Quad/Graphics, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Quad provides print, logistics and marketing services through its U.S. Print and Related Services and International segments. Results are seasonal, typically stronger in the third and fourth quarters; management reported higher-than-usual first-half working-capital needs as it built inventory and navigated supply-chain disruptions.
Key financial metrics
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $757.7 million | $693.9 million | $1,501.9 million | $1,399.7 million |
| Operating income | $14.2 million | $48.0 million | $19.6 million | $69.0 million |
| Operating margin | 1.9% | 6.9% | 1.3% | 4.9% |
| Net earnings | $5.3 million | $34.4 million | $4.3 million | $44.6 million |
| Diluted EPS | $0.10 | $0.66 | $0.08 | $0.85 |
| EBITDA and margin (non-GAAP) | $52.6 million; 6.9% | $90.0 million; 13.0% | $97.7 million; 6.5% | $157.1 million; 11.2% |
- Revenue mix and margins: Q2 product sales rose 16.1% to $593.9 million, while service sales fell 10.1% to $163.8 million. For the first half, product sales increased 13.2% and services declined 9.7%. Higher paper pass-through sales contributed materially to product growth; print volume and pricing also increased. Operating income and EBITDA fell sharply as cost inflation, labor and supply-chain pressures outweighed sales growth.
- Cash flow: First-half operating cash flow was negative $23.5 million, versus positive $88.9 million a year earlier. Capital expenditures were $33.5 million, producing negative free cash flow of $57.0 million (non-GAAP), compared with positive $61.7 million. Management attributed the operating cash-flow decline mainly to working-capital changes, including inventory build, higher receivables and payments of current liabilities.
- Debt and liquidity: June 30 cash was $11.8 million, down from $179.9 million at year-end. Debt and finance lease obligations totaled $695.9 million; net debt was $684.1 million. The reported debt leverage ratio was 2.95x, up from 2.39x at December 31, 2021, and above management’s desired 2.0x–2.5x range. Total liquidity was $298.3 million, but $183.2 million under the most restrictive covenant calculation. The company reported compliance with its debt covenants.
- Balance sheet: Inventories increased to $278.5 million from $226.2 million at year-end. Total assets were $1.724 billion and shareholders’ equity was $138.3 million at June 30.
Material changes versus prior comparable periods
- Q2 sales increased 9.2%, but operating income fell $33.8 million and diluted EPS declined from $0.66 to $0.10. First-half sales increased 7.3%, while operating income declined $49.4 million and diluted EPS fell from $0.85 to $0.08.
- U.S. Print and Related Services Q2 sales were $649.4 million and operating income was $19.9 million, down from $55.8 million. International sales were $108.3 million and operating income was $6.2 million, up from $3.0 million. International improvement was primarily associated with higher print volume and cost savings.
- Service revenue comparisons reflect the June 2021 divestiture of Quad’s third-party logistics business. Prior-year earnings also included a $13.7 million sale-and-leaseback gain and substantial net restructuring income, including a $20.9 million business-sale gain; these did not recur in 2022.
- On May 2, 2022, Quad repaid $209.1 million of 7.0% senior unsecured notes at maturity using revolving-credit-facility capacity and cash. At June 30, outstanding borrowings included $569.4 million on Term Loan A, $111.1 million on the revolver and $4.4 million under a Master Note and Security Agreement.
Outlook, commentary and risks
- The filing provides no quantified revenue or earnings guidance. Management expected inflationary pressures and supply-chain shortages to potentially continue through fiscal 2022, and said it would continue passing price increases to clients. It also expected to operate above its leverage target range due to disruption-related pressures and potentially seasonal working-capital needs.
- Management expects additional restructuring charges as it reduces excess manufacturing capacity and aligns costs. Restructuring, impairment and transaction-related charges were $3.2 million in Q2 and $6.8 million for the first half of 2022.
- Principal risks discussed include paper and other input-cost inflation, raw-material availability, labor and freight shortages, rising interest rates, print-industry overcapacity and digital substitution, postal-rate and service changes, COVID-19-related uncertainty, and client credit or contract risks. The company also noted currency exposure, including Argentina’s highly inflationary economy.
- The company had $30.3 million reserved for multiemployer pension-plan withdrawal liabilities. It reported no material change in previously disclosed risk factors and stated disclosure controls were effective.
Important facts for investors to verify
- Whether price increases and improved print volume can offset paper, labor, freight and other production-cost inflation without further margin erosion.
- Whether working capital normalizes after the inventory build and whether operating cash flow and free cash flow recover, particularly in seasonally stronger quarters.
- Liquidity available under the applicable debt covenants, covenant headroom and progress toward reducing the 2.95x leverage ratio.
- How much reported sales growth reflects pass-through paper pricing versus underlying print volume, and the continuing effects of the logistics-business divestiture.
- The amount and timing of future restructuring costs, pension obligations and any effect of postal-rate changes or client shifts away from print.