Quad/Graphics, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Quad provides print, logistics and marketing services through its U.S. Print and Related Services and International segments. The U.S. Book business is reported as discontinued operations.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $679.3 million | $943.6 million | $2,086.3 million | $2,853.5 million |
| Operating income (loss), continuing operations | $6.3 million | $(29.4) million | $8.5 million | $5.7 million |
| Net earnings (loss), all operations | $1.6 million | $(126.4) million | $(34.5) million | $(163.9) million |
| Diluted EPS | $0.03 | $(2.52) | $(0.68) | $(3.28) |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $107.4 million | $4.1 million |
- Q3 sales fell 28.0% year over year; nine-month sales declined 26.9%. Print volume and pricing pressures, COVID-19 effects, lower pass-through paper sales and the Omaha packaging plant divestiture were principal factors.
- Q3 continuing-operations operating margin was 0.9%, compared with (3.1)% a year earlier. For nine months, it was 0.4%, versus 0.2%.
- Company-reported non-GAAP EBITDA was $52.3 million in Q3 versus $(69.9) million, and $139.3 million for nine months versus $37.1 million. Comparisons benefited from lower discontinued-operation losses and lower prior-year transaction-related charges; EBITDA includes discontinued-operation results.
- Nine-month free cash flow, a company-defined non-GAAP measure, was $56.7 million versus $(34.6) million. It includes Book business cash flows and is defined as operating cash flow less capital expenditures plus LSC-related payments.
Liquidity, debt and capital
- At September 30, 2020, cash was $92.9 million and total debt was $1,025.9 million; finance lease obligations were an additional $5.3 million. Debt declined from $1,098.5 million at December 31, 2019.
- Reported liquidity was $557.4 million, including $92.9 million cash and $464.5 million of unused revolver capacity. Under the most restrictive debt covenants, available liquidity was $402.3 million. No revolving-credit borrowings were outstanding at quarter-end.
- Debt Leverage Ratio, as defined by Quad, was 3.53x, or 3.22x net of cash, compared with 3.32x and 3.09x, respectively, at year-end 2019. Management’s target range is 2.0x–2.5x; it expected to operate above that range amid COVID-19 impacts.
- Nine-month capital expenditures were $50.7 million, down from $98.5 million. Operating cash flow improved by $103.3 million year over year, reflecting increased cash from earnings and working-capital changes.
- The company reported compliance with financial covenants at September 30. Its June credit amendment reduced the revolver from $800 million to $500 million, provided covenant relief through September 30, 2021, and prohibited dividends and share repurchases during that period. The quarterly dividend was suspended beginning Q2 2020.
Material changes, outlook and risks
- COVID-19: Management said the pandemic continued to negatively affect demand, operations, cash flows and the supply chain, with the ultimate impact uncertain. Cost and cash measures included furloughs, temporary compensation reductions, delayed capital spending, facility suspensions (all resumed by September-end), and the dividend suspension. Quad said it may take further cost-reduction measures.
- Portfolio actions: Quad sold its Versailles book plant in July and, on October 31, after quarter-end, completed sales of its Fairfield and Martinsburg plants, completing the planned Book business divestiture. Proceeds were used to reduce debt. The Omaha packaging plant was sold in January. Quad increased its ownership of Rise Interactive from 57% to 99% in June.
- Unusual items: Nine-month continuing results included a $14.7 million CARES Act tax benefit. Restructuring and related charges were $49.0 million for nine months. Q3 2019 included a $45.0 million reverse termination fee related to the abandoned LSC acquisition; this helps explain the large year-over-year improvement in reported results.
- Additional costs and exposures: Management expects further restructuring charges. Risks include secular declines and excess capacity in print, pricing pressure, digital substitution, postal-rate or service changes, uncertain client demand and credit losses, commodity and labor costs, and foreign-exchange exposure. Argentina’s highly inflationary status led to $3.0 million of foreign-currency losses in Q3 and $4.3 million for nine months.
- Other matters: Management did not expect ordinary-course litigation or environmental compliance to materially affect the financial statements. Tax audits remain open; the company recorded $10.7 million of unrecognized tax benefits at quarter-end. No quantitative revenue or earnings guidance was provided in the supplied filing text.
Investor verification checklist
- Track sales volumes and margins by segment, separating continuing operations from the discontinued Book business and pass-through paper sales.
- Assess whether operating cash flow and free cash flow are repeatable, given working-capital timing, reduced capital spending and defined adjustments.
- Monitor debt, leverage, liquidity under covenant restrictions, and covenant headroom as relief measures approach expiration in September 2021.
- Confirm debt reduction from Book divestiture proceeds and the effect of the remaining business mix after the October 2020 plant sales.
- Evaluate the duration of COVID-19 demand impacts, planned restructuring, and the conditions required to resume dividends or share repurchases.