Lawsuit alleges Quad misled investors over last 21 months

Company stock fell from $11.27 to $4.85 after Q3 earnings

quad investor lawsuit
The Quad/Graphics headquarters in Sussex

Last updated on March 17th, 2020 at 01:36 pm

Two Sheboygan County residents who saw their investment in Quad/Graphics Inc. fall by more than $240,000 when the company reported its third quarter results are suing the Sussex-based company, alleging executives had made false or misleading statement about Quad’s business, operations and prospects.

In late October, Quad reported its third quarter results, including a 3.1% drop in net sales and a $126.5 million net loss for the quarter. The company also said it would divest its book business and proactively reset its dividend from 30 to 15 cents per share.

The news sent Quad’s stock price tumbling, from $11.27 to $4.85 per share. The price has gone as low as $4.10 per share.

In their lawsuit, Dennis and Marilynn Born argue that Quad failed to disclose that its book business was underperforming and it would likely be divested, that the company was “unreasonably vulnerable to decreases in market prices” and that it would need to reset its dividend and expand cost reduction programs to maintain financial flexibility.

The lawsuit, filed last week in the U.S. District court for the Southern District of New York, seeks to establish a class action case against Quad for anyone who bought shares between Feb. 21, 2018 and Oct. 29, 2019.

According to court documents, the Borns acquired a net of around 37,500 shares during that period, suggesting the drop in price after the earnings announcement erased around $240,700 in value. The cut in the dividend also cost them around $5,600.

Quad did not immediately respond to a request for comment on the case.

The company has been working to transform itself from a printer to also offer a suite of integrated marketing services. Those efforts are gaining traction and will generate an extra $125 million in revenue this year, according to Quad.

But the company’s results have also been impacted by continued declines in the printing industry. In the third quarter specifically, Quad pointed to $8 million in costs from its investment in higher starting wages and another $8 million from lower market prices for paper byproduct recoveries.

Quad is also dealing with the aftermath of walking away from its $1.4 billion acquisition of Chicago-based LSC Communications. The two companies opted earlier this year to not fight a U.S. Department of Justice lawsuit blocking the deal. The companies said they couldn’t afford the uncertainty in a rapidly evolving industry. Quad says it is has made $60 million in LSC-related payments this year.

The company has moved to continue refining its portfolio after the deal fell apart, including selling its industrial wood crating business for $11 million. The potential sale of the book business is described as a continuation of those efforts.

Resetting the company’s dividend also provides an additional $30 million in financial flexibility annually, Dave Honan, chief financial officer of Quad, told analysts.

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Arthur covers banking and finance and the economy at BizTimes while also leading special projects as an associate editor. He also spent five years covering manufacturing at BizTimes. He previously was managing editor at The Waukesha Freeman. He is a graduate of Carroll University and did graduate coursework at Marquette. A native of southeastern Wisconsin, he is also a nationally certified gymnastics judge and enjoys golf on the weekends.

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