Company Focused on Maintaining Employee Health and Well-Being, and Serving Clients, While Taking Decisive Action to Protect Its Long-Term Financial Health, and Position Quad for Post-Pandemic Success
SUSSEX, WI, May 5, 2020 — Quad/Graphics, Inc. (NYSE: QUAD) (“Quad” or the “Company”) today reported results for its first quarter ended March 31, 2020.
- Developed and launched Quad’s Safe-at-Work Program to proactively protect employee health and well-being during the COVID-19 pandemic, as the Company continued to operate as an essential business.
- Delivered strong first quarter despite reduction in near-term client demand due to the COVID-19 pandemic.
- Swiftly implemented risk-mitigating efforts and cost reductions across the Company, which supported a $103 million increase in net cash provided by operating activities and a $116 million increase in Free Cash Flow compared to the first quarter of 2019.
- Reduced net debt by $49 million in the quarter and reduced the Debt Leverage Ratio to 3.0x as of March 31, 2020, net of excess cash.
- Maintained significant liquidity as of March 31, 2020, including $208 million of cash on hand and up to $636 million in unused capacity under Quad’s revolving credit agreement.
- Created new innovative solutions to help clients during these unprecedented times while maintaining quality and on-time delivery.
“Our first quarter performance exceeded our expectations until mid-March when we started to feel the initial disruption from COVID-19. Since then, we have seen a meaningful impact to customer demand in certain end markets, primarily in retail, as a result of the pandemic. As this unprecedented situation continues to evolve, our main priority is protecting our employees’ health and well-being, and serving our clients while also ensuring the financial health of the Company. We were able to deliver strong first quarter results, in part, by taking early and swift action to align our cost structure to lower volumes in certain product categories, thereby protecting our balance sheet, and preserving cash flow and liquidity. We have historically treated almost all costs as variable, and demonstrated our agility to react in real-time during the pandemic to reduce costs. We are focused on taking care of our employees through Quad’s Safe-at-Work Program and are continuing to monitor and respond to the ever-changing economic landscape,” said Joel Quadracci, Quad Chairman, President and CEO.
“Throughout this disruptive time we have leveraged our unique integrated marketing platform to better serve our clients,” Quadracci continued. “This includes innovative in-store marketing solutions that promote shopper safety through social distancing, and content creation and execution for clients who have had challenges staffing critical functions during the pandemic. I am proud of Quad’s ability to continue to quickly innovate new products, services and solutions for our clients — and for our employees — to help navigate the impacts of the pandemic. For example, to protect our employees at work, we began producing our own hand sanitizer and designed our own non-medical face masks, which are being mass-produced on our existing printing press equipment.”
Quadracci concluded: “We are currently planning for the reopening of the economy under multiple scenarios based on our clients’ advertising and marketing needs. We expect this to be a gradual ramp-up over time to a ‘new normal’ as the economy emerges from the pandemic. We believe our experience in managing significant change over the last decade has prepared us to be agile and decisive as needed, and I am confident in our leadership team’s ability to manage through the current economic disruption. Our Quad 3.0 strategy provides us with the right tools and platform to be stronger than we were prior to the pandemic, supported by our diverse product portfolio and the cash flow needed to continue to accelerate our long-term strategic transformation as a marketing solutions partner. In the meantime, I am extremely proud of our team’s ability to come together, and act quickly and decisively to navigate this unprecedented period in history, all while maintaining employee safety and delivering high quality and innovative products.”
Results for the three months ended March 31, 2020, included:
- Net Sales (excluding discontinued operations) — Net sales were $823 million in 2020, down 14.4% from 2019. Organic sales declined 13.3% during the quarter, after excluding the impact of the sale of the Omaha packaging plant. The organic results reflect ongoing print industry volume and pricing pressures, including the initial impact from COVID-19 pandemic, and a negative 0.4% impact from foreign exchange.
- Net Loss From Continuing Operations — Excluding the results from discontinued operations, net loss from continuing operations was $9 million in 2020, or $0.17 diluted loss per share, as compared to net loss from continuing operations of $13 million in 2019, or $0.25 diluted loss per share.
- Adjusted EBITDA (excluding discontinued operations) — Adjusted EBITDA was $75 million in 2020, as compared to $78 million in 2019, while Adjusted EBITDA margin improved to 9.2% in 2020, as compared to 8.2% in 2019. The variance in Adjusted EBITDA to prior year primarily reflects the impact from the organic sales decline of 13.3%, a $9 million decrease in print profits from the reduction in market price for paper byproduct recoveries, a $4 million increase in hourly production wages due to strategic investments made to increase starting wages, partially offset by a $9 million net non-cash benefit from a change in vacation policy, an $8 million reduction in worker’s compensation reserves from improved production safety initiatives, and savings from other cost reduction initiatives.
- Net Cash Provided by Operating Activities — Net cash provided by operating activities increased by $103 million and was $45 million in 2020, as compared to net cash used in operating activities of $58 million in 2019, primarily due to improvements in working capital.
- Free Cash Flow — Free Cash Flow increased by $116 million and was $16 million in 2020, as compared to negative $101 million in 2019, primarily due to improvements in working capital and a $16 million decrease in capital expenditures. As a reminder, the Company generates the majority of its Free Cash Flow in the fourth quarter of the year.
Dave Honan, Executive Vice President and CFO, concluded: “In the midst of this pandemic, we responded quickly with multiple cost reduction and cash conservation efforts to deliver strong first quarter operating and cash performance, including the generation of $16 million of Free Cash Flow and lowering our Debt Leverage Ratio to 3.0x, net of excess cash. We have significant liquidity and no material maturities in our debt capital structure until May of 2022, which allows us to have significant financial flexibility to adapt to the uncertain economic impacts of the COVID-19 pandemic.”
Quarterly Conference Call
Quad will hold a conference call at 10 a.m. ET on Wednesday, May 6, to discuss first quarter 2020 results.
Participants can pre-register for the webcast by navigating to http://dpregister.com/10143254. Participants will be given a unique PIN to gain immediate access to the call on May 6, bypassing the live operator. Participants may pre-register at any time, including up to and after the call start time.
Alternatively, participants without internet access may dial in on the day of the call as follows:
- U.S. Toll-Free: 1-877-328-5508
- International Toll: 1-412-317-5424
An audio replay of the call will be posted on the Investors section of Quad’s website shortly after the conference call ends. In addition, telephone playback will also be available until June 6, 2020, accessible as follows:
- U.S. Toll-Free: 1-877-344-7529
- International Toll: 1-412-317-0088
- Replay Access Code: 10143254
This press release contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements regarding, among other things, our current expectations about the Company’s future results, financial condition, sales, earnings, free cash flow, margins, objectives, goals, strategies, beliefs, intentions, plans, estimates, prospects, projections and outlook of the Company and can generally be identified by the use of words or phrases such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “plan,” “foresee,” “project,” “believe,” “continue” or the negatives of these terms, variations on them and other similar expressions. These forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual results to be materially different from those expressed in or implied by such forward-looking statements. Forward-looking statements are based largely on the Company’s expectations and judgments and are subject to a number of risks and uncertainties, many of which are unforeseeable and beyond our control.
The factors that could cause actual results to materially differ include, among others: the uncertain negative impacts the coronavirus (COVID-19) will have on the Company’s business, financial condition, cash flows, results of operations and supply chain, as well as the global economy in general; the impact of decreasing demand for printed materials and significant overcapacity in the highly competitive environment creates downward pricing pressures and potential underutilization of assets; the impact of digital media and similar technological changes, including digital substitution by consumers; the impact of fluctuations in costs (including labor and labor- related costs, energy costs, freight rates and raw materials) and the impact of fluctuations in the availability of raw materials; the inability of the Company to reduce costs and improve operating efficiency rapidly enough to meet market conditions; the impact of the various restrictive covenants in the Company’s debt facilities on the Company’s ability to operate its business, as well as the uncertain negative impacts COVID-19 may have on the Company’s ability to continue to be in compliance with these restrictive covenants; the impact of increased business complexity as a result of the Company’s transformation to a marketing solutions partner; the failure to successfully identify, manage, complete and integrate acquisitions and other significant transactions, as well as the successful identification and execution of strategic divestitures; the failure of clients to perform under contracts or to renew contracts with clients on favorable terms or at all; the impact of changing future economic conditions; the fragility and decline in overall distribution channels, including newspaper distribution channels; the impact of changes in postal rates, service levels or regulations; the failure to attract and retain qualified talent across the enterprise; the impact of regulatory matters and legislative developments or changes in laws, including changes in cyber-security, privacy and environmental laws; significant capital expenditures may be needed to maintain the Company’s platforms and processes and to remain technologically and economically competitive; the impact of risks associated with the operations outside of the United States, including costs incurred or reputational damage suffered due to improper conduct of its employees, contractors or agents; the impact of an other than temporary decline in operating results and enterprise value that could lead to non-cash impairment charges due to the impairment of property, plant and equipment and intangible assets; the impact on the holders of Quad’s class A common stock of a limited active market for such shares and the inability to independently elect directors or control decisions due to the voting power of the class B common stock; and the other risk factors identified in the Company’s most recent Annual Report on Form 10-K, which may be amended or supplemented by subsequent Quarterly Reports on Form 10-Q or other reports filed with the Securities and Exchange Commission.
Except to the extent required by the federal securities laws, the Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Non-GAAP Financial Measures
This press release contains financial measures not prepared in accordance with generally accepted accounting principles (referred to as Non-GAAP), specifically Adjusted EBITDA, Adjusted EBITDA Margin, Free Cash Flow, Debt Leverage Ratio and Adjusted Diluted Earnings (Loss) Per Share. Adjusted EBITDA is defined as net earnings (loss) attributable to Quad common shareholders excluding interest expense, income tax expense (benefit), depreciation and amortization, restructuring, impairment and transaction-related charges, (loss) earnings from discontinued operations, net of tax, net pension income, employee stock ownership plan contributions, loss (gain) on debt extinguishment, equity in (earnings) loss of unconsolidated entity, the Adjusted EBITDA for unconsolidated equity method investments (calculated in a consistent manner with the calculation for Quad) and net earnings (loss) attributable to noncontrolling interests. Adjusted EBITDA Margin is defined as Adjusted EBITDA divided by net sales. Free Cash Flow is defined as net cash provided by operating activities less purchases of property, plant and equipment, plus LSC-related payments primarily related to incremental interest payments associated with the 2019 amended debt refinancing and transaction-related costs. Debt Leverage Ratio is defined as total debt and finance lease obligations divided by the last twelve months of Adjusted EBITDA. Adjusted Diluted Earnings (Loss) Per Share is defined as earnings (loss) from continuing operations before income taxes and equity in (earnings) loss of unconsolidated entity excluding restructuring, impairment and transaction-related charges, employee stock ownership plan contributions, loss (gain) on debt extinguishment, and adjusted for income tax expense at a normalized tax rate, divided by diluted weighted average number of common shares outstanding.
The Company believes that these Non-GAAP measures, when presented in conjunction with comparable GAAP measures, provide additional information for evaluating Quad’s performance and are important measures by which Quad’s management assesses the profitability and liquidity of its business. These Non-GAAP measures should be considered in addition to, not as a substitute for or superior to, net earnings (loss) as a measure of operating performance or to cash flows provided by operating activities as a measure of liquidity. These Non-GAAP measures may be different than Non-GAAP financial measures used by other companies. Reconciliation to the GAAP equivalent of these Non-GAAP measures are contained in tabular form on the attached unaudited financial statements.
Quad (NYSE: QUAD) is a worldwide marketing solutions partner dedicated to creating a better way for its clients through a data-driven, integrated marketing platform that helps reduce complexity, increase efficiency and enhance marketing spend effectiveness. Quad provides its clients with unmatched scale for client on-site services and expanded subject expertise in marketing strategy, creative solutions, media deployment (which includes a strong foundation in print) and marketing management services. With a client-centric approach that drives its expanded offering, combined with leading-edge technology and single-source simplicity, Quad has the resources and knowledge to help a wide variety of clients in multiple vertical industries, including retail, financial/insurance, healthcare, consumer packaged goods, publishing and direct-to-consumer. Quad has multiple locations throughout North America, South America and Europe, and strategic partnerships in Asia and other parts of the world. For additional information visit www.Quad.com.
Investor Relations Contact
Director of Investor Relations and Assistant Treasurer, Quad
Director of Corporate Communications, Quad