Quad annual report, FY2019

Quad/Graphics, Inc. (NYSE: QUAD) — 2019 Form 10-K

Reporting period: Fiscal year ended December 31, 2019. This is an annual report; fourth-quarter figures are included where relevant. Quad provides printing, logistics and integrated marketing services. The U.S. Print and Related Services segment generated about 90% of 2019 sales.

Financial performance

Metric20192018
Net sales$3,923.4 million$3,985.8 million
Operating income from continuing operations$34.7 million; 0.9% margin$87.3 million; 2.2% margin
Net earnings (loss) attributable to Quad common shareholders$(156.3) million; $(3.12) diluted EPS$8.5 million; $0.16 diluted EPS
EBITDA (non-GAAP)$118.8 million; 3.0% margin$294.2 million; 7.4% margin
Cash provided by operating activities$155.5 million$260.6 million
Free cash flow (non-GAAP)$105.8 million$164.3 million

Reported free cash flow includes $61.3 million of LSC-related payments added back under Quad’s definition; operating cash flow less capital expenditures, before that add-back, was $44.5 million. Capital expenditures were $111.0 million, versus $96.3 million in 2018.

Fourth-quarter 2019 sales were $1,069.9 million, versus $1,124.9 million a year earlier. Operating income from continuing operations was $29.0 million (versus $2.1 million), and net earnings attributable to common shareholders were $7.5 million (versus a $20.8 million loss); diluted EPS was $0.15 (versus $(0.42)).

Balance sheet, debt and liquidity

  • Cash and cash equivalents were $78.7 million; current assets were $910.9 million and current liabilities $813.4 million.
  • Total debt and finance lease obligations were $1,112.2 million, up from $940.8 million. Debt leverage ratio (non-GAAP) rose to 3.32x from 2.18x; management’s desired range is 2.0x–2.5x.
  • Quad had $764.2 million of unused capacity under its revolving credit facility, net of letters of credit. It reported compliance with debt covenants at year-end.
  • Debt includes $768.3 million outstanding under Term Loan A and $243.5 million of 7.0% senior unsecured notes due May 2022. The revolving facility and Term Loan A mature in January 2024.
  • Underfunded single-employer pension liabilities were $78.9 million; multiemployer pension withdrawal liability was $44.1 million. Dividends paid were $1.05 per share for 2019, down from $1.20 in 2018.

Material changes and unusual items

  • Sales fell 1.6% year over year: product sales declined 2.7%, while services sales grew 3.0%, supported partly by the Periscope acquisition and Rise investment.
  • Operating income from continuing operations declined by $52.6 million. Quad cited print volume and pricing pressure, higher production wages, lower paper byproduct recoveries, and prior-year gains that did not recur; cost-reduction savings and acquired businesses partly offset these pressures.
  • Quad acquired creative agency Periscope in January 2019 for $121.0 million cash. In July, after terminating its proposed LSC Communications acquisition, Quad paid a $45.0 million reverse termination fee and refinanced debt; the year included a $30.5 million loss on debt extinguishment.
  • Quad decided to sell its U.S. Book business and reported it as discontinued operations. Impairments included $86.5 million on property, plant and equipment, $5.6 million on contract assets and $10.1 million of goodwill. The business recorded a $100.6 million after-tax loss for 2019.
  • Restructuring, impairment and transaction-related charges from continuing operations were $89.4 million, including the LSC fee. Management expected further restructuring and integration costs.
  • After year-end, Quad sold its Omaha packaging plant for $41.3 million cash, subject to working-capital adjustments, and said proceeds would reduce debt. It declared a $0.15-per-share quarterly dividend in February 2020.

Outlook, commentary and risks

Quad’s strategy is to expand from print into integrated, data-driven marketing services while improving print productivity and lowering costs. The filing gives no formal earnings or revenue guidance. Management said available cash, operating cash flows and revolving-credit capacity were expected to support operations, restructuring, investment, debt service and shareholder returns.

  • Key business risks include secular declines in print demand, industry overcapacity and pricing pressure; digital substitution; postal-rate and service changes; and fluctuations in labor, paper, energy and freight costs.
  • Leverage is above management’s stated target range. Debt covenants restrict dividends, repurchases and certain other payments when leverage exceeds specified thresholds; the relevant annual-payment limit applied at year-end.
  • Other risks include customer retention and contract renewals, execution and integration of acquisitions, the Book business sale, cyber-security and privacy compliance, pension obligations, foreign-currency and international exposures, and possible asset impairments.
  • Quad disclosed a $9.9 million SEC payment in October 2019 resolving FCPA-related matters; the DOJ declined to bring an action. It also agreed to pay Peru’s INDECOPI $6.9 million over four years. Shareholder lawsuits alleging misleading public disclosures were pending.
  • Results are seasonal, generally stronger in the third and fourth quarters. The filing also notes that the Quadracci family voting trust controls about 71% of total voting power, limiting Class A shareholders’ influence.

Most important facts for investors to verify

  • Whether print-volume and pricing declines continue, and whether services growth and cost savings can offset them.
  • Cash generation excluding the $61.3 million LSC-related free-cash-flow add-back, and the sustainability of capital spending and dividends.
  • Progress reducing leverage toward management’s 2.0x–2.5x target, covenant headroom and the 2022 note maturity.
  • Completion and net proceeds of the Book business divestiture, alongside the subsequent Omaha plant sale and debt reduction.
  • Final costs or outcomes relating to restructuring, the SEC and INDECOPI matters, shareholder litigation, pension liabilities and other contingencies.