Quad/Graphics, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Unaudited results. Quad provides print, logistics, imaging and marketing services through its U.S. Print and Related Services and International segments. The U.S. segment generated about 88% of Q3 sales. Results are seasonal, with sales and operating income typically higher in the second half and operating cash flow typically strongest in Q4.
Key financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $706.1m | $679.3m | $2,105.8m | $2,086.3m |
| Operating income | $28.0m | $6.3m | $97.0m | $8.5m |
| Operating margin | 4.0% | 0.9% | 4.6% | 0.4% |
| Net earnings (loss) | $14.3m | $1.6m | $58.9m | $(34.5)m |
| Diluted EPS | $0.27 | $0.03 | $1.12 | $(0.68) |
| EBITDA and margin (non-GAAP) | $70.3m; 10.0% | $52.3m; 7.7% | $227.4m; 10.8% | $139.3m; 6.7% |
For the nine months, operating cash flow was $22.1m, capital expenditures were $41.6m and free cash flow was negative $19.5m, versus positive $56.7m in 2020. Cash declined to $27.4m from $55.2m at year-end 2020. Total debt was $822.3m; debt and finance lease obligations less cash were $798.7m. Reported debt leverage was 3.14x, down from 3.35x at year-end. Liquidity was $490.6m, or $300.6m under the most restrictive debt-covenant calculation. Quad reported compliance with its financial covenants at September 30.
Changes versus prior period
- Q3 sales rose 3.9%: product sales increased 9.5%, while services fell 10.9%, principally reflecting the divestiture of third-party logistics. Nine-month sales rose 0.9%; products declined slightly and services increased.
- Q3 operating income improved by $21.7m and nine-month operating income by $88.5m. The nine-month comparison benefited materially from $52.4m lower restructuring and related charges, including 2021 gains on business and facility sales, and $24.5m in sale-leaseback gains. The company also cited improved print volume, lower depreciation, paper byproduct recoveries, insurance proceeds and cost savings.
- Q3 interest expense fell to $15.0m from $17.9m; nine-month expense fell to $45.1m from $52.2m, reflecting lower average debt and rates. The 2020 periods included losses from discontinued Book operations; the Book business was sold in 2020.
- Operating cash flow fell $85.3m year over year for the nine-month period, largely due to working-capital movements as Quad carried higher inventory for its peak season and lower cash from earnings.
Outlook, risks and unusual items
- Management said COVID-19 impacts had eased compared with the heavily affected 2020 periods, but remained uncertain; it may take further cost-reduction actions. The filing gives no specific earnings or revenue guidance.
- Management expected inflationary pressures and supply-chain shortages to persist at least through year-end 2021 and potentially into 2022. Labor shortages, rising paper, freight and other input costs, and delivery constraints could limit capacity, raise costs or affect client service. Quad said it was passing price increases to clients.
- Structural risks include declining print demand, digital substitution, industry overcapacity and pricing pressure, postal-rate and USPS service uncertainty, and client demand shifts. Additional restructuring charges are expected.
- Q3 included a $10.8m gain from the West Allis sale-leaseback. The two 2021 sale-leasebacks generated $24.5m of gains for the nine months. Nine-month restructuring and related items were a net $3.4m credit, including a $20.9m gain on sale of a business.
- On November 2, 2021, Quad amended its secured credit facility: revolving commitments were reduced to $432.5m, portions of the revolver and term loan were extended to November 2026, and pricing and covenants were revised. The extended tranche initially carried a 2.75% margin over reserve-adjusted LIBOR, subject to stated floors and other terms.
- Dividends remained suspended and restricted payments were constrained under the covenant-relief period; management said it remained committed to a dividend over the long term but would seek to resume it after operating conditions stabilized.
Important facts for investors to verify
- How much of reported earnings and EBITDA improvement reflects recurring operations versus sale-leaseback, insurance and divestiture-related gains, and lower prior-year restructuring charges.
- Whether higher inventory converts to cash after the seasonal peak, given negative nine-month free cash flow and reduced cash balances.
- The effects of inflation, labor and logistics shortages, paper availability and postal changes on margins, volumes and customer retention.
- Debt maturities, pricing and covenant headroom under the November 2021 amendment, including the effect of restricted-payment limits on future dividends.
- The pace of print-market decline, service and marketing-services growth, and execution of ongoing restructuring and cost reductions.