Quad/Graphics, Inc. — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020, compared with fiscal 2019. This filing reports annual results; standalone fourth-quarter figures are not clearly provided in the supplied text.
Business context
Quad is an integrated marketing-solutions provider with substantial commercial printing, production and distribution operations. The U.S. Print and Related Services segment generated about 90% of 2020 sales; International generated about 10%. COVID-19 weakened customer demand, particularly for print, while secular digital substitution and industry overcapacity continued to pressure pricing. Quad continued its shift toward integrated marketing services and increased its ownership of digital agency Rise from 57% to 99%.
Financial performance and liquidity
| Metric | 2020 | 2019 |
|---|---|---|
| Net sales | $2,929.6 million | $3,923.4 million |
| Operating income (loss), continuing operations | $(46.0) million; (1.6)% margin | $34.7 million; 0.9% margin |
| Net loss attributable to Quad shareholders | $(128.3) million; $(2.53) per diluted share | $(156.3) million; $(3.12) per diluted share |
| EBITDA, non-GAAP | $122.4 million; 4.2% margin | $118.8 million; 3.0% margin |
| Cash from operating activities | $190.2 million | $155.5 million |
| Capital expenditures | $61.0 million | $111.0 million |
| Free cash flow, non-GAAP | $129.2 million | $105.8 million |
Revenue fell 25.3%: product sales declined 28.1% and service sales 15.1%. The reduction reflected lower print volumes and pricing, reduced pass-through paper sales, and the Omaha packaging-plant divestiture. The operating result included $124.1 million of restructuring, impairment and transaction-related charges, including $64.1 million of impairment charges. The net loss improved year over year largely because the discontinued Book business incurred a smaller loss; continuing-operations loss worsened.
At year-end, cash was $55.2 million and reported debt was $923.4 million; debt plus finance-lease obligations totaled $928.2 million. Net debt was $873.0 million. Quad’s non-GAAP Debt Leverage Ratio was 3.35x, up from 3.09x, as Adjusted EBITDA fell despite lower debt. Total liquidity was $516.6 million, or $382.9 million under the most restrictive debt covenants; the revolving facility had no year-end borrowings, with $461.4 million available before covenant adjustments.
Interest expense was $68.8 million, down from $90.0 million. Current and long-term debt included $238.7 million of 7% senior unsecured notes due May 2022 and $657.6 million under Term Loan A, which matures in 2024. Shareholders’ equity declined to $84.1 million from $226.6 million. The reported gross profit margin was approximately 20.3%, versus 18.6% in 2019.
Material changes and unusual items
- Five facilities were announced for closure in 2020; the Oklahoma City plant was expected to stop operations in March 2021. Impairment charges included $56.6 million related to that facility.
- Quad sold its Omaha packaging plant in January 2020 and completed the sale of its Book business during 2020. Book operations are reported as discontinued operations; their 2020 net loss was $21.9 million, versus $100.6 million in 2019.
- Debt and finance-lease obligations declined by $184 million during 2020. The company also reported a $30.7 million decline in combined underfunded pension and MEPP obligations to $92.3 million.
- The Board suspended quarterly dividends beginning in the second quarter of 2020. The June 2020 credit-facility amendment prohibits cash dividends and share repurchases through September 30, 2021.
- The 2020 operating results included a $2.2 million COVID-related government subsidy in Poland and a $3.9 million net benefit from property-insurance claim gains. The 2019 comparison included a $45 million reverse termination fee after Quad’s proposed LSC acquisition was terminated.
Outlook, risks and contingencies
Quad did not provide specific revenue or earnings guidance in the supplied filing text. Management said COVID-19’s duration and its effects on demand, operations and supply chains remained uncertain; it expected to continue evaluating costs and take further cost-reduction actions as needed. Management’s target Debt Leverage Ratio range is 2.0x–2.5x, but it expected to operate above that range due to pandemic effects and potentially strategic investments or seasonal working-capital needs. The company said expected operating cash flows, cost actions and available liquidity should fund operations, debt service and pension obligations.
- Key business risks include continued print-volume decline, digital substitution, excess capacity and pricing pressure; customer spending and contract-retention risks; and increases or supply disruptions in paper, labor, energy and freight costs.
- Debt covenants remain important: the company reported compliance at year-end, but covenant relief runs through September 2021, after which a 3.75x Total Leverage Ratio covenant applies. Management’s non-GAAP leverage measure is distinct from covenant ratios.
- Pension exposure includes a $56.6 million underfunded single-employer pension liability and $35.7 million of MEPP withdrawal liability. The GCIU and GCC plans were described as critically underfunded.
- The filing describes consolidated shareholder lawsuits alleging pre-2019 earnings-release disclosures were misleading; claimed damages are unspecified. Management stated ordinary-course legal matters were not expected to materially affect results, but outcomes remain uncertain.
- Other risks include customer credit losses, cybersecurity and privacy regulation, postal-rate and service changes, foreign-exchange exposure, possible asset impairments, and the possibility that tax assets cannot be fully used. The credit-loss allowance was $33.8 million at year-end, and deferred tax assets were subject to a $143.9 million valuation allowance.
Important facts for investors to verify
- Whether print volumes, pricing and marketing-services demand stabilized after 2020, and the extent of continuing COVID-19 effects.
- Current liquidity, covenant headroom, leverage calculations and the company’s refinancing plan for the $238.7 million of notes due in May 2022.
- Progress toward the stated leverage target and whether cost reductions can offset ongoing revenue pressure without further impairing assets or weakening operations.
- Whether dividends can resume after the covenant restriction ends, subject to covenant compliance and Board approval.
- Updates on the shareholder litigation, pension and MEPP funding obligations, and collectability of receivables.