Quad Reports Fourth Quarter and Full-Year 2019 Results

Strong Customer Service Performance Drives Fourth Quarter Profitability, Free Cash Flow and Reduced Leverage; Positions Company for Accelerated Transformation

SUSSEX, Wis.–(BUSINESS WIRE)–Quad/Graphics, Inc. (NYSE: QUAD) (“Quad” or the “Company”) today reported results for its fourth quarter and full-year ending December 31, 2019.

Recent Highlights

  • Exceeded revised 2019 guidance for net sales, Adjusted EBITDA and Free Cash Flow.
  • Reduced Debt Leverage Ratio to 3.1x in the fourth quarter.
  • Expands cost reduction program to $100 million, to be fully realized in 2020.
  • Divested Omaha, Neb., packaging plant for $41 million as part of ongoing efforts to optimize its product portfolio.
  • Declares quarterly dividend of $0.15 per share.

“I am pleased to report that our fourth quarter results exceeded expectations, driven by continued execution against our strategic priorities, including aggressive cost management and increased manufacturing productivity. We had one of the best quarters in the past decade in terms of customer service performance, achieving strong quality and on-time delivery for our clients in their busiest season. This strong performance is due, in large part, to our decision to invest $40 million to increase hourly production employees’ wages, as we saw significant productivity gains throughout the quarter,” said Joel Quadracci, Chairman, President & CEO.

“In 2020, we will continue to make prudent, long-term decisions as we accelerate the transformation of our company as a marketing solutions partner with a strong foundation in print,” Quadracci continued. “This transformation, which we call Quad 3.0, is focused on counteracting ongoing print industry volume declines in order to reposition the business toward growth. During 2019, this strategy led to $225 million of organic incremental sales growth, helping to significantly offset print sales decline. Our ultimate goal is to completely offset the organic sales decline through growth of our higher-margin marketing solutions, which drive revenue across all our products and services.”

Added Quadracci: “We continue to win segment share, which reflects the strength of our offering as well as the long-term financial and operational stability of our company. We recently secured 100 percent of print volumes from two large national magazine publishers, and are onboarding that multi-year work now. We also continue to optimize our product portfolio for the long term through the lens of Quad 3.0. Most recently we divested our Omaha packaging plant to focus on our higher value packaging solutions that help clients create a cohesive brand experience across channels. This follows our decision to divest our book business and sell our industrial wood crating business in 2019.”

Summary Results

Results for the three months ended December 31, 2019, included:

  • Net Sales (excluding discontinued operations) — Net sales were $1.1 billion in 2019, down 4.9% from 2018. Organic sales declined 5.9% 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 growth strategy, which were offset by ongoing print industry volume and pricing pressures, and a negative 0.3% impact from foreign exchange.
  • Net Earnings Attributable to Quad Common Shareholders — Net earnings attributable to Quad common shareholders were $8 million in 2019, or $0.15 diluted earnings per share, as compared to net loss of $21 million in 2018, or $0.42 diluted loss per share. Excluding the results from discontinued operations, net earnings from continuing operations were $7 million in 2019, or $0.14 diluted earnings per share, as compared to net loss from continuing operations of $11 million in 2018, or $0.23 diluted loss per share.
  • Adjusted EBITDA (excluding discontinued operations) — Adjusted EBITDA was $96 million in 2019, as compared to $118 million in 2018, and Adjusted EBITDA margin was 9.0% in 2019, as compared to 10.5% in 2018. The variance to prior year primarily reflects the impact from the organic sales decline of 5.9%, a $13 million decrease in print profits from the reduction in market price for paper byproduct recoveries, the impact of a $6 million gain in 2018 from a sales tax litigation settlement in Peru, and $5 million of strategic investments made to increase hourly production employees’ wages, partially offset by cost reduction activities.

Results for the full-year ended December 31, 2019, included:

  • Net Sales (excluding discontinued operations) — Net sales were $3.9 billion in 2019 as compared to $4.0 billion in 2018, down 1.6%. Organic sales declined 3.5% 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 growth strategy, offset by ongoing print industry volume and pricing pressures, and a negative 0.6% impact from foreign exchange.
  • Net Loss Attributable to Quad Common Shareholders — Net loss attributable to Quad common shareholders was $156 million in 2019, or $3.12 diluted loss per share, as compared to net earnings of $9 million in 2018, or $0.16 diluted earnings per share. Excluding the results from discontinued operations, net loss from continuing operations was $56 million in 2019, or $1.11 diluted loss per share, as compared to net earnings from continuing operations of $30 million in 2018, or $0.59 diluted earnings per share.
  • Adjusted EBITDA (excluding discontinued operations) — Adjusted EBITDA was $335 million in 2019, as compared to $428 million in 2018, and Adjusted EBITDA margin was 8.5% in 2019, as compared to 10.7% in 2018. The variance to prior year primarily reflects the impact from the organic sales decline of 3.5%, $33 million in non-recurring benefits in 2018 that did not repeat at the same level in 2019, a $29 million impact from strategic investments made to increase hourly production employees’ wages, and a $27 million decrease in print profits from the reduction in market price for paper byproduct recoveries, partially offset by cost reduction activities.
  • Net Cash Provided by Operating Activities — Net cash provided by operating activities was $156 million in 2019, as compared to $261 million in 2018, primarily due to lower net earnings and $61 million in transaction costs associated with a terminated acquisition during the year.
  • Free Cash Flow — Free Cash Flow, excluding $61 million in payments from a terminated acquisition, was $106 million in 2019, as compared to $164 million in 2018, primarily due to lower net earnings and increased capital expenditures on long-term investments in automation and productivity improvements in the manufacturing platform.

Dividend

Quad’s next quarterly dividend of $0.15 per share will be payable on March 9, 2020, to shareholders of record as of February 28, 2020.

2020 Guidance

The Company provided the following 2020 financial guidance:

U.S. $

2019 Actuals

2020 Guidance Range

Net Sales

$3.9 billion

$3.5 to $3.7 billion

Adjusted EBITDA

$335 million

$285 to $315 million

Free Cash Flow(1)

$106 million

$100 to $130 million

   

(1)

Free Cash Flow includes cash flows from the discontinued operations of the book business.

Dave Honan, Executive Vice President and CFO, concluded: “In fiscal 2020, we remain disciplined in our efforts to manage our costs, and drive earnings and Free Cash Flow growth to reduce our leverage and further strengthen our balance sheet. In line with these goals, we have doubled our previously announced $50 million cost reduction program to $100 million, which we expect to fully realize in 2020. Looking ahead, these efforts, and the ongoing success of our Quad 3.0 strategy, are expected to continue to significantly offset ongoing print industry volume and pricing pressures.”

Quarterly Conference Call

Quad will hold a conference call at 10 a.m. ET on Wednesday, February 19, to discuss fourth quarter and full-year 2019 results.

Participants can pre-register for the webcast by navigating to http://dpregister.com/10137590. Participants will be given a unique PIN to gain immediate access to the call on February 19, 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 March 19, 2020, accessible as follows:

  • U.S. Toll-Free: 1-877-344-7529
  • International Toll: 1-412-317-0088
  • Replay Access Code: 10137590

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 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 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 impact of the various restrictive covenants in the Company’s debt facilities on the Company’s ability to operate its business; 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.

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 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.

QUAD/GRAPHICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three Months Ended December 31, 2019 and 2018

(in millions, except per share data)

(UNAUDITED)

 

Three Months Ended December 31,

 

2019

 

2018

Net sales

$

1,069.9

 

 

$

1,124.9

 

Cost of sales

867.9

 

 

917.1

 

Selling, general and administrative expenses

107.1

 

 

90.1

 

Depreciation and amortization

50.2

 

 

52.9

 

Restructuring, impairment and transaction-related charges

15.7

 

 

62.7

 

Total operating expenses

1,040.9

 

 

1,122.8

 

Operating income from continuing operations

29.0

 

 

2.1

 

Interest expense

20.4

 

 

19.3

 

Net pension income

(1.5

)

 

(3.1

)

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

10.1

 

 

(14.1

)

Income tax expense (benefit)

3.6

 

 

(2.6

)

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

6.5

 

 

(11.5

)

Equity in earnings of unconsolidated entity

(0.6

)

 

(0.3

)

Net earnings (loss) from continuing operations

7.1

 

 

(11.2

)

Earnings (loss) from discontinued operations, net of tax

0.5

 

 

(9.4

)

Net earnings (loss)

7.6

 

 

(20.6

)

Less: net earnings attributable to noncontrolling interests

0.1

 

 

0.2

 

Net earnings (loss) attributable to Quad common shareholders

$

7.5

 

 

$

(20.8

)

 

 

 

 

Earnings (loss) per share attributable to Quad common shareholders

 

 

 

Basic:

 

 

 

Continuing operations

$

0.14

 

 

$

(0.23

)

Discontinued operations

0.01

 

 

(0.19

)

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

$

0.15

 

 

$

(0.42

)

 

 

 

 

Diluted:

 

 

 

Continuing operations

$

0.14

 

 

$

(0.23

)

Discontinued operations

0.01

 

 

(0.19

)

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

$

0.15

 

 

$

(0.42

)

 

 

 

 

Weighted average number of common shares outstanding

 

 

 

Basic

50.2

 

 

49.4

 

Diluted

51.0

 

 

49.4

 

QUAD/GRAPHICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

For the Years Ended December 31, 2019 and 2018

(in millions, except per share data)

(UNAUDITED)

 

Year Ended December 31,

 

2019

 

2018

Net sales

$

3,923.4

 

 

$

3,985.8

 

Cost of sales

3,192.2

 

 

3,221.4

 

Selling, general and administrative expenses

397.6

 

 

358.9

 

Depreciation and amortization

209.5

 

 

214.9

 

Restructuring, impairment and transaction-related charges

89.4

 

 

103.3

 

Total operating expenses

3,888.7

 

 

3,898.5

 

Operating income from continuing operations

34.7

 

 

87.3

 

Interest expense

90.0

 

 

73.2

 

Net pension income

(6.0

)

 

(12.4

)

Loss on debt extinguishment

30.5

 

 

 

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

(79.8

)

 

26.5

 

Income tax benefit

(24.4

)

 

(2.4

)

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

(55.4

)

 

28.9

 

Equity in (earnings) loss of unconsolidated entity

0.3

 

 

(1.0

)

Net earnings (loss) from continuing operations

(55.7

)

 

29.9

 

Loss from discontinued operations, net of tax

(100.6

)

 

(22.0

)

Net earnings (loss)

(156.3

)

 

7.9

 

Less: net loss attributable to noncontrolling interests

 

 

(0.6

)

Net earnings (loss) attributable to Quad common shareholders

$

(156.3

)

 

$

8.5

 

 

 

 

 

Earnings (loss) per share attributable to Quad common shareholders

 

 

 

Basic:

 

 

 

Continuing operations

$

(1.11

)

 

$

0.61

 

Discontinued operations

(2.01

)

 

(0.44

)

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

$

(3.12

)

 

$

0.17

 

 

 

 

 

Diluted:

 

 

 

Continuing operations

$

(1.11

)

 

$

0.59

 

Discontinued operations

(2.01

)

 

(0.43

)

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

$

(3.12

)

 

$

0.16

 

 

 

 

 

Weighted average number of common shares outstanding

 

 

 

Basic

50.0

 

 

49.8

 

Diluted

50.0

 

 

51.6

 

QUAD/GRAPHICS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

As of December 31, 2019 and 2018

(in millions)

(UNAUDITED)

 

December 31,

2019

 

December 31,

2018

ASSETS

 

 

 

Cash and cash equivalents

$

78.7

 

 

$

69.5

 

Receivables, less allowances for doubtful accounts

456.1

 

 

497.6

 

Inventories

210.5

 

 

279.0

 

Prepaid expenses and other current assets

109.0

 

 

45.2

 

Current assets of discontinued operations

56.6

 

 

55.3

 

Total current assets

910.9

 

 

946.6

 

 

 

 

 

Property, plant and equipment—net

1,036.5

 

 

1,153.8

 

Operating lease right-of-use assets—net

97.9

 

 

 

Goodwill

103.0

 

 

44.5

 

Other intangible assets—net

137.2

 

 

112.6

 

Equity method investment in unconsolidated entity

3.6

 

 

4.0

 

Other long-term assets

127.5

 

 

89.2

 

Long-term assets of discontinued operations

0.5

 

 

118.4

 

Total assets

$

2,417.1

 

 

$

2,469.1

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

Accounts payable

$

416.7

 

 

$

496.3

 

Other current liabilities

303.0

 

 

285.1

 

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

40.0

 

 

42.9

 

Current portion of finance lease obligations

7.7

 

 

5.0

 

Current portion of operating lease obligations

30.2

 

 

 

Current liabilities of discontinued operations

15.8

 

 

22.0

 

Total current liabilities

813.4

 

 

851.3

 

 

 

 

 

Long-term debt

1,058.5

 

 

882.6

 

Finance lease obligations

6.0

 

 

10.3

 

Operating lease obligations

70.4

 

 

 

Deferred income taxes

2.8

 

 

32.1

 

Other long-term liabilities

221.1

 

 

231.8

 

Long-term liabilities of discontinued operations

0.6

 

 

0.8

 

Total liabilities

2,172.8

 

 

2,008.9

 

 

 

 

 

Shareholders’ Equity

 

 

 

Preferred stock

 

 

 

Common stock

1.4

 

 

1.4

 

Additional paid-in capital

847.4

 

 

861.3

 

Treasury stock, at cost

(31.5

)

 

(56.6

)

Accumulated deficit

(423.5

)

 

(211.4

)

Accumulated other comprehensive loss

(167.2

)

 

(152.2

)

Quad’s shareholders’ equity

226.6

 

 

442.5

 

Noncontrolling interests

17.7

 

 

17.7

 

Total shareholders’ equity and noncontrolling interests

244.3

 

 

460.2

 

Total liabilities and shareholders’ equity

$

2,417.1

 

 

$

2,469.1

 

QUAD/GRAPHICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended December 31, 2019 and 2018

(in millions)

(UNAUDITED)

 

Year Ended December 31,

 

2019

 

2018

OPERATING ACTIVITIES

 

 

 

Net earnings (loss)

$

(156.3

)

 

$

7.9

 

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

 

 

 

Depreciation and amortization

223.1

 

 

230.7

 

Employee stock ownership plan contribution

 

 

22.3

 

Impairment charges

100.0

 

 

26.5

 

Goodwill impairment

10.1

 

 

 

Loss on debt extinguishment

30.5

 

 

 

Stock-based compensation

13.6

 

 

15.6

 

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

(6.6

)

 

(17.8

)

Gain on the sale of a business

(8.4

)

 

 

Gain from property insurance claims

(0.8

)

 

(18.3

)

Deferred income taxes

(57.1

)

 

(14.5

)

Other non-cash adjustments to net earnings (loss)

3.9

 

 

2.5

 

Changes in operating assets and liabilities

3.5

 

 

5.7

 

Net cash provided by operating activities

155.5

 

 

260.6

 

 

 

 

 

INVESTING ACTIVITIES

 

 

 

Purchases of property, plant and equipment

(111.0

)

 

(96.3

)

Proceeds from the sale of property, plant and equipment

17.5

 

 

32.7

 

Proceeds from the sale of a 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

(208.1

)

 

(120.5

)

 

 

 

 

FINANCING ACTIVITIES

 

 

 

Proceeds from issuance of long-term debt

1,285.1

 

 

7.8

 

Payments of long-term debt

(1,119.4

)

 

(33.2

)

Payments of finance lease obligations

(8.7

)

 

(6.3

)

Borrowings on revolving credit facilities

3,636.1

 

 

2,563.7

 

Payments on revolving credit facilities

(3,642.1

)

 

(2,561.1

)

Payments of debt issuance costs and financing fees

(20.2

)

 

 

Purchases of treasury stock

 

 

(36.7

)

Proceeds from stock options exercised

 

 

4.2

 

Equity awards redeemed to pay employees’ tax obligations

(6.6

)

 

(9.0

)

Payment of cash dividends

(57.1

)

 

(62.9

)

Contingent consideration paid for business acquired

(5.3

)

 

 

Net cash provided by (used in) financing activities

61.8

 

 

(133.5

)

 

 

 

 

Effect of exchange rates on cash and cash equivalents

 

 

(1.5

)

 

 

 

 

Net increase (decrease) in cash and cash equivalents

9.2

 

 

5.1

 

 

 

 

 

Cash and cash equivalents at beginning of year

69.5

 

 

64.4

 

 

 

 

 

Cash and cash equivalents at end of year

$

78.7

 

 

$

69.5

 

Contacts

Investor Relations Contact
Kyle Egan

Director of Investor Relations and Assistant Treasurer, Quad

414-566-2482

[email protected]

Media Contact
Claire Ho

Director of Corporate Communications, Quad

414-566-2955

[email protected]

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