Thursday, October 31, 2019

Quad's Stock Price Drops 60% in Two Days -- and Now the Lawyers Are Circling

Cliff diving: Quad stock price on Yahoo!
First Meredith, now Quad.

The nation's largest magazine printer just entered the same shark-infested water that the country's largest magazine publisher found itself in less than two months ago.

In the past two days, at least seven law firms have announced that they are investigating whether to file a class-action lawsuit against Quad (aka Quad/Graphics) and its leadership on behalf of Quad's investors. That follows a gloomy earnings announcement Tuesday evening that caused the big printer's stock price to drop from $11.28 to $4.53 in just two days.

"On October 29, 2019, after the market closed, the Company slashed its quarterly dividend to $0.15 per share, announced plans to divest its book business, and reported third quarter 2019 financial results," says a press release from the Law Offices of Howard G. Smith. "Analysts were “absolutely shocked by these developments given the confidence management had just three months ago.”

"The investigation focuses on whether Quad issued false and misleading statements regarding its business practices and prospects," says another law firm's announcement. "Specifically, Quad was experiencing dramatically lowered sales than projected due to ongoing print industry volume and pricing pressures."

The Smith firm is also behind the pending class-action litigation against Meredith Corporation on behalf of the big publisher's stockholders.

That was spurred by Meredith's own downbeat quarterly earnings announcement Sept. 5 in which it lowered its forecasts and revealed that it had taken on a bigger mess than expected with its 2018 purchase of Time Inc.

Quad's Oct. 29 re-forecast
Quad issued a 10-Q quarterly report yesterday explaining (on page 25) that terms of its major loan package forced it to cut its dividend in half.

Loan covenants cap how much Quad can shell out to stockholders when its "total leverage ratio" goes above 2.75. Quad said the ratio was 3.18 on September 30, at the close of a quarter in which the company swung from a $23 million profit a year ago to a $126 million loss.

One reason for the disappointing quarter, Quad CEO Joel Quadracci said yesterday, is that Quad raised many employees' pay last year to improve productivity, but the productivity gains won't offset the higher wages until next year.

Quadracci's comments are worth quoting at length, especially because of what I heard just a few weeks ago about a rival printer suffering from labor shortages and missed deadlines. And also because I'm about to ask my boss for a pay raise:

“When you look back to 2018, we suffered from a productivity standpoint because of the changing labor market, and so our productivity actually was worse than we had in the past . . . 

“So we made the tough decision to really bite the bullet and increase significantly the starting wage. Then you have to deal with compression as a result. And we did that in concentrated areas where we had the biggest problems. 

“What I find interesting these days is that with the known entity of the labor market, everyone is talking about wage pressure. But it seems, as I talk to industry after industry, everyone is putting off the inevitable as long as possible. 

“In our case, if you put that off, you get hurt pretty hard. And the problem when you do this, and you do it in the way we did, is all the cost is a light switch. It comes on right away. The productivity improvements come later… 

“I'd say that from 2018 to 2019, it's actually significant, the productivity improvements we've had year-to-date. We've seen an incredible increase in productivity wherever we've been able to impact the labor rates because we've definitely seen a higher-quality employee as well as less turnover. 

“And remember, when you have the turnover because of the tight labor market, the training side gets hurt pretty hard because you're spending that money but then you have to start over again. And you don't train someone in one day.

"So we saw the increase in productivity happening throughout the year. But . . . we haven't gotten to the point of totally offsetting it. But we feel good about 2020, continuing that trend upward in terms of productivity improvements."
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Tuesday, October 29, 2019

Quad/Graphics Exiting the Book Business

UPDATE: Quad's stock price lost more than half its value at the opening bell on October 30 and was still down 53% nearly three hours later.
The second largest printer of books in the United States announced late today that it plans to exit the business.

Quad, AKA Quad/Graphics, stated in a news release that it "plans to divest book business that generates annual sales of $200 million as part of ongoing portfolio optimization."

The announcement comes barely three months after Quad called off a merger with rival megaprinter LSC Communications, the nation's largest book printer. The U.S. Justice Department objected to the proposed merger because LSC and Quad are "the only two significant providers of magazine, catalog, and book printing services."

In the same news release, the big printing company announced a 50% reduction of its dividend, to 15 cents per share, as well as $50 million in cost cuts and a $126 million 3rd Quarter loss.

"We have made the strategic decision to divest our book business, which follows our recent sale of our non-core industrial wood crating business, Transpak," Joel Quadracci, Quad's CEO, said in the news release.

No details were offered about when the book business will be sold or to whom. Quad will have its quarterly-earnings conference call with investors tomorrow morning.

"Our Quad 3.0 transformation strategy is working as evidenced by $125 million of expected organic incremental sales growth in 2019, which helps offset over three percentage points of annual print sales decline," Quadracci said.

The Quad 3.0 strategy seeks to turn Quad from being primarily a printer into a multimedia provider of a broad array of marketing services. Book publishers may not fit the 3.0 strategy because, unlike retailers and magazine publishers, they are likely to have little use for Quad's non-printing offerings.

Tuesday, September 24, 2019

Need a Loan? Subscribe to a Magazine

Thanks to the big-data revolution, subscribing to a magazine may help you overcome a weak credit score.

Many lenders are looking beyond credit scores to determine the credit-worthiness of consumers who have limited or somewhat checkered credit histories, according to a recent article in The Wall Street Journal.

About 53 million U.S. adults have no credit scores and another 56 million have sub-prime scores, writes the Journal’s AnnaMaria Andriotis.

“Now, revenue-hungry companies are considering metrics both mundane and peculiar, like whether applicants shop at discount stores, subscribe to magazines or pay their phone bills on time.”

That’s the power of data analytics at work – identifying more people who can be loaned money to buy stuff they can’t afford.

Think big! Live large! File Chapter 11!
“TransUnion says it sells alternative data to U.S. lenders that can include whether consumers subscribe to and pay for magazines. ‘It’s an indicator of stability,’ said Mike Mondelli, senior vice president of global data strategy.”

Now you may be wondering, “Do my favorite magazines really sell information about me that helps the banks poke into my spending habits?” Mr. Tree pleads the Fifth.

There’s no indication whether only print subscriptions count as an indicator of stability. But it doesn’t really matter because no one buys digital magazines.

(Editor’s note: Mr. Tree, as usual, is exaggerating. After all, Meredith Corporation, the largest magazine publisher in the U.S. and a leader in the shift to digital magazines, recently reported that subscriptions and single-copy sales for its digital editions represent a whopping “4.5% of our total rate base.” So there actually are a few people who buy digital magazines.)

Quiz: Which of these titles are still in print?
If you're hoping that signing up for a magazine will help you get your hands on that Jaguar you’ve been eyeing, act fast. This gravy train will screech to a halt once the big-data analysts realize that magazine subscription lists have been invaded by the unstable, phone-reading, print-is-dead, ad-blocking, paywall-hopping hordes.

So quick, subscribe to five print magazines (before they shut down), pay your phone bill, and run to the dollar store.

Pop quiz: Of the 11 magazines depicted in this article, which five are no longer in print? Leave a comment with your answer.

Dead Tree Edition's off-the-wall, slightly more offensive commentary on the magazine-media business includes:

Monday, September 16, 2019

Meredith's Time-Management Problem: The Largest Magazine Publisher Has Some Explaining To Do

Tom Harty sounds like a guy who thought he’d bought a shiny new car, only to find out the engine had been removed right before he wrote the check. And who then failed to report the theft to his insurance company in a timely manner.

Earlier this month, the Meredith CEO made some revealing statements about the mess Meredith inherited when it acquired fellow publisher Time Inc. (My article for Publishing Executive, Meredith Stumbles with Time Inc. Purchase, provides additional explanation and insights about Meredith’s announcements.):
  • “They were holding cash and not investing in the business.” 
  • “We had two years before we acquired it with their mismanagement, the business was down 25% year-over-year in print advertising,” Harty said. “And so the base of that advertising business is much lower than what we had expected at the acquisition.” 
  • “It has taken longer than we initially expected to elevate the print and digital performance of the Time Inc. assets.” 
  • “We acknowledge the challenges we face that resulted in a reset of EBITDA expectations for fiscal 2019 and going forward. Foremost, it took longer than expected to turn around advertising performance with the legacy Time Inc. brands.”
The trouble is that these revelations and acknowledgements came more than 18 months after Meredith plunked down $2.8 billion to buy Time Inc. and become the U.S.’s largest magazine publisher.

When Meredith released a revised forecast on Sept. 5 that announced the Time-acquisition troubles, its stock price dropped more than 26% in a matter of minutes, Wall Street cried foul, and trial lawyers started circling like sharks.

Meredith headquarters
“The Company made false and misleading statements to the market,” charges one of the many law firms that have announced or are considering class-action stock-fraud lawsuits. “Meredith overinflated the profitability of the Time Inc. merger. In fact, the Company was forced to make significant investments in the Time business to improve it. These investments negatively impacted the Company’s earnings.”

Most of Meredith's previous comments about the Time deal were far rosier. Ten months ago, Harty said, “We continue to expect to achieve our goals of reducing debt by $1 billion by the end of fiscal 2019 and generating $1 billion of adjusted EBITDA in fiscal 2020, meaningfully contributing to total shareholder return.” In the Sept. 5 announcements, Meredith dialed down its FY2020 EBITDA (earnings) forecast to the $640 million to $675 million range.

Just seven months ago, Meredith’s CEO said, “We are off to a strong start in fiscal 2019, delivering results that exceeded expectations. He added that, “We delivered significantly improved year-over-year adjusted EBITDA and margins, which we expect will continue through fiscal 2019.” There was no breakout of the former Time Inc. properties’ money-losing performance or references to the sad state of their ad-sales efforts and magazine-subscription lists.

Meredith now faces a few key questions about the Time Inc. acquisition:

Savings delayed or savings lost?
Meredith had projected $550 million in “synergy” cost savings from combining the two companies. Have those gains gone “poof,” as one stock analyst charged last week, or is it just that they will come later than originally projected?

Did Meredith understand what it was buying?
Some stock analysts now question whether Meredith conducted proper due diligence. I suspect much of the trouble happened after Time realized its sale was imminent, causing it to focus on short-term gains (by shrinking its sales staff and shifting to a cash-upfront subscription strategy, for example) rather than the long-term health of its titles.

Could it have prevented Time Inc.’s deterioration? 
Because it was purchasing Time with cash and not stock, it should have realized that Time no longer had an incentive to manage for long-term sustainability. But could it have built safeguards or incentives into the deal to ensure the Time titles didn’t deteriorate while awaiting new ownership?

What did it know about Time Inc.’s troubles, and when did it know it? 
Meredith dropped the first hints of trouble with the Time deal just three months ago, when Harty said, “We believe it will take longer than originally anticipated to achieve the remainder of the synergies.” But even then he added, “we remain confident we will achieve our $550 million cost synergy goal by the end of fiscal 2020.”

In hindsight, it’s easy to say that Meredith should have realized, and revealed, months ago that there was trouble in paradise. But the acquisition was massive and complex – Time Inc. after all was bigger than Meredith – and there was the difficult matter of splitting off the operations of titles like Time and Sports Illustrated for sale to other parties.

Could Meredith have been so consumed simply with keeping the newly acquired titles running that it didn't at first notice that in Time's last days advertising sales had been neglected and many multi-year, low-profit subscriptions had been sold?

Meredith’s Fiscal Year 2019 annual report, released Friday, said that it recently discovered “incorrect coding of certain magazine subscriptions by Time” – more than a year after it acquired Time. That gives you some idea of the challenges it faces in combining the two companies’ operations, systems, and data.

Did Time cheat Meredith?
Meredith has referred to Time as a sick “patient” that was mismanaged, but it hasn’t given any indication that Time violated the terms of the acquisition deal. Still, you have to wonder whether there will be claims that Time failed to disclose information or violated terms of the deal by allowing its business to deteriorate.

Stay tuned in the coming months (and years?) as high-powered lawyers for Meredith and its investors attempt to answer these questions.

Other Dead Tree Edition articles on Meredith and the magazine industry in general include: