Quad/Graphics(QUAD) - 2021 Q2 - Quarterly Report

PART I — FINANCIAL INFORMATION Condensed Consolidated Financial Statements (Unaudited) The unaudited condensed consolidated financial statements present the company's financial performance, balance sheet, and cash flows for the three and six months ended June 30, 2021, and 2020 Condensed Consolidated Statements of Operations The company achieved a significant turnaround in Q2 2021 with net earnings of $34.4 million, compared to a net loss of $23.5 million in Q2 2020, driven by higher sales and favorable restructuring charges Q2 and Six-Month Financial Performance (2021 vs. 2020) | Financial Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Total Net Sales | $693.9 M | $584.5 M | $1,399.7 M | $1,407.0 M | | Operating Income (Loss) | $48.0 M | $(2.8) M | $69.0 M | $2.2 M | | Net Earnings (Loss) to Shareholders | $34.4 M | $(23.5) M | $44.6 M | $(35.9) M | | Diluted EPS | $0.66 | $(0.46) | $0.85 | $(0.71) | - A gain from a sale and leaseback of $13.7 million was recognized in Q2 2021, contributing significantly to operating income[10] - Restructuring, impairment, and transaction-related charges were a net credit of $(13.4) million in Q2 2021, compared to a charge of $16.4 million in Q2 2020, marking a significant positive swing[10] Condensed Consolidated Statements of Comprehensive Income (Loss) Total comprehensive income attributable to common shareholders showed a substantial recovery, reaching $39.1 million in Q2 2021 versus a loss of $21.4 million in the prior-year period Comprehensive Income (Loss) (2021 vs. 2020) | Period | Comprehensive Income (Loss) Attributable to Quad Shareholders (2021) | Comprehensive Income (Loss) Attributable to Quad Shareholders (2020) | | :--- | :--- | :--- | | Three Months Ended June 30 | $39.1 M | $(21.4) M | | Six Months Ended June 30 | $45.1 M | $(57.4) M | Condensed Consolidated Balance Sheets The balance sheet as of June 30, 2021, reflects reduced total assets and liabilities, a significant decrease in long-term debt, and an increase in shareholders' equity Key Balance Sheet Items (June 30, 2021 vs. Dec 31, 2020) | Account | June 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Cash and cash equivalents | $98.3 M | $55.2 M | | Total current assets | $626.7 M | $679.2 M | | Total assets | $1,789.1 M | $1,927.7 M | | Long-term debt | $589.0 M | $902.7 M | | Total liabilities | $1,657.0 M | $1,842.9 M | | Total shareholders' equity | $132.1 M | $84.8 M | Condensed Consolidated Statements of Cash Flows For the first half of 2021, net cash from operations increased, investing activities provided cash primarily from asset sales, and financing activities used cash for debt repayments Six-Month Cash Flow Summary (2021 vs. 2020) | Cash Flow Activity | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $88.9 M | $67.2 M | | Net cash provided by investing activities | $45.9 M | $6.1 M | | Net cash used in financing activities | $(91.5) M | $(81.5) M | | Net increase (decrease) in cash | $43.1 M | $(8.5) M | Condensed Consolidated Statements of Shareholders' Equity Total shareholders' equity increased significantly to $132.1 million by June 30, 2021, driven by net earnings and other comprehensive income adjustments - Quad's shareholders' equity grew to $132.1 million as of June 30, 2021, up from $84.1 million at the end of 2020[21] - The primary drivers for the equity increase in the first six months of 2021 were net earnings of $44.6 million and positive other comprehensive income adjustments[21] Notes to Condensed Consolidated Financial Statements (Unaudited) The notes detail revenue disaggregation, the impact of discontinued operations, restructuring activities, debt structure, and dividend and share repurchase program status - The company's business is seasonal, with net sales and operating income typically higher in the third and fourth quarters due to back-to-school and holiday-related advertising[24] - The COVID-19 pandemic has had, and is expected to continue to have, a negative impact on the company's business, financial condition, and results of operations[27] - The sale of the company's Book business was completed in 2020, and its results are reported as discontinued operations for the 2020 periods presented[26] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses a strong Q2 2021 recovery, improved liquidity, reduced debt, and strategic priorities focused on client relationships and financial strength Overview The company is a worldwide marketing solutions partner with strategic priorities focused on client-centric growth, disciplined investment, and enhancing financial strength - The company's strategy focuses on transforming into a marketing solutions partner to help clients reduce complexity and increase marketing effectiveness across multiple channels[139] - Strategic priorities include growing market share in key verticals like consumer technology, healthcare, and direct-to-consumer, while defending its position in retail and publishing[141] - Capital allocation priorities are deleveraging the balance sheet through debt and pension liability reduction, making compelling investments, and pursuing value-driven industry consolidation[146] - The company faces significant trends including media disruption, intense competition in the printing industry, and potential impacts from USPS financial issues and rate changes[158][162][163] Results of Operations Q2 2021 net sales increased 18.7% year-over-year, and operating income improved significantly, driven by organic growth, a sale-leaseback gain, and reduced restructuring charges Q2 2021 vs Q2 2020 Performance | Metric | Q2 2021 | Q2 2020 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Total Net Sales | $693.9 M | $584.5 M | +$109.4 M | +18.7% | | Operating Income (Loss) | $48.0 M | $(2.8) M | +$50.8 M | N/A | | Restructuring Charges (Income) | $(13.4) M | $16.4 M | -$29.8 M | -181.7% | | EBITDA (Non-GAAP) | $90.0 M | $35.1 M | +$54.9 M | +156.4% | Six Months 2021 vs 2020 Performance | Metric | 6M 2021 | 6M 2020 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Total Net Sales | $1,399.7 M | $1,407.0 M | -$7.3 M | -0.5% | | Operating Income | $69.0 M | $2.2 M | +$66.8 M | N/A | | Restructuring Charges (Income) | $(10.8) M | $39.2 M | -$50.0 M | -127.6% | | EBITDA (Non-GAAP) | $157.1 M | $87.0 M | +$70.1 M | +80.6% | - The significant improvement in operating income for both the three and six-month periods was heavily influenced by gains on asset sales and reduced restructuring expenses, including a $20.9 million gain on the sale of a business in Q2 2021[167][182][207] Liquidity and Capital Resources The company maintained strong liquidity of $561.4 million, increased cash from operations, more than doubled Free Cash Flow, and reduced its Debt Leverage Ratio - Total liquidity stood at $561.4 million as of June 30, 2021, consisting of $98.3 million in cash and $463.1 million in unused revolving credit capacity[243] Key Liquidity Metrics (Six Months Ended June 30) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Net Cash from Operations | $88.9 M | $67.2 M | | Free Cash Flow (Non-GAAP) | $61.7 M | $29.2 M | - The Debt Leverage Ratio improved to 3.00x at June 30, 2021, down from 3.35x at December 31, 2020, primarily due to a $120.2 million decrease in Net Debt[256][258] - The company was in compliance with all financial covenants as of June 30, 2021, including its Maximum Total Net Leverage Ratio, which was 3.03 to 1.00 against a requirement of 4.25 to 1.00[259][260] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks from interest rates, foreign currency, credit, and commodities, which are managed through various mitigation strategies - Interest rate risk is managed through the use of interest rate swaps, which have converted $380.0 million of variable-rate debt to fixed-rate, leaving $212.4 million exposed to variable rates[270] - The economy in Argentina is considered highly inflationary, requiring its financial results to be remeasured into U.S. dollars, which resulted in foreign currency losses of $0.9 million for the first six months of 2021[276] - Credit risk is considered moderate due to a large, diverse client base; the allowance for credit losses was $31.1 million as of June 30, 2021[277] - Commodity price risk is mitigated as the majority of paper is supplied by clients, and the company produces most of its own ink, controlling quality, cost, and supply[280][281] Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2021, with no material changes to internal controls - The company's management concluded that disclosure controls and procedures were effective as of the end of the period covered by the report[284] - No material changes were made to the internal control over financial reporting during the quarter ended June 30, 2021[285] PART II — OTHER INFORMATION Risk Factors There have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2020 - The company reports no material changes to its risk factors from those disclosed in its 2020 Annual Report on Form 10-K[287] Unregistered Sales of Equity Securities and Use of Proceeds No shares were repurchased in Q2 2021, and the company is currently prohibited from repurchases by its credit facility covenants - No shares were repurchased during the three months ended June 30, 2021[289] - As of June 30, 2021, $100.0 million remained authorized under the share repurchase program, but repurchases are currently prohibited by debt covenants until after the Covenant Relief Period[289] Exhibits This section indexes the exhibits filed with the report, including officer certifications and iXBRL-formatted financial statements - The report includes standard exhibits such as officer certifications (31.1, 31.2, 32) and iXBRL financial data (101, 104)[291] Signatures The report was duly signed and authorized by the CEO and CFO on August 4, 2021 - The Form 10-Q was signed on August 4, 2021, by the company's Principal Executive Officer and Principal Financial Officer[294]