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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Unknown said...

Good luck to Quad Graphics. Raising minimum pay rates and dealing with compression issues is both courageous and needed. It's only the first step, however, because if those new, better quality employees are Millenials and Gen Z's, they won't last if you can't engage them in a way that meets other needs than pay and benefits. That's step two. Step three is that the job of meeting those other needs falls on the shoulders primarily of first line managers and supervisors. History may prove that falling productivity was only the symptom of deeper issues including high enough pay rates to attract better entry level people. An annual Gallup poll finds that 85% of all employees worldwide are disengaged from their jobs. Quad has been a great company for a long time and they may be an exception but I doubt it. Just saying...

Anonymous said...

I am not surprised by this at all. Not mentioned in previous reports was a reduction of estimated 20% of the sales work force at Quad. With shelling out roughly 55-60 million in the failed takeover of LSC as well as the bribery charges something has to give.... Good luck in their efforts to find a buyer for their book business. My thought is no one will step forward to purchase the book plants at Quad one by one they will be closed and in the end 1300 people will be out of work.
Disappointing and sad to say the least.

Anonymous said...

Some facts of what has happened at Quad that we the public do not hear.
Quad delayed annual raises until September 2019. Typically raised are issued in the first or second quarter. 401k match was cut in half (fifteen cents on the dollar up to 6%) which was put into employees accounts in January 2019. Forced layoffs and reduced head counts have increased for the third quarter. This is in addition to two plant closures.

Anonymous said...

Was it unethical for Quad's management to not mention the breach of bank covenants as the reason for the dividend reduction on the earnings call? They published it in the 10K so it was a material part of the financial health of the company. Why was it not discussed?