Company Generated $51 Million Increase in Cash From Operating Activities, Driven by Aggressive Efforts to Realign Business in Response to COVID-19 Pandemic
SUSSEX, WI, August 4, 2020 — Quad/Graphics, Inc. (NYSE: QUAD) (“Quad” or the “Company”) today reported results for its second quarter ended June 30, 2020.
- Aggressively implemented risk-mitigating and cost-reduction efforts while growing print segment share through its integrated marketing solutions for clients.
- Generated positive cash flow during the second quarter and increased year-to-date net cash provided by operating activities by $51 million and increased Free Cash Flow by $79 million, compared to the first half of 2019.
- Reduced net debt by $125 million over last 12 months to end the quarter with a Debt Leverage Ratio of 3.18x, net of excess cash.
- Maintained significant liquidity as of June 30, 2020, including $70 million of cash on hand and up to $465 million in unused capacity under Quad’s revolving credit agreement.
- Sold Versailles, Ky., book manufacturing facility on July 1 as part of ongoing efforts to optimize product portfolio.
“Our second quarter performance was strong despite the significant economic impact from the COVID-19 pandemic. We proactively aligned our cost structure with lower demand while also continuing to improve productivity, leading to higher Adjusted EBITDA margin and increased cash flow. Throughout the quarter, we remained unwavering in our focus to: 1) maintain our employees’ health and well-being; 2) provide high-quality, on-time delivery for our clients; and 3) ensure the long-term financial health of the Company,” said Joel Quadracci, Quad Chairman, President and CEO.
“I am extremely proud of our team’s ability to come together and act with urgency to not only navigate this unprecedented period in history, but to continue to innovate for our clients,” Quadracci added. “We continue to advance our strategic transformation as a marketing solutions partner, making investments in talent and technology, and innovating new integrated solutions that help our clients simplify their executional requirements to deliver content and campaigns more efficiently and effectively. Our Quad 3.0 strategy provides us with the right tools, talent and platform to exit the COVID-19 pandemic from a position of strength. Despite the disruptive impact of COVID-19, we continue to demonstrate our value to clients by offering innovative solutions such as content workflow re-engineering, freeing clients to focus on developing strategies that will drive response and revenues.”
Quadracci concluded: “As we look forward, we will continue to closely monitor the COVID-19 pandemic and its impacts on our clients and the worldwide economy, and adjust our priorities accordingly to support our financial objectives, all while continuing to keep our employees safe and serving our clients’ evolving needs.”
Results for the three months ended June 30, 2020, included:
- Net Sales (excluding discontinued operations) — Net sales were $585 million in 2020, down 38% from 2019. Sales declined 36% during the quarter, excluding the impact of the January 2020 sale of the Omaha packaging plant primarily due to the economic impact from the COVID-19 pandemic, and ongoing print industry volume and pricing pressures.
- Net Loss From Continuing Operations — Excluding the results from discontinued operations, net loss from continuing operations was $15 million in 2020, or $0.29 diluted loss per share, compared to net loss from continuing operations of $3 million in 2019, or $0.07 diluted loss per share.
- Adjusted EBITDA (excluding discontinued operations) — Adjusted EBITDA was $60 million in 2020, as compared to $81 million in 2019, while Adjusted EBITDA margin improved to 10.2% in 2020, as compared to 8.5% in 2019. The Adjusted EBITDA variance to prior year primarily reflects the impact from the sales decline due to the COVID-19 pandemic as well as ongoing printing industry volume and pricing pressures, partially offset by savings from cost reduction initiatives. Adjusted EBITDA margin grew by 170 basis points in the quarter due to cost savings initiatives more than offsetting the relative percentage decline in sales.
Results for the six months ended June 30, 2020, included:
- Net Sales (excluding discontinued operations) — Net sales were $1.4 billion in 2020 as compared to $1.9 billion in 2019, down 26%. Sales declined 25% during the six months ended June 30, 2020, after excluding the impact of the January 2020 sale of the Omaha packaging plant primarily due to the economic impact from the COVID-19 pandemic, and ongoing print industry volume and pricing pressures.
- Net Loss From Continuing Operations — Excluding the results from discontinued operations, net loss from continuing operations was $24 million in 2020, or $0.46 diluted loss per share, as compared to net loss from continuing operations of $16 million in 2019, or $0.31 diluted loss per share.
- Adjusted EBITDA (excluding discontinued operations) — Adjusted EBITDA was $135 million in 2020, as compared to $159 million in 2019, while Adjusted EBITDA margin improved to 9.6% in 2020, as compared to 8.3% in 2019. The Adjusted EBITDA variance to prior year primarily reflects the impact from the sales decline, an $11 million decrease in paper byproduct recoveries, and a $7 million increase in hourly production wages due to strategic investments made to increase starting wages, partially offset by savings from cost reduction initiatives, a $9 million net non-cash benefit from a change in vacation policy, and a $6 million net reduction in workers’ compensation reserves from improved production safety initiatives. Adjusted EBITDA margin grew by 130 basis points year-to-date due to cost savings initiatives more than offsetting the relative percentage decline in sales.
- Net Cash Provided by Operating Activities — Net cash provided by operating activities was $67 million for the six months ended June 30, 2020, an increase of $51 million from 2019, primarily due to improvements in working capital.
- Free Cash Flow — Free Cash Flow was $29 million for the six months ended June 30, 2020, an increase of $79 million from 2019, primarily due to improvements in working capital and a $37 million decrease in capital expenditures. As a reminder, the Company historically generates the majority of its Free Cash Flow in the fourth quarter of the year.
Dave Honan, Executive Vice President and CFO, concluded: “We continue to demonstrate our ability to manage through the pandemic by showing disciplined cost management and cash conservation efforts, while also continuing to grow print segment share through our integrated marketing solutions for our clients. We delivered strong second quarter operating and cash performance when considering the significant economic impact that the pandemic had on our net sales. These efforts, along with ongoing debt reduction, also helped protect the health of our balance sheet. In the last 12 months, we have reduced net debt by $125 million, and have ample liquidity and no material maturities in our debt capital structure until May of 2022.”
Quarterly Conference Call
Quad will hold a conference call at 10 a.m. ET on Wednesday, August 5, 2020, to discuss second quarter and full-year results.
Participants can pre-register for the webcast by navigating to http://dpregister.com/10145463. Participants will be given a unique PIN to gain immediate access to the call on August 5, 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 September 5, 2020, accessible as follows:
- U.S. Toll-Free: 1-877-344-7529
- International Toll: 1-412-317-0088
- Replay Access Code: 10145463
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 impact negative publicity could have on our business; 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 From Continuing Operations. 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, 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 From Continuing Operations 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, 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
Investor Relations Lead, Quad
Director of Corporate Communications, Quad