Quad/Graphics, Inc. (NYSE: QUAD) — FY2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023, compared with FY2022. This filing reports annual results; it does not provide a clear standalone fourth-quarter income statement or financial results. Quad is a global marketing experience company with print, logistics, creative, media, data and technology services. Its U.S. Print and Related Services segment generated approximately 86% of FY2023 sales; International generated 14%.
Key financial results
| Metric | FY2023 | FY2022 |
|---|---|---|
| Net sales | $2,957.7 million | $3,217.0 million |
| Operating income / margin | $25.7 million / 0.9% | $53.5 million / 1.7% |
| Net earnings (loss) | $(55.4) million | $9.3 million |
| Diluted earnings (loss) per share | $(1.14) | $0.18 |
| EBITDA / EBITDA margin (non-GAAP) | $156.2 million / 5.3% | $207.4 million / 6.4% |
| Net cash from operating activities | $147.6 million | $154.6 million |
| Free cash flow (non-GAAP) | $76.8 million | $94.3 million |
| Capital expenditures | $70.8 million | $60.3 million |
- Sales fell 8.1%. Product sales declined 7.7% and service sales 9.5%, mainly reflecting lower print and logistics volumes, lower paper sales and the Argentina business divestiture.
- Operating income declined 52.0%; restructuring, impairment and transaction-related charges rose to $77.5 million from $44.8 million. Excluding these charges, management’s comparison indicated a $4.9 million improvement in other operating income elements, including pricing, productivity and cost savings, partly offset by lower volumes.
- Interest expense increased to $70.0 million from $48.4 million, largely due to higher borrowing rates. Net pension income decreased to $1.7 million from $12.6 million. Income tax expense was $12.8 million despite a pretax loss, including effects of tax assessments and valuation allowances.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $52.9 million at year-end, versus $25.2 million in 2022. Total liquidity was $454.3 million, or $406.7 million under the most restrictive debt covenant calculation; no borrowings were outstanding on the revolving credit facility at year-end.
- Total debt and finance lease obligations were $522.7 million; net debt was $469.8 million. The company-reported Debt Leverage Ratio (non-GAAP) improved to 2.01x from 2.16x, within management’s stated 1.75x–2.25x target range. Debt covenants were met at year-end.
- On January 31, 2024, Quad repaid $87.7 million of Term Loan A principal using available cash and revolver capacity. A January 4, 2024 credit amendment added $25 million to the extended-maturity Term Loan A tranche; remaining revolver capacity after the January maturity was $342.5 million.
- Quad repurchased 2.85 million Class A shares for $12.6 million in 2023. On February 15, 2024, the board reinstated a quarterly dividend of $0.05 per share.
- Management stated it expects operating cash flow and current liquidity to fund ongoing needs and debt and pension requirements for the next 12 months and beyond.
Material changes, outlook and risks
- The U.S. segment’s operating income fell to $56.6 million from $108.3 million, with margin down to 2.2% from 3.9%. International returned to operating income of $18.3 million from a $4.5 million loss, mainly because restructuring charges were lower; International sales still declined 4.5%.
- FY2023 restructuring and impairment included $35.1 million of employee termination charges and $25.2 million of impairment charges. Impairments included underused machinery and equipment, a terminated software project and right-of-use assets. The company expects additional restructuring and integration costs as it removes excess capacity and aligns costs.
- Quad announced closure of its Effingham, Illinois facility in October 2023 and Saratoga Springs, New York facility in January 2024. The Merced, California facility sale generated a $9.2 million gain. DART Innovation, an in-store digital media solutions provider, was acquired in December 2023; preliminary goodwill recorded was $16.6 million.
- Management expects inflationary cost pressures, some supply shortages and distribution challenges to potentially continue through 2024, and said the full impact of industry and macroeconomic challenges remains uncertain. No specific FY2024 revenue or earnings guidance is provided in the supplied filing text.
- Principal risks include structural decline and price pressure in print, digital substitution, postal-rate increases and USPS service issues, paper and labor costs and availability, high interest rates, execution of the marketing-services transformation, client retention, operational efficiency, cyber and privacy threats, and covenant compliance. The company also reported $39.4 million of underfunded single-employer pension obligations and $24.0 million of MEPP withdrawal liabilities.
- Auditor Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective. The auditor identified workers’ compensation claim accruals as a critical audit matter because of estimation complexity.
Important facts for investors to verify
- Whether print and logistics volumes stabilize, and whether growth in marketing, media and digital in-store services can offset the decline in traditional print.
- How much of the $77.5 million in restructuring and impairment charges is nonrecurring, and the cash cost, timing and realized savings from announced facility closures and other restructuring.
- Post-January 2024 debt balances, borrowing costs, liquidity and covenant headroom after the $87.7 million repayment and credit amendment.
- Whether operating cash flow and free cash flow can support debt reduction, pension obligations, investment, share repurchases and the reinstated dividend amid seasonal working-capital needs.
- Progress and financial contribution from the DART acquisition, and whether the company’s stated liquidity outlook remains achievable under weaker demand, higher costs or postal disruption.