Quad/Graphics, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Quad is a global marketing experience company whose operations include U.S. print and related services, international printing, and marketing services. Results are unaudited and seasonally affected; sales and operating income are generally higher in the third and fourth quarters.
Financial performance
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Net sales | $744.2 million | $705.8 million |
| Operating income | $5.4 million; 0.7% margin | $21.0 million; 3.0% margin |
| Net earnings (loss) | $(1.0) million; $(0.02) per diluted share | $10.2 million; $0.19 per diluted share |
| EBITDA (non-GAAP) | $45.1 million; 6.1% margin | $67.1 million; 9.5% margin |
| Operating cash flow | $(16.9) million | $72.9 million |
| Free cash flow (non-GAAP) | $(36.0) million | $56.0 million |
- Revenue increased 5.4%, but cost of sales rose 10.7%; gross profit declined to $124.6 million from $146.0 million. Product sales rose 10.4%, mainly from higher pass-through paper sales and print volume. Services revenue fell 9.2%, principally reflecting the prior divestiture of the third-party logistics business.
- Cash and equivalents were $138.3 million at quarter-end, down from $179.9 million at year-end 2021. Total debt was $799.4 million; debt and finance lease obligations together were $802.2 million. Working capital was negative $151.8 million.
- Reported total liquidity was $535.0 million, including $396.7 million of unused revolver capacity net of letters of credit. Under the most restrictive debt covenants, liquidity was $230.8 million, including $92.5 million available on the revolver.
- Management’s non-GAAP Debt Leverage Ratio was 2.77x, versus 2.39x at December 31, 2021, and above its stated 2.0x–2.5x target range.
Changes and management commentary
- Operating income declined $15.6 million year over year. Management attributed weaker results primarily to supply-chain disruption, inflation in materials and freight, and labor shortages. Paper byproduct recoveries and cost-reduction initiatives partially offset those pressures.
- U.S. Print and Related Services operating income fell to $11.8 million from $32.5 million, with margin declining to 1.8% from 5.1%. International operating income increased to $3.7 million from $1.5 million, aided by higher print volume and cost savings.
- Operating cash flow swung down by $89.8 million, largely because of working-capital movements, including payments of other current liabilities and higher inventory carried to serve clients. The company expects first- and second-quarter working-capital needs to be higher than typical in 2022 because of supply-chain disruptions.
- Quad said inflationary pressures and supply-chain shortages could continue through fiscal 2022 and that it was passing price increases to clients. It also cited print-industry overcapacity and declining demand, digital substitution, postal-rate and delivery uncertainty, talent shortages, and COVID-19-related disruption as risks.
- Management said expected future operating cash flows and current liquidity should be sufficient for operating needs and debt and pension obligations. The filing gives no quantified earnings or revenue guidance. Management expected leverage to remain above its target range at times due to operating pressures, strategic investment opportunities, and seasonal working capital.
Debt, contingencies, and other notable items
- Quad reported compliance with all debt covenants at March 31, 2022. Its covenant Total Leverage Ratio was 3.30x against a 3.75x maximum; the Senior Secured Leverage Ratio was 1.89x against a 3.50x maximum, and the Interest Coverage Ratio was 5.18x against a 3.00x minimum. At the reported Total Leverage Ratio, limits on dividends, stock repurchases, and certain other payments applied.
- After quarter-end, on May 2, 2022, Quad repaid all $209.1 million of its 7.0% senior unsecured notes at maturity, using revolver capacity and available cash. The filing does not provide the post-repayment liquidity balance.
- The quarterly dividend remained suspended. No open-market share repurchases were made; shares reported as transferred to the company related to employee tax withholding on vested restricted stock.
- Restructuring, impairment, and transaction-related charges were $3.6 million, and management expected additional restructuring charges. The company also reported a $31.3 million reserve for multiemployer pension withdrawal liabilities, with payments scheduled through 2032 for one plan and February 2024 for another.
- Management said ordinary-course litigation was not expected to materially affect the financial statements and reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether pricing actions and cost reductions can offset continued inflation, freight, labor, and paper-supply pressures without materially weakening client demand.
- Post-May 2 cash, revolver availability, debt balances, and covenant headroom after repayment of the senior notes.
- Whether working-capital use and negative free cash flow improve as seasonal inventory and receivables unwind later in the year.
- Progress in restoring operating margins and reducing leverage toward management’s stated target range.
- Potential effects of postal-rate changes, delivery disruptions, print-industry decline, and the disclosed pension withdrawal liabilities.