Quad/Graphics, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Quad provides printing, logistics, imaging and marketing services through its U.S. Print and Related Services and International segments. Results are seasonal, typically stronger in the third and fourth quarters.
Key financial results
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $1,003.7 million | $1,015.5 million | $2,008.4 million | $1,983.0 million |
| Operating income | $8.7 million | $20.9 million | $11.6 million | $28.0 million |
| Operating margin | 0.9% | 2.1% | 0.6% | 1.4% |
| EBITDA and margin (non-GAAP) | $66.6 million; 6.6% | $82.4 million; 8.1% | $114.5 million; 5.7% | $149.1 million; 7.5% |
| Net earnings (loss) attributable to Quad shareholders | $(14.8) million | $9.4 million | $(37.3) million | $5.9 million |
| Diluted EPS | $(0.30) | $0.18 | $(0.75) | $0.11 |
Q2 product sales were $798.3 million and services sales were $205.4 million. For the first half, products were $1,603.4 million and services were $405.0 million.
Cash flow, debt and liquidity
- For the first half, operating cash flow was $16.3 million, down from $40.5 million; capital expenditures were $74.6 million, up from $53.8 million. Free cash flow, a company-defined non-GAAP measure, was negative $49.8 million versus negative $13.3 million.
- Cash was $10.0 million at June 30, down from $69.5 million at year-end 2018. Quad reported $531.2 million of unused revolving-credit capacity, net of letters of credit.
- Total debt was $1,097.2 million, versus $925.5 million at year-end; debt and finance lease obligations totaled $1,112.0 million. The company-reported Debt Leverage Ratio rose to 3.06x from 2.25x, above management’s target range of 2.0x–2.5x.
- Quad reported compliance with its debt covenants. Its covenant total leverage ratio was 2.96x against a 3.75x maximum; senior secured leverage was 2.30x against a 3.50x maximum; interest coverage was 4.67x against a 3.00x minimum. The total-leverage-based restriction on dividends, repurchases and certain other payments applied.
- The quarterly dividend was $0.30 per share. The board declared another $0.30 dividend on July 30, payable September 6, 2019.
Changes and operating drivers
- Q2 sales fell 1.2% year over year, while operating income declined 58.4%. First-half sales rose 1.3%, but operating income fell 58.6% and EBITDA declined $34.6 million.
- Management attributed pressure primarily to print-volume and pricing declines amid industry overcapacity, lower paper byproduct recoveries, and higher production wages. In Q2, production hourly wages increased $8.0 million; in the first half, $16.0 million.
- First-half services growth reflected $55.1 million of added sales from the Ivie and Periscope acquisitions and the Rise investment, partly offset by lower marketing-services and imaging sales. Periscope was acquired in January for $121.0 million cash paid.
- Restructuring, impairment and transaction-related charges were $9.4 million in Q2 and $17.0 million in the first half, down from $10.4 million and $35.3 million, respectively. Quad expects additional restructuring and integration costs.
Outlook, events and risks
- The filing provides no specific financial guidance. Management expects seasonal results to continue, with stronger sales and operating income in the second half and typically strongest operating cash flow in Q4.
- On July 22, 2019, Quad and LSC Communications mutually terminated their proposed acquisition after the DOJ sued to block it. Quad paid LSC a $45 million reverse termination fee. On July 26, Quad funded the $825 million delayed-draw Term Loan A, retired the $500 million Term Loan B and reduced revolver borrowings; it expected a $14.7 million Q3 debt-extinguishment loss.
- Key industry risks include declining print demand, digital substitution, excess capacity and pricing pressure, labor and input-cost increases, postal-rate and service changes, and customer contract and renewal risks. The filing also identifies international, foreign-exchange, interest-rate, commodity, credit and debt-covenant risks.
- Quad continues to cooperate with the SEC, DOJ and OFAC regarding investigations involving Peru FCPA matters, certain China transactions and Cuba-related transactions; INDECOPI is investigating alleged past printer collusion in Peru. Management did not anticipate a material adverse effect from these matters. The company also has a $47.6 million reserve for multiemployer pension withdrawal liabilities.
Important facts for investors to verify
- Whether operating performance, print pricing and volumes stabilize, and whether cost reductions offset wage and other cost inflation.
- Post-LSC termination financing costs, the effect of the $45 million fee and expected Q3 debt-extinguishment charge, and progress toward reducing leverage.
- Cash generation through seasonal working-capital peaks and the company’s capacity to fund capital spending, pension obligations and dividends.
- Integration and returns from Periscope, Ivie and Rise, alongside continuing restructuring costs.
- Developments in the regulatory investigations, pension liabilities and postal-rate or service changes.