Quad Reports $15M Q2 Net Loss, But Says Full-Year Guidance Remains on Track

Quad/Graphics, Inc. reported results for its second quarter, ending June 30, 2019.

Recent Highlights

• Reported second quarter 2019 net sales of $1 billion and a net loss of $15 million, or $0.30 diluted loss per share.
• Achieved second quarter 2019 Non-GAAP Adjusted EBITDA of $75 million, within the Company’s second quarter 2019 guidance range of $70 million to $80 million, and Non-GAAP Adjusted diluted loss per share of $0.09.
• Generated second quarter 2019 cash from operations of $75 million and Free Cash Flow of $51 million.
• Terminated merger agreement with LSC Communications Inc. and, as a result, Quad optimized its debt structure by replacing its Term Loan B with a lower interest Term Loan A, saving approximately $12 million in annualized interest costs.
• Announced investment and partnership with the dtx company, a leader in the direct-to-consumer economy.
• Declares quarterly dividend of $0.30 per share.

Joel Quadracci

“Our second quarter results were in line with our expectations and we remain on track to achieve our full-year 2019 guidance as we continue to transform our Company as a marketing solutions partner focused on creating more value for all our stakeholders,” said Joel Quadracci, Chairman, President & CEO. “Our recent investment and partnership with the dtx company builds on a series of strategic investments, including the acquisitions of Periscope and Ivie & Associates, and a controlling ownership interest in Rise Interactive, which have all been designed to accelerate our transformation.

"dtx, which was founded by Tim Armstrong, formerly CEO of Oath andAOL and a senior leader at Google, empowers consumers and companies to build direct relationships. Through our partnership with dtx, we will help consumers discover and interact with direct-to-consumer brands, and help those brands acquire and retain customers with personalized, multichannel programs.”

Quadracci continued: “As we announced last week, we mutually agreed with LSC Communications to terminate the merger agreement under which Quad would have acquired LSC. The U.S. Department of Justice’s decision to sue to block the transaction added delay, uncertainty and costs that likely would have eroded a considerable amount of the expected benefits of the acquisition. Independent of that outcome, we have continued to develop exciting innovations in print and integrated marketing solutions that reduce complexity, improve efficiencies and enhance marketing spend effectiveness.

"Our strategy is working, as designed, to help offset expected print industry headwinds. As always, we remain focused on making decisions in the long-term best interest of our clients, shareholders and employees. With our strong and engaged workforce and state-of-the-art technology and processes, we are well-positioned to continue driving productivity improvements to generate the earnings and cash flow that further advance our value-creating transformation.”

Summary Results

Net sales decreased 1.2% during the second quarter of 2019 to $1 billion. Organic sales declined 2.4%, after excluding sales related to the January 2019 acquisition of Periscope. The organic results reflect ongoing print industry volume and pricing pressures, and a negative impact from foreign exchange, partially offset by new revenue generated from the Company’s Quad 3.0 growth strategy and an increase in paper sales.

Net loss attributable to Quad common shareholders during the second quarter of 2019 was $14.8 million, or $0.30 diluted loss per share, as compared to earnings of $9.4 million, or$0.18 diluted earnings per share in 2018. Non-GAAP Adjusted diluted loss per share for the second quarter of 2019 was$0.09 per share compared to earnings per share of $0.23. Second quarter 2019 Non-GAAP Adjusted EBITDA was $75 million compared to $90 million in second quarter 2018, and Adjusted EBITDA margin was 7.5% compared to 8.8% in 2018. The Adjusted EBITDA variance to prior-year primarily reflects an $8 million impact from strategic investments made to increase hourly production employees’ wages, a $7 million impact from the reduction in market price for paper byproduct recoveries, and the impact from the organic sales decline of 2.4%.

Net sales increased 1.3% during the six months ended June 30, 2019, to $2 billion, primarily from the impact of the Ivie and Periscope acquisitions and the investment in Rise. Organic sales declined 1.5% after excluding acquisition sales impact of 2.8%. The organic results reflect ongoing print industry volume and pricing pressures, and a negative impact from foreign exchange, partially offset by new revenue generated from the Company’s Quad 3.0 growth strategy and an increase in paper sales.

Net loss attributable to Quad common shareholders for the six months ended June 30, 2019, was $37.3 million, or $0.75 diluted loss per share, as compared to earnings of $5.9 million, or $0.11 diluted earnings per share in 2018. Excluding the loss on debt extinguishment in 2019, expense associated with an employee ownership plan contribution in 2018 and restructuring costs, Non-GAAP Adjusted diluted loss per share for the six month ended June 30, 2019, was $0.24 compared to earnings of $0.80 per share in 2018. Year-to-date Non-GAAP Adjusted EBITDA was $145 million compared to $200 million for 2018, and Adjusted EBITDA margin was 7.2% compared to 10.1% in 2018. The Adjusted EBITDA 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 $16 million impact from strategic investments made to increase hourly production employees’ wages, a $6 million impact from the reduction in market price for paper byproduct recoveries, and the impact from the organic sales decline of 1.5%.

Net cash provided by operating activities during the second quarter of 2019 was $75 million compared to $38 million in 2018, and Free Cash Flow was $51 million in 2019 as compared to $9 million in 2018, representing an increase of$42 million. Net cash provided by operating activities was $16 million for the first six months of 2019 compared to $41 million in 2018, and Free Cash Flow was negative $50 million in 2019 as compared to negative $13 million in 2018. The year-to-date variances were primarily due to lower net earnings and increased capital expenditures on long-term investments in automation and productivity improvements in the manufacturing platform, partially offset by an improvement in cash provided from working capital. As a reminder, the Company generates the majority of its Free Cash Flow in the fourth quarter of the year.

“We made several strategic investments in 2019, such as the acquisition of Periscope, resulting in a Debt Leverage Ratio of 3.06x, temporarily above our long-term targeted range of 2.0x to 2.5x,” said Dave Honan, Quad Executive Vice President and Chief Financial Officer. “However, we anticipate that the Debt Leverage Ratio will decrease significantly by year end to be less than 2.8x due to continued strong Free Cash Flow generation of the business as we benefit from our Quad 3.0 integrated services offering. In addition, the significant and consistent Free Cash Flow generating power of our business allows the Company to maintain an affordable and sustainable annual dividend of $1.20 per share, representing 39% of Free Cash Flow at the midpoint of our annual guidance. As always, we remain stringently focused on transforming our business to drive further stability and greater shareholder value as we move forward.”

Quad’s next quarterly dividend of $0.30 per share will be payable on September 6, 2019, to shareholders of record as of August 19, 2019.

Source: Quad/Graphics, Inc.

The preceding press release was provided by a company unaffiliated with Printing Impressions. The views expressed within do not directly reflect the thoughts or opinions of the staff of Printing Impressions.