Quad reveals plans to sell $ 200 million book printing platform amid grim third quarter report


Joel quadracci

Just two days less than a year after Quad CEO Joel Quadracci first announced and described LSC Communications’ $ 1.4 billion equity acquisition project Back then as a “defining moment” in Quad’s 47-year history, the printing industry giant finds itself facing yet another defining moment as it attempts to continue its Quad transformation strategy 3.0.

On October 29, Quad announced a net loss in the third quarter of 2019; halve its quarterly dividend to shareholders (from 30 cents to 15 cents per share); lowered its annual forecast; announced an additional cost reduction initiative of $ 50 million; and revealed plans to sell its book-making platform in the United States, which generates around $ 200 million in annual revenue.

Quad’s book printing business encompasses manufacturing operations in Kentucky, Pennsylvania and West Virginia, employing a total of approximately 1,350 full-time and part-time workers. US book publishers, it seems, are not viewed by Quad as sufficiently large targets for its omnichannel services that extend beyond print. The divestiture plan does not include Quad’s book manufacturing activities in Latin America. However, the announcement follows Quad’s sale of its industrial wood crate business Transpak, located in 300,000 square feet of land. Franklin, Wis. plant in early September to FCA Packaging for about $ 11 million.

The company has indicated that it is in active discussions with potential buyers for its US book printing platform and wants to close the sale as soon as possible to help remove the uncertainty for customers, employees and within the local communities where the book factories operate.

Its three book manufacturing plants in the United States were all acquired as part of Quad’s acquisition of Worldcolor in 2010. Specifically, they include:

  • The plant in Versailles, Kentucky employs approximately 700 people. The 1 million square feet. The establishment specializes in textbooks and business books.
  • Quad of 370,000 square feet. The Fairfield, PA plant employs approximately 300 people and specializes in commercial books.
  • Its Martinsburg plant, W. Va. (Baker Road) produces commercial and consumer books. The 380,000 sq.ft. The factory employs around 350 people. Quad operates two manufacturing plants in Martinsburg. The company’s other facility (located on Caperton Boulevard) primarily prints magazines, catalogs and retail advertising inserts, and is unaffected by the decision to sell its book business.

“This move makes sense as we look at our business through the lens of our Quad 3.0 transformation strategy,” Quadracci said, in a media statement. “We are making bold decisions to accelerate our transformation through investments in our business that will drive long-term growth and shareholder value, and empower us to take advantage of opportunities in the rapidly evolving printing industry. .

Any potential suitors for Quad’s US book printing business?

According to 2018 Printing fingerprints 400 ranking of the largest printers in North America based on annual sales (access the full list by clicking here), Quad, based in Sussex, Wisconsin, is the second-largest book printer, just behind Chicago-based LSC Communications, which has recorded more than $ 1 billion in book sales. It should also be noted that the central book printing company, CJK Group, of Brainerd, Minn., Is privately held and does not disclose its financial statements, so does not appear on the Printing fingerprints 400 list. But one would assume that CJK Group – which is led by CEO Chris Kurtzman and has been an active acquirer in the bookmaking market, including Thomson-Shore assets, more recently – is on the shortlist. potential suitors.

Likewise, it would be an ironic twist of fate for Quad to sell its book platform to LSC Communications, especially following the failed acquisition of LSC which was canceled on July 23, 2019, due to of a decision by Quad not to initiate antitrust proceedings. filed by the Department of Justice (DOJ) to block the acquisition. As a result, Quad also had to pay LSC a sum of $ 45 million. reverse termination fee which was written in their original merger agreement (the total LSC-related payments actually amount to $ 60 million, according to Quad’s financial data). That said, however, LSC’s weak second quarter earnings report, including the decline in its core business, a modified credit facility, and the complete suspension of payment of its dividends to shareholders, makes it an unlikely acquirer, given its current indebtedness.

Other Third Quarter Results and Actions Taken by Quad

Quad’s financial results for the quarter ended September 30, 2019 include:

  • Net sales (excluding discontinued operations) – Net sales were $ 944 million in 2019 compared to $ 974 million in 2018, down 3.1%. Organic sales were down 4.3% in the quarter, after excluding sales related to the acquisition of Periscope in January 2019. Organic results benefited from new sales generated by Quad’s transformation 3.0 strategy, which increased was offset by continued pressure on volumes and prices from the printing industry, and a negative impact of 0.5% from the exchange rate.
  • Quad net loss attributable to common shareholders – Quad net loss attributable to common shareholders was $ 126 million in 2019, or diluted loss per share of $ 2.52, compared to net income of $ 23 million in 2018, or earnings diluted per share of $ 0.46, and includes a loss of $ 79 million on discontinued operations. Net loss from continuing operations was $ 47 million, or a diluted loss of $ 0.94 per share, compared to net income from continuing operations of $ 27 million, or diluted earnings per share of 0 , $ 56.
  • Adjusted EBITDA (excluding discontinued operations) – Adjusted EBITDA was $ 80 million in 2019, compared to $ 107 million in 2018, and Adjusted EBITDA margin was 8.4% in 2019, compared to 11.0% in 2018. The difference by year-over-year report mainly reflects $ 8 million of strategic investments made to increase hourly wages for production employees, $ 8 million from lower market prices for paper by-product recoveries and l impact of the 4.3% organic drop in sales.

Quad also updated its forecast for full year 2019 to exclude discontinued operations from the book business and to reflect what it described as “updated business trends due to the weakening market prices for recoveries of paper by-products and timing of productivity improvements resulting from wage increases ”.

Quad lowers its forecast for 2019.

Click to enlarge.

In a third quarter earnings call this morning, Quadracci and Dave Honan, executive vice president and chief financial officer, confirmed that Quad remains on track with its 3.0 transformation strategy (click here to view a PDF of their PowerPoint presentation) to become a fully integrated marketing solutions provider.

They referred to ongoing attempts to cut costs, including the Transpak and upcoming divestitures of book printing; an additional effort of savings of $ 50 million; as well as noting that Quad has sold more than 20 vacant facilities for $ 100 million in cash since 2015. The 50% dividend cut will also provide more free cash flow, they added, and the repayment of a B term loan in the third quarter would result in $ 12 million in annualized reductions in interest payments.

Quadracci also highlighted the potential benefit he expects from Quad’s $ 40 million investment to increase starting pay scales for hourly workers and to help attract, train and retain a more skilled workforce. in today’s tight labor market – which he says will ultimately help boost productivity. and efficiency improvements throughout the Quad organization. On the bright side, Quadracci also referred to a growing return to printing among some former digital-only marketers.

Asked about the proposed LSC merger and acquisition deal, Quadracci replied that the printing industry needed a reset back then – and still needs it now.

“The industry needed another reset and we, and LSC, felt this was a great way to do it in a controlled manner for all constituents: customers, employees and shareholders. But due to the delay taken by the DOJ … we walked away because both parties understood that with this uncertainty in a dynamic industry, with media trends in dynamic evolution, the risk would have been much higher if we had not done so. were not far from it.

“So now that’s not happening, the industry still needs a reset,” Quadracci said. “And we’re doing it. You’ve seen us close two factories after the deal failed, and we continue to look for ways to make sure our top-performing platforms are operating at a labor-intensive rate. That being said, there are going to be further upheavals and we are always looking at consolidation opportunities if they are affordable and lend themselves to us by creating strong free cash flow to continue to use to transform us.

“[Quad] 3.0 is no longer an experience like three years ago, “he added.” We are putting dots on the scoreboard now, and it’s accelerating faster and faster. “


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