Ongoing Cost Discipline and Segment Share Gains Drive Margin and Cash Flow Growth
Company Continues to Pay Down Debt, Achieving Net Debt Reduction of $95 Million Year-to-Date and $222 Million Over the Past 12 Months
SUSSEX, WI, November 3, 2020 — Quad/Graphics, Inc. (NYSE: QUAD) (“Quad” or the “Company”) today reported results for its third quarter ending September 30, 2020.
- Continued to align costs with current demand environment and achieved margin expansion while growing print segment share.
- Increased year-to-date cash from operating activities by $103 million and Free Cash Flow by $91 million compared to the first nine months of 2019.
- Reduced net debt by $95 million year-to-date and $222 million over the past 12 months, ending the quarter with a Debt Leverage Ratio of 3.22x, which was flat versus the comparable period in 2019.
- Maintained strong liquidity position as of September 30, 2020, including $93 million of cash on hand and up to $465 million in unused capacity under Quad’s revolving credit agreement.
- Completed the divestiture of Quad’s remaining Book platform on October 31 as part of the Company’s ongoing strategy to optimize its product portfolio.
“Building on our momentum from the first half of the year, we delivered a solid third quarter with strong operating and cash performance. We achieved net earnings gains through diligent cost management while continuing to focus on winning segment share and driving operational improvements. Our efforts resulted in higher Adjusted EBITDA margin both for the quarter and year-to-date, as well as increased cash flow. This enabled us to continue to pay down debt and strengthen our balance sheet, despite a significant net sales impact from the COVID-19 pandemic,” said Joel Quadracci, Chairman, President & CEO of Quad.
“Our team has been resilient in the face of significant challenges, and continues to demonstrate the ability to skillfully navigate the unprecedented headwinds created by the pandemic,” Quadracci added. “Throughout the quarter, we continued to prioritize the health and well-being of our employees and protect Quad’s long-term financial health, all while providing great service to our clients and securing new work. We also continued to advance our strategic transformation as a marketing solutions partner through investments in talent and technology, and innovating new integrated solutions like QDMX, a suite of solutions that delivers 100% personalized direct marketing at a fraction of the cost and with greater speed-to-market – a real game-changer for our clients who use direct mail or are thinking of adding it to their portfolio. Our Quad 3.0 strategy provides us with the right tools, talent and platform to exit the pandemic from a position of strength, poised to generate the revenue and Free Cash Flow required to take advantage of value-creating opportunities that will further offset organic print decline through expansion into higher margin products and services.”
Quadracci concluded: “As we move through our seasonally busiest time of year, we continue to closely monitor the pandemic and its impacts on our clients and the worldwide economy. Client volumes remain significantly below last year – a trend we anticipate will continue through year end. We are a nimble organization that can adjust our priorities to maintain good financial health, grow segment share and support our ongoing transformation, while continuing to keep our employees safe and serving our clients well.”
Results for the three months ended September 30, 2020, included:
- Net Sales — Net sales were $679 million in 2020, down 28% from 2019. Sales declined 26% 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 Earnings (Loss) From Continuing Operations — Net earnings from continuing operations increased $50 million from the third quarter of 2019, from a net loss of $47 million in 2019 ($0.94 diluted loss per share from continuing operations) to net earnings of $3 million in 2020 ($0.05 diluted earnings per share from continuing operations).
- Adjusted EBITDA — Adjusted EBITDA was $61 million in 2020, as compared to $80 million in 2019, while Adjusted EBITDA margin improved to 8.9% in 2020, as compared to 8.4% in 2019. The Adjusted EBITDA variance to prior year primarily reflects the impact from the sales decline, partially offset by savings from cost reduction initiatives. Adjusted EBITDA margin increased by 49 basis points in the quarter driven by cost-savings initiatives more than offsetting the relative percentage decline in sales.
Results for the nine months ended September 30, 2020, included:
- Net Sales — Net sales were $2.1 billion in 2020, down 27% in 2019. Sales declined 25% during the nine months ended September 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 — Net loss from continuing operations improved $42 million from the first nine months of 2019, from a net loss of $63 million in 2019 ($1.26 diluted loss per share from continuing operations) to a net loss of $21 million in 2020 ($0.41 diluted loss per share from continuing operations).
- Adjusted EBITDA — Adjusted EBITDA was $196 million in 2020, as compared to $239 million in 2019, while Adjusted EBITDA margin improved to 9.4% in 2020, as compared to 8.4% in 2019. The Adjusted EBITDA variance to prior year primarily reflects the impact from the sales decline, a $13 million decrease in paper byproduct recoveries, and an $11 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 performance. Year-to-date Adjusted EBITDA margin increased by 101 basis points driven by 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 $107 million for the nine months ended September 30, 2020, an increase of $103 million from 2019, primarily due to higher cash earnings and improvements in working capital.
- Free Cash Flow — Free Cash Flow was $57 million for the nine months ended September 30, 2020, an increase of $91 million from 2019, primarily due to a $48 million decrease in capital expenditures, $40 million of income tax refunds received during the third quarter of 2020 due to the CARES Tax Act and improvements in working capital. 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 generate significant cash from strong operational performance and disciplined cost management, despite the unprecedented economic impact the pandemic has had on demand. We improved the health of our balance sheet by deploying the strong cash flow performance to reduce net debt by $95 million so far this year, and have reduced net debt by a total of $222 million over the past 12 months. We possess ample liquidity to invest in our Quad 3.0 strategy, with $93 million of cash at the end of the quarter as well as up to $465 million in unused capacity under Quad’s revolving credit agreement.”
Quarterly Conference Call
Quad will hold a conference call at 10 a.m. ET on Wednesday, November 4, 2020, to discuss third quarter and full-year results. A slide presentation will be concurrently available on the Investors section of Quad’s website at www.quad.com/investors. Quad will conduct a question and answer session. Investors are invited to email their questions in advance to IR@quad.com.
Participants may pre-register for the webcast by navigating to https://dpregister.com/sreg/10148791/daba91cc3a. Participants will be given a unique PIN to gain immediate access to the call on November 4, 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 December 4, 2020, accessible as follows:
- U.S. Toll-Free: 1-877-344-7529
- International Toll: 1-412-317-0088
- Replay Access Code: 10148791
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 negative impacts the coronavirus (COVID-19) has had and will continue to have on the Company’s business, financial condition, cash flows, results of operations and supply chain, as well as the global economy in general (including future uncertain impacts); 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, investment opportunities or 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, as such were previously supplemented and amended in the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020, and which may be further 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, Net Debt, 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. Net Debt is defined as total debt and finance lease obligations less cash and cash equivalents. Debt Leverage Ratio is defined as Net Debt 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