Quad/Graphics, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Quad provides print products, logistics, imaging and marketing services through its U.S. Print and Related Services and International segments. Results are unaudited. Comparisons with 2020 are affected by COVID-19 disruption, the sale of the Book business in 2020, and other divestitures and ownership changes.
Key financial metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $693.9 million | $584.5 million | $1,399.7 million | $1,407.0 million |
| Operating income from continuing operations | $48.0 million | $(2.8) million | $69.0 million | $2.2 million |
| Operating margin | 6.9% | (0.5)% | 4.9% | 0.2% |
| Net earnings (loss) | $34.4 million | $(23.7) million | $44.6 million | $(36.1) million |
| Diluted EPS | $0.66 | $(0.46) | $0.85 | $(0.71) |
| EBITDA and EBITDA margin (non-GAAP) | $90.0 million; 13.0% | $35.1 million; 6.0% | $157.1 million; 11.2% | $87.0 million; 6.2% |
Q2 sales increased 18.7% year over year: product sales rose 14.3% and services 33.3%. For the first half, sales declined 0.5%; product sales fell 5.0%, while services increased 15.2%. Q2 operating income improvement reflected higher volume and services, lower depreciation, cost savings and substantially lower restructuring charges compared with 2020. Reported results also included significant gains described below.
- Cash flow, six months: Operating cash flow was $88.9 million, versus $67.2 million. Capital expenditures were $27.2 million, versus $38.0 million; free cash flow, a non-GAAP measure defined as operating cash flow less capital expenditures, was $61.7 million, versus $29.2 million.
- Debt and leverage: Total debt was $846.7 million at June 30, down from $923.4 million at year-end 2020. Cash was $98.3 million, versus $55.2 million. Quad’s non-GAAP net debt was $752.8 million and its non-GAAP debt leverage ratio was 3.00x, compared with $873.0 million and 3.35x at year-end.
- Liquidity: Reported total liquidity was $561.4 million, including $98.3 million cash and up to $463.1 million of unused revolving-credit capacity. Under the most restrictive debt covenants, available liquidity was $416.0 million.
- Interest and balance sheet: Interest expense was $15.6 million in Q2 and $30.1 million for the six months, down from $16.2 million and $34.3 million, respectively, in 2020. Total shareholders’ equity was $132.1 million at June 30, versus $84.8 million at December 31, 2020.
Material changes and unusual items
- Q2 included a $13.7 million gain from the sale and leaseback of the Chalfont, Pennsylvania facility; the transaction generated $20.0 million net proceeds and a seven-year operating leaseback.
- Restructuring, impairment and transaction-related items were a net $13.4 million benefit in Q2 and a net $10.8 million benefit for the first half, compared with charges of $16.4 million and $39.2 million in 2020. The 2021 amounts included a $20.9 million gain on sale of a business and facility-sale gains. These items materially boosted reported comparisons.
- Quad sold its third-party logistics business on June 30, 2021. The filing records a $20.9 million gain on the business sale; cash proceeds from sales of businesses were $39.0 million in the first half.
- First-half 2020 net loss included $12.5 million of after-tax discontinued Book business losses; the Book business was sold during 2020.
- Quad completed its purchase of the remaining Rise ownership interest in April 2021, taking ownership to 100%.
Outlook, commentary and risks
- The filing provides no specific numerical revenue or earnings guidance. Management expects normal seasonality to continue, with sales and operating income typically higher in the third and fourth quarters and operating cash flow generally strongest in the fourth quarter. It cautioned that COVID-19 could further affect seasonality and demand.
- Management said it expects to remain above its 2.0x–2.5x target leverage range at times, including because of pandemic effects, strategic investment opportunities and seasonal working-capital needs. It stated that expected operating cash flows and current liquidity should be sufficient for operating, debt and pension requirements.
- Quad reported compliance with all financial covenants at June 30, 2021. Covenant relief was scheduled through September 30, 2021; afterward, a total leverage covenant of no more than 3.75x applies. Management cautioned that future compliance is not assured.
- Dividends and share repurchases remained suspended or prohibited during the covenant-relief period. Management said it remains committed to a dividend over the long term and would seek to resume one after operating conditions stabilize.
- Key risks include COVID-19 impacts, declining print demand and digital substitution, industry overcapacity and pricing pressure, rising paper, labor, energy and freight costs, workforce shortages, distribution delays, postal-rate changes, client performance and renewal risk, and debt covenant restrictions. The filing says there were no material changes to previously disclosed risk factors.
- Quad expects further restructuring charges as it continues capacity reductions and cost-alignment initiatives. It had announced 50 plant closures through June 30, 2021.
Most important facts for investors to verify
- How much of the earnings and EBITDA improvement reflects underlying operating performance versus the $20.9 million business-sale gain, the $13.7 million sale-leaseback gain and lower comparative restructuring charges.
- Whether the rebound in Q2 volumes and service sales persists, given first-half product-sales declines and ongoing structural pressure on print.
- Progress against debt reduction and the 2.0x–2.5x leverage target, plus covenant compliance as relief expires after September 30, 2021.
- Whether labor, paper, freight and distribution constraints affect Quad’s ability to serve clients during the seasonally stronger second half.
- Potential impact of the logistics-business divestiture on future revenue, cash flow and segment comparability; the filing text does not provide a clear quantified outlook for these effects.