Quad/Graphics, Inc. — Q1 2020 Form 10-Q
Business context and reporting period. The filing covers the three months ended March 31, 2020. Quad provides print, logistics, imaging and marketing services through its U.S. Print and Related Services and International segments. Results reflect seasonality, ongoing pressure on print volumes and pricing, and the initial effects of COVID-19. The U.S. Book business is reported as discontinued operations.
Financial results and liquidity
- Revenue: Net sales were $822.5 million, down 14.4% from $961.0 million. Product sales fell 15.3% to $645.0 million; services fell 11.1% to $177.5 million.
- Profitability: Gross profit was $174.8 million versus $172.7 million, while gross margin increased to approximately 21.2% from 18.0%. Continuing-operations operating income fell to $5.0 million from $16.4 million, and operating margin fell to 0.6% from 1.7%. Net loss attributable to Quad shareholders was $12.4 million, or $0.25 per share, compared with $22.5 million, or $0.45 per share.
- EBITDA: Company-reported non-GAAP EBITDA was $51.9 million, or 6.3% of sales, compared with $46.3 million, or 4.8%. The comparison includes significant restructuring charges and other factors; EBITDA is not a GAAP measure.
- Cash flow: Operating activities provided $44.7 million, versus $58.6 million used in Q1 2019. Capital expenditures were $29.0 million; company-defined free cash flow was $15.7 million versus negative $100.6 million. The improvement in operating cash flow was principally attributed to changes in operating assets and liabilities.
- Cash, debt and liquidity: Cash was $207.8 million at March 31, up from $78.7 million at year-end. Total debt was $1,181.9 million; debt and finance lease obligations together were $1,192.5 million. Reported liquidity was $843.3 million, but only $281.7 million under the most restrictive debt-covenant calculation. Debt leverage ratio was 3.59x, or 3.00x net of excess cash, versus 3.32x and 3.12x, respectively, at year-end.
- Covenants: Quad reported compliance with all financial covenants at quarter-end. Total leverage was 3.53x against a 3.75x maximum; senior secured leverage was 2.24x against 3.50x; interest coverage was 4.62x against a 3.00x minimum.
Material changes versus Q1 2019
- Sales declined across products and services, reflecting lower print volume and pricing, the Omaha packaging plant divestiture, paper pass-through reductions and unfavorable foreign exchange. Management also cited initial COVID-related demand effects.
- Reported operating income declined despite lower cost of sales. Restructuring, impairment and transaction-related charges increased to $22.8 million from $7.6 million. Excluding these charges, management said operating income improved, citing cost initiatives and certain favorable items, partly offset by weaker volume, pricing and higher credit-loss expense.
- Credit-loss expense rose to $5.0 million from $0.8 million, and the allowance for credit losses increased to $37.1 million from $25.0 million at year-end. The company adopted the expected-credit-loss accounting standard, recording a $6.3 million after-tax transition adjustment to accumulated deficit.
- Interest expense declined to $18.1 million from $21.8 million. A $0.6 million gain on debt extinguishment replaced the prior-year $15.9 million loss, which related to a 2019 debt refinancing.
- Cash increased partly because Quad borrowed $100 million under its revolving credit facility to preserve flexibility amid COVID-19. Debt and finance lease obligations increased $80 million during the quarter.
Outlook, risks and unusual items
- COVID-19: Management said the pandemic had negatively affected, and could continue to affect, demand, operations, cash flows, supply chain and client payments; the extent and duration were uncertain. Quad reduced executive and other salaries, implemented furloughs, suspended production at certain facilities, delayed capital spending and suspended quarterly dividends until further notice. Management said it would consider additional cost reductions and believed available liquidity and conservation measures were sufficient for operating and debt-service needs.
- Dividend: Quad paid a $0.15-per-share Q1 dividend, down from $0.30 a year earlier, then suspended quarterly payments after quarter-end. Management stated an intention to seek resumption after operating conditions stabilize; no timing was provided.
- Restructuring and divestitures: The company announced closure of its Charlotte facility and had announced 46 plant closures through March 31. It expected additional restructuring costs. The Omaha packaging plant sale closed January 31; the U.S. Book business was classified as discontinued operations and held for sale.
- Other notable items: An interim goodwill impairment test, prompted by the stock-price decline and COVID-19 uncertainty, found reporting-unit fair value exceeded carrying value by more than 20%; no goodwill impairment was recorded. The CARES Act produced a $4.6 million discrete tax benefit, which management said could be adjusted as tax filings were completed.
- Principal risks: COVID-19 uncertainty, declining print demand and industry overcapacity, pricing pressure, client credit and contract retention, raw-material and labor costs, postal-rate and service changes, and the ability to maintain debt-covenant compliance. Management provided no quantified earnings or revenue guidance in the supplied filing text.
Important facts for investors to verify
- Subsequent quarterly results, demand trends and the actual duration and financial effects of COVID-19.
- Whether cash conservation measures, including the dividend suspension and delayed capital spending, remain adequate as liquidity and covenant headroom change.
- Client collections, credit-loss provisions and any further deterioration in receivables.
- Progress and proceeds from the planned Book business sale, and costs or savings from facility closures and other restructuring.
- Debt reduction, refinancing needs and compliance with covenant thresholds; also distinguish reported liquidity from liquidity available under restrictive covenant calculations.