-capital needs and ability to maintain liquidity while addressing the 2024 debt maturities and longer-dated obligations.
- The composition and recurring nature of restructuring charges, including the Argentina divestiture loss, and the expected timing and benefits of further capacity reductions.
- Future covenant headroom, floating-rate interest exposure, pension funding and multiemployer withdrawal payments; note that Quad’s non-GAAP leverage ratio differs from covenant ratios.
- Any change in dividend policy or share repurchases, taking account of debt covenants and the controlling voting rights of Class B shares.