Quad/Graphics, Inc. — Q1 2021 Form 10-Q
Business context and reporting period. The filing covers the three months ended March 31, 2021, compared with Q1 2020. 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 90% of Q1 2021 sales. Results are seasonal, with sales and operating income typically higher in the third and fourth quarters.
Key financial results
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Net sales | $705.8 million | $822.5 million |
| Operating income from continuing operations | $21.0 million; 3.0% margin | $5.0 million; about 0.6% margin |
| Net earnings (loss) attributable to Quad shareholders | $10.2 million | $(12.4) million |
| Diluted earnings (loss) per share | $0.19 | $(0.25) |
| EBITDA and EBITDA margin (non-GAAP) | $67.1 million; 9.5% | $51.9 million; 6.3% |
| Cash from operating activities | $72.9 million | $44.7 million |
| Capital expenditures | $16.9 million | $29.0 million |
| Free cash flow (non-GAAP) | $56.0 million | $15.7 million |
At March 31, 2021, cash was $80.6 million, total debt was $888.1 million, and debt plus finance lease obligations was $892.6 million. Net debt under Quad’s non-GAAP calculation was $812.0 million; its Debt Leverage Ratio was 3.24x, down from 3.35x at December 31, 2020. Total liquidity was reported as $543.7 million, or $426.9 million under the most restrictive debt covenants. Shareholders’ equity was $93.1 million.
Material changes versus Q1 2020
- Sales fell 14.2%, primarily from lower print volumes, lower pass-through paper sales and the 2020 sale of the Omaha packaging plant. Product sales declined 18.4%; service sales increased 1.3%.
- Operating income improved by $16.0 million, but the comparison benefited substantially from restructuring and related charges falling by $20.2 million, to $2.6 million. Management said operating income excluding those charges decreased $4.2 million, chiefly due to lower print volume and favorable 2020 items that did not recur.
- SG&A declined $19.1 million, while service costs rose $7.5 million, primarily due to higher freight costs.
- Operating cash flow rose $28.2 million, with a $35.0 million improvement in cash from changes in operating assets and liabilities. Investing cash flow was a $6.0 million use, versus $14.3 million provided in Q1 2020, which included business-sale proceeds. Financing cash flow was a $41.4 million use, including $33.9 million of long-term debt payments.
- The Q1 2020 comparison included a $3.8 million after-tax loss from the Book business, which Quad sold in 2020.
Outlook, management commentary and risks
- The filing provides no specific numerical earnings or revenue guidance. Management said COVID-19 continues to negatively affect demand, operations and supply chains, and that the extent and duration of effects remain uncertain. Further cost reductions may be implemented as needed.
- Management expects seasonal patterns to continue, but said pandemic uncertainty may further affect seasonality. It considers current cash flows, cost actions and liquidity sufficient to meet operating, debt-service and pension requirements.
- Quad was in compliance with its financial covenants at quarter-end. Covenant relief runs through September 30, 2021; after that period, the company is subject to a total leverage covenant of no more than 3.75x. Management’s stated target Debt Leverage Ratio is 2.0x–2.5x, and the reported 3.24x was above that range.
- Dividends and share repurchases were prohibited during the covenant relief period. The board had suspended quarterly dividends beginning in Q2 2020; management said it remains committed to a dividend over the long term and will seek to resume it after operating conditions stabilize.
- Key risks include structural declines and pricing pressure in print, digital substitution, COVID-19 impacts, higher labor, freight, energy and raw-material costs, postal-rate and service changes, client credit or contract risks, and covenant compliance. The company also disclosed $34.9 million of multiemployer pension withdrawal liabilities, open tax audits and ordinary-course litigation; management did not expect the litigation to materially affect the financial statements.
- Q1 restructuring charges were net of a $7.6 million gain on the Riverside facility sale. The company expects further restructuring charges. The 2021 net earnings also included $4.1 million of net pension income.
Important facts for investors to verify
- How much of the improvement in reported operating income and EBITDA reflects sustainable cost savings versus lower restructuring charges and nonrecurring prior-year comparison items.
- Whether print volumes, service growth and freight costs change in subsequent quarters, and how COVID-19 and postal developments affect client demand.
- Liquidity and covenant headroom as relief expires on September 30, 2021, including the ability to meet the post-relief leverage test.
- Debt reduction, pension contributions and withdrawal-liability payments, alongside capital spending and any resumption of dividends.
- The filing reports 258,670 shares transferred to the company in March for employee tax withholding; it states that no shares were repurchased under the public repurchase program in Q1.