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.