Quad Reports Third Quarter and Year-to-Date 2019 Results

Accelerates Quad 3.0 Transformation Strategy

SUSSEX, Wis.–(BUSINESS WIRE)–Quad/Graphics, Inc. (NYSE: QUAD) (“Quad” or the “Company”) today reported results for its third quarter ending September 30, 2019.

Key Actions to Accelerate Transformation

  • Plans to divest book business that generates annual sales of $200 million as part of ongoing portfolio optimization.
  • Expands cost reduction program to $50 million in annual savings.
  • Resets quarterly dividend to $0.15 per share to provide additional financial flexibility to continue to scale its Quad 3.0 strategy and maintain a strong long-term balance sheet.

“We are making bold decisions to accelerate our transformation through investments in our business that will drive long-term growth and shareholder value, and provide us with the ability to take advantage of opportunities in the rapidly changing print industry,” said Joel Quadracci, Chairman, President & CEO. “Our Quad 3.0 transformation strategy is working as evidenced by $125 million of expected organic incremental sales growth in 2019, which helps offset over three percentage points of annual print sales decline. Our Quad 3.0 strategy is centered on our unique integrated marketing solutions platform that includes customer analytics, campaign strategies, media optimization and global production. These integrated services, supported by an industry-leading manufacturing platform, help clients drive growth by reducing complexity, enhancing efficiencies and improving marketing spend effectiveness across all channels.”

Quadracci continued: “We have made the strategic decision to divest our book business, which follows our recent sale of our non-core industrial wood crating business, Transpak. We will continue to optimize our product portfolio for the long-term to advance our Quad 3.0 transformation strategy. We’ve also made the decision to further streamline costs through our $50 million cost reduction program and proactively reset the dividend to provide additional financial flexibility for growth-focused opportunities that address our clients’ evolving needs and to maintain a strong balance sheet over the long term.”

Summary Results

Results for the three months ended September 30, 2019, included:

  • Net Sales (excluding discontinued operations) — Net sales were $944 million in 2019 as compared to $974 million in 2018, down 3.1%. Organic sales declined 4.3% during the quarter, after excluding sales related to the January 2019 acquisition of Periscope. The organic results benefitted from new sales generated from the Company’s Quad 3.0 transformation strategy, which were offset by the ongoing print industry volume and pricing pressures, and a negative 0.5% impact from foreign exchange.
  • Net Loss Attributable to Quad Common Shareholders — Net loss attributable to Quad common shareholders was $126 million in 2019, or $2.52 diluted loss per share, as compared to net earnings of $23 million in 2018, or $0.46 diluted earnings per share, and includes a $79 million loss on discontinued operations. Net loss from continuing operations was $47 million, or $0.94 diluted loss per share, as compared to net earnings from continuing operations of $27 million, or $0.56 diluted earnings per share.
  • Adjusted EBITDA (excluding discontinued operations) — Adjusted EBITDA was $80 million in 2019, as compared to $107 million in 2018, and Adjusted EBITDA margin was 8.4% in 2019, as compared to 11.0% in 2018. The variance to prior year primarily reflects $8 million of strategic investments made to increase hourly production employees’ wages, $8 million from the reduction in market price for paper byproduct recoveries, and the impact from the organic sales decline of 4.3%.

Results for the nine months ended September 30, 2019, included:

  • Net Sales (excluding discontinued operations) — Net sales were $2.9 billion in both 2019 and 2018. Organic sales declined 2.6% after excluding sales related to the acquisitions of Ivie and Periscope, and an investment in Rise Interactive. The organic results reflect new sales generated from the Company’s Quad 3.0 transformation strategy, offset by ongoing print industry volume and pricing pressures, and a negative 0.7% impact from foreign exchange.
  • Net Loss Attributable to Quad Common Shareholders — Net loss attributable to Quad common shareholders was $164 million in 2019, or $3.28 diluted loss per share, as compared to net earnings of $29 million in 2018, or $0.57 diluted earnings per share, and includes a $101 million loss from discontinued operations. Net loss from continuing operations was $63 million, or $1.26 diluted loss per share, as compared to net earnings from continuing operations of $41 million, or $0.81 diluted earnings per share.
  • Adjusted EBITDA (excluding discontinued operations) — Adjusted EBITDA was $239 million, as compared to $310 million in 2018, and Adjusted EBITDA margin was 8.4% in 2019, as compared to 10.8% in 2018. The variance to prior year primarily reflects $24 million in non-recurring benefits in 2018 that did not repeat at the same level in 2019, a $24 million impact from strategic investments made to increase hourly production employees’ wages, a $14 million impact from the reduction in market price for paper byproduct recoveries, and the impact from the organic sales decline of 2.6%.
  • Net Cash Provided by Operating Activities — Net cash provided by operating activities was $4 million in 2019, as compared to $47 million in 2018, primarily due a $45 million reverse termination fee paid to LSC Communications during the third quarter 2019 and lower net earnings, partially offset by an improvement in cash provided from working capital.
  • Free Cash Flow — Free Cash Flow, after excluding $60 million in LSC-related payments, was negative $35 million in 2019, as compared to negative $38 million in 2018, primarily due to an improvement in cash provided from working capital, partially offset by lower net earnings and increased capital expenditures on long-term investments in automation and productivity improvements in the manufacturing platform. As a reminder, the Company generates the majority of its Free Cash Flow in the fourth quarter of the year.

Dividend

As part of the Company’s commitment to effective capital allocation, and to provide ample resources and additional financial flexibility to drive Quad’s continued transformation, the Company made the proactive decision to reset its dividend policy. Quad’s next quarterly dividend of $0.15 per share will be payable on December 6, 2019, to shareholders of record as of November 18, 2019.

Guidance

The Company is updating its full-year 2019 guidance to exclude the discontinued operations of the book business and to reflect updated business trends from weakening market prices for paper byproduct recoveries, and the timing of productivity improvements from wage increases. Updated guidance is as follows:

U.S. $

Previous 2019 Guidance Range

Updated 2019 Guidance Range Excluding Discontinued Operations

Net Sales

$4.05 billion to $4.25 billion

Approximately $3.9 billion

Adjusted EBITDA

$360 million to $400 million

$300 million to $330 million

Free Cash Flow

$145 million to $185 million

$80 million to $100 million*

*Free Cash Flow excludes $60 million in LSC-related payments and includes cash flows from discontinued operations.

Quarterly Conference Call

Quad (NYSE: QUAD) will hold a conference call at 10 a.m. EST on Wednesday, October 30, to discuss third quarter and year-to-date 2019 results. Participants can pre-register for the webcast by navigating to http://dpregister.com/10134997. Participants will be given a unique PIN to gain immediate access to the call on October 30, 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

Telephone playback will be available shortly after the conference call ends, accessible as follows:

  • U.S. Toll-Free: 1-877-344-7529
  • International Toll: 1-412-317-0088
  • Replay Access Code: 10134997

The playback will be available until November 30, 2019.

Forward-Looking Statements

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 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 failure to successfully identify, manage, complete and integrate acquisitions and investments; the inability of the Company to reduce costs and improve operating efficiency rapidly enough to meet market conditions; the impact of increased business complexity as a result of the Company’s transformation into a marketing solutions partner; the impact of regulatory matters and legislative developments or changes in laws, including changes in cyber-security, privacy and environmental laws; the impact of changing future economic conditions; the failure of clients to perform under contracts or to renew contracts with clients on favorable terms or at all; the failure to attract and retain qualified talent across the enterprise; significant capital expenditures may be needed to maintain the Company’s platforms and processes and to remain technologically and economically competitive; the impact of changes in postal rates, service levels or regulations; the fragility and decline in overall distribution channels, including newspaper distribution channels; the impact of the various restrictive covenants in the Company’s debt facilities on the Company’s ability to operate its business; 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 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; 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 of divestitures or discontinued operations; 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.

About Quad

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 clients reduce complexity, increase efficiency and enhance marketing spend effectiveness. Quad provides its clients with unmatched scale for client onsite services and expanded subject expertise in marketing strategy, creative solutions, media deployment and marketing management services. With a client-centric approach that drives its expanded offering, combined with leading-edge technology and single-source simplicity, Quad believes it has the resources and knowledge to help a wide variety of clients in multiple vertical industries, including retail, publishing and healthcare. 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.

QUAD/GRAPHICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three Months Ended September 30, 2019 and 2018

(in millions, except per share data)

(UNAUDITED)

 

Three Months Ended September 30,

 

2019

 

2018

Net sales

$

943.6

 

 

$

973.5

 

Cost of sales

764.5

 

 

777.0

 

Selling, general and administrative expenses

99.6

 

 

89.2

 

Depreciation and amortization

52.2

 

 

55.0

 

Restructuring, impairment and transaction-related charges

56.7

 

 

5.3

 

Total operating expenses

973.0

 

 

926.5

 

Operating income (loss) from continuing operations

(29.4

)

 

47.0

 

Interest expense

22.0

 

 

18.3

 

Net pension income

(1.5

)

 

(3.1

)

Loss on debt extinguishment

14.6

 

 

 

Earnings (loss) from continuing operations before income taxes and equity in (earnings) loss of unconsolidated entity

(64.5

)

 

31.8

 

Income tax expense (benefit)

(17.6

)

 

4.5

 

Earnings (loss) from continuing operations before equity in (earnings) loss of unconsolidated entity

(46.9

)

 

27.3

 

Equity in (earnings) loss of unconsolidated entity

0.1

 

 

(0.2

)

Net earnings (loss) from continuing operations

(47.0

)

 

27.5

 

Loss from discontinued operations, net of tax

(79.4

)

 

(5.0

)

Net earnings (loss)

(126.4

)

 

22.5

 

Less: net earnings (loss) attributable to noncontrolling interests

0.1

 

 

(0.9

)

Net earnings (loss) attributable to Quad common shareholders

$

(126.5

)

 

$

23.4

 

 

 

 

 

Earnings (loss) per share attributable to Quad common shareholders

 

 

 

Basic:

 

 

 

Continuing operations

$

(0.94

)

 

$

0.57

 

Discontinued operations

(1.58

)

 

(0.10

)

Basic earnings (loss) per share attributable to Quad common shareholders

$

(2.52

)

 

$

0.47

 

 

 

 

 

Diluted:

 

 

 

Continuing operations

$

(0.94

)

 

$

0.56

 

Discontinued operations

(1.58

)

 

(0.10

)

Diluted earnings (loss) per share attributable to Quad common shareholders

$

(2.52

)

 

$

0.46

 

 

 

 

 

Weighted average number of common shares outstanding

 

 

 

Basic

50.1

 

 

49.3

 

Diluted

50.1

 

 

51.1

 

QUAD/GRAPHICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

For the Nine Months Ended September 30, 2019 and 2018

(in millions, except per share data)

(UNAUDITED)

 

Nine Months Ended September 30,

 

2019

 

2018

Net sales

$

2,853.5

 

 

$

2,860.9

 

Cost of sales

2,324.3

 

 

2,304.3

 

Selling, general and administrative expenses

290.5

 

 

268.8

 

Depreciation and amortization

159.3

 

 

162.0

 

Restructuring, impairment and transaction-related charges

73.7

 

 

40.6

 

Total operating expenses

2,847.8

 

 

2,775.7

 

Operating income from continuing operations

5.7

 

 

85.2

 

Interest expense

69.6

 

 

53.9

 

Net pension income

(4.5

)

 

(9.3

)

Loss on debt extinguishment

30.5

 

 

 

Earnings (loss) from continuing operations before income taxes and equity in (earnings) loss of unconsolidated entity

(89.9

)

 

40.6

 

Income tax expense (benefit)

(28.0

)

 

0.2

 

Earnings (loss) from continuing operations before equity in (earnings) loss of unconsolidated entity

(61.9

)

 

40.4

 

Equity in (earnings) loss of unconsolidated entity

0.9

 

 

(0.7

)

Net earnings (loss) from continuing operations

(62.8

)

 

41.1

 

Loss from discontinued operations, net of tax

(101.1

)

 

(12.6

)

Net earnings (loss)

(163.9

)

 

28.5

 

Less: net loss attributable to noncontrolling interests

(0.1

)

 

(0.8

)

Net earnings (loss) attributable to Quad common shareholders

$

(163.8

)

 

$

29.3

 

 

 

 

 

Earnings (loss) per share attributable to Quad common shareholders

 

 

 

Basic:

 

 

 

Continuing operations

$

(1.26

)

 

$

0.84

 

Discontinued operations

(2.02

)

 

(0.25

)

Basic earnings (loss) per share attributable to Quad common shareholders

$

(3.28

)

 

$

0.59

 

 

 

 

 

Diluted:

 

 

 

Continuing operations

$

(1.26

)

 

$

0.81

 

Discontinued operations

(2.02

)

 

(0.24

)

Diluted earnings (loss) per share attributable to Quad common shareholders

$

(3.28

)

 

$

0.57

 

 

 

 

 

Weighted average number of common shares outstanding

 

 

 

Basic

50.0

 

 

50.0

 

Diluted

50.0

 

 

51.8

 

QUAD/GRAPHICS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

As of September 30, 2019 and December 31, 2018

(in millions)

(UNAUDITED)

 

September 30,

2019

 

December 31,

2018

ASSETS

 

 

 

Cash and cash equivalents

$

18.2

 

 

$

69.5

 

Receivables, less allowances for doubtful accounts

472.0

 

 

497.6

 

Inventories

288.6

 

 

279.0

 

Prepaid expenses and other current assets

46.4

 

 

45.2

 

Current assets of discontinued operations

39.8

 

 

55.3

 

Total current assets

865.0

 

 

946.6

 

Property, plant and equipment—net

1,079.6

 

 

1,149.1

 

Operating lease right-of-use assets—net

118.1

 

 

 

Goodwill

103.0

 

 

44.5

 

Other intangible assets—net

149.7

 

 

112.6

 

Equity method investment in unconsolidated entity

2.9

 

 

4.0

 

Other long-term assets

126.2

 

 

89.2

 

Long-term assets of discontinued operations

23.5

 

 

123.1

 

Total assets

$

2,468.0

 

 

$

2,469.1

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

Accounts payable

$

416.3

 

 

$

496.3

 

Accrued liabilities

277.3

 

 

285.1

 

Short-term debt and current portion of long-term debt

66.0

 

 

42.9

 

Current portion of finance lease obligations

8.2

 

 

3.6

 

Current portion of operating lease obligations

32.6

 

 

 

Current liabilities of discontinued operations

18.5

 

 

23.4

 

Total current liabilities

818.9

 

 

851.3

 

Long-term debt

1,098.9

 

 

882.6

 

Finance lease obligations

5.1

 

 

6.7

 

Operating lease obligations

88.5

 

 

 

Deferred income taxes

5.3

 

 

32.1

 

Other long-term liabilities

207.2

 

 

231.8

 

Long-term liabilities of discontinued operations

3.1

 

 

4.4

 

Total liabilities

2,227.0

 

 

2,008.9

 

 

 

 

 

Shareholders’ equity

 

 

 

Preferred stock

 

 

 

Common stock

1.4

 

 

1.4

 

Additional paid-in capital

843.5

 

 

861.3

 

Treasury stock, at cost

(30.4

)

 

(56.6

)

Accumulated deficit

(423.1

)

 

(211.4

)

Accumulated other comprehensive loss

(168.0

)

 

(152.2

)

Quad’s shareholders’ equity

223.4

 

 

442.5

 

Noncontrolling interests

17.6

 

 

17.7

 

Total shareholders’ equity and noncontrolling interests

241.0

 

 

460.2

 

Total liabilities and shareholders’ equity

$

2,468.0

 

 

$

2,469.1

 

QUAD/GRAPHICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Nine Months Ended September 30, 2019 and 2018

(in millions)

(UNAUDITED)

 

Nine Months Ended September 30,

 

2019

 

2018

OPERATING ACTIVITIES

 

 

 

Net earnings (loss)

$

(163.9

)

 

$

28.5

 

Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:

 

 

 

Depreciation and amortization

172.9

 

 

173.6

 

Employee stock ownership plan contribution

 

 

22.3

 

Impairment charges

94.2

 

 

16.0

 

Goodwill impairment

10.1

 

 

 

Loss on debt extinguishment

30.5

 

 

 

Stock-based compensation

11.6

 

 

12.3

 

Gain from property insurance claims

(0.8

)

 

(18.3

)

Gain on sale of business

(8.6

)

 

 

Gain on the sale or disposal of property, plant and equipment

(6.6

)

 

(10.7

)

Deferred income taxes

(58.3

)

 

(0.5

)

Other non-cash adjustments to net earnings (loss)

3.9

 

 

1.9

 

Changes in operating assets and liabilities—net of acquisitions

(80.9

)

 

(178.5

)

Net cash provided by operating activities

4.1

 

 

46.6

 

INVESTING ACTIVITIES

 

 

 

Purchases of property, plant and equipment

(98.5

)

 

(85.0

)

Proceeds from the sale of property, plant and equipment

17.3

 

 

22.3

 

Proceeds from the sale of business

11.1

 

 

 

Proceeds from property insurance claims

0.3

 

 

14.5

 

Loan to an unconsolidated entity

(5.0

)

 

 

Acquisition of businesses—net of cash acquired

(121.0

)

 

(71.4

)

Net cash used in investing activities

(195.8

)

 

(119.6

)

FINANCING ACTIVITIES

 

 

 

Proceeds from issuance of long-term debt

1,284.1

 

 

0.3

 

Payments of long-term debt

(1,067.7

)

 

(27.8

)

Payments of finance lease obligations

(5.8

)

 

(4.9

)

Borrowings on revolving credit facilities

3,171.3

 

 

1,830.0

 

Payments on revolving credit facilities

(3,160.1

)

 

(1,691.9

)

Payments of debt issuance costs and financing fees

(20.2

)

 

 

Purchases of treasury stock

 

 

(36.7

)

Proceeds from stock options exercised

 

 

4.1

 

Equity awards redeemed to pay employees’ tax obligations

(6.6

)

 

(9.0

)

Payment of cash dividends

(49.2

)

 

(47.5

)

Contingent consideration paid for business acquired

(5.3

)

 

 

Net cash provided by financing activities

140.5

 

 

16.6

 

 

 

 

 

Effect of exchange rates on cash and cash equivalents

(0.1

)

 

(1.7

)

Net decrease in cash and cash equivalents

(51.3

)

 

(58.1

)

Cash and cash equivalents at beginning of period

69.5

 

 

64.4

 

Cash and cash equivalents at end of period

$

18.2

 

 

$

6.3

 

Contacts

Investor Relations Contact
Kyle Egan

Director of Investor Relations and Assistant Treasurer, Quad

414-566-2482

kegan@quad.com

Media Contact
Claire Ho

Director of Corporate Communications, Quad

414-566-2955

cho@quad.com

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