QUAD/GRAPHICS, INC. The following discussion of the financial condition and results of operations of Quad should be read together with (1) the Quad condensed consolidated financial statements for the three and six months endedJune 30, 2020 and 2019, including the notes thereto, included in Item 1, "Condensed Consolidated Financial Statements (Unaudited)," of this Quarterly Report on Form 10-Q; and (2) the audited consolidated annual financial statements as of and for the year endedDecember 31, 2019 , and notes thereto included in the Company's Annual Report on Form 10-K, filed with theSEC onFebruary 19, 2020 . Management's discussion and analysis of financial condition and results of operations is provided as a supplement to the Company's condensed consolidated financial statements and accompanying notes to help provide an understanding of the Company's financial condition, the changes in the Company's financial condition and the Company's results of operations. This discussion and analysis is organized as follows:
•Cautionary Statement Regarding Forward-Looking Statements.
•Overview. This section includes a general description of the Company's business and segments, an overview of key performance metrics the Company's management measures and utilizes to evaluate business performance, and an overview of trends affecting the Company, including management's actions related to the trends. •Results of Operations. This section contains an analysis of the Company's results of operations by comparing the results for (1) the three months endedJune 30, 2020 , to the three months endedJune 30, 2019 ; and (2) the six months endedJune 30, 2020 , to the six months endedJune 30, 2019 . The comparability of the Company's results of operations between periods was impacted by the divestiture of theOmaha, Nebraska packaging plant, which was sold onJanuary 31, 2020 , and the additional investment in Rise inJune 2020 . The results of operations of the divestiture are included in the Company's condensed consolidated results until the date of disposition, and the results of operations of the investment in Rise reflect the Company's ownership interest from the respective dates of change in ownership. The results of the Company's United States Book business have been reported as discontinued operations for all periods presented. Forward-looking statements providing a general description of recent and projected industry and Company developments that are important to understanding the Company's results of operations are included in this section. This section also provides a discussion of EBITDA and EBITDA margin, financial measures that the Company uses to assess the performance of its business that are not prepared in accordance with GAAP. •Liquidity and Capital Resources. This section provides an analysis of the Company's capitalization, cash flows, a statement about off-balance sheet arrangements and a discussion of outstanding debt and commitments. Forward-looking statements important to understanding the Company's financial condition are included in this section. This section also provides a discussion of Free Cash Flow and Debt Leverage Ratio, non-GAAP financial measures that the Company uses to assess liquidity and capital allocation and deployment. 37 -------------------------------------------------------------------------------- Table of Contents Cautionary Statement Regarding Forward-Looking Statements To the extent any statements in this Quarterly Report on Form 10-Q contain information that is not historical, these statements are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements relate to, among other things, the objectives, goals, strategies, beliefs, intentions, plans, estimates, prospects, projections and outlook of the Company, and can generally be identified by the use of words such as "may," "will," "expect," "intend," "estimate," "anticipate," "plan," "foresee," "believe" or "continue" or the negatives of these terms, variations on them and other similar expressions. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond the control of the Company. These risks, uncertainties and other factors could cause actual results to differ materially from those expressed or implied by those forward-looking statements. Among risks, uncertainties and other factors that may impact Quad are those described in Part I, Item 1A, "Risk Factors," of the Company's 2019 Annual Report on Form 10-K, filed with theSEC onFebruary 19, 2020 , as such were previously supplemented and amended in Part II, Item 1A, "Risk Factors," of the Company's Quarterly Report on Form 10-Q, filed with theSEC onMay 6, 2020 , and which may further be amended or supplemented in Part II, Item 1A, "Risk Factors," of the Company's subsequently filed Quarterly Reports on Form 10-Q (including this report), and the following: •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 a highly competitive environment creates downward pricing pressures and potential under-utilization 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;
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•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 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 other intangible assets; and
•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. Quad cautions that the foregoing list of risks, uncertainties and other factors is not exhaustive, and you should carefully consider the other factors detailed from time to time in Quad's filings with theSEC and other uncertainties and potential events when reviewing the Company's forward-looking statements. Because forward-looking statements are subject to assumptions and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. You are cautioned not to place undue reliance on such statements, which speak only as of the date of this Quarterly Report on Form 10-Q. Except to the extent required by the federal securities laws, Quad undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. 39 --------------------------------------------------------------------------------
Table of Contents Overview Business Overview 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 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, the Company believes it 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 believes employee pride, combined with a relentless quest to create a better way, builds the opportunity to invent the future as a preferred marketing solutions partner, helping its clients win every day. To accomplish this vision, Quad remains focused on its consistent strategic priorities as follows:
Walk in the Shoes of Clients
The Company encourages all employees, regardless of job title, to walk in the shoes of clients by putting a priority on listening to clients' needs and challenges, doing what they can to make it easy to work with Quad, and making the client experience enjoyable at every touchpoint. As part of its transformation, the Company has focused on evolving client print-production conversations to conversations encompassing consultative, enterprise-wide solutions that solve marketing and process challenges, and create more value for clients. To accomplish this, a key component of Quad's client-facing strategy is to strengthen relationships at higher levels within a client's organization so the Company can better understand, anticipate and satisfy the organization's needs. Quad seeks to become an invaluable strategic marketing partner for its clients, helping them successfully navigate today's constantly evolving media landscape through innovative data-driven solutions, produced and deployed across multiple media channels. The Company also believes its proactive thought leadership in the key issues facing its clients, including data-driven marketing and postal reform, will foster loyalty to the Quad brand.
Grow the Business Profitably
This strategy centers on Quad's ability to grow its business at a time when significant media disruption and print industry headwinds continue. Key components of this strategy are as follows:
•Transformation as a marketing solutions partner, with an integrated marketing
platform that the Company believes creates more value than the traditional
agency approach that operates in silos and is focused on profit by individual
media channel. The Company calls this transformation Quad 3.0. Quad's unique
integrated marketing platform removes the complexity Quad's clients face when
working with multiple agency partners and vendors, eliminating multiple handoffs
that compromise both the strategy of programs as well as the speed at which they
are executed. In addition, the Company believes its platform increases client
efficiencies through workflow re-engineering, content production and process
optimization; and improves their clients' overall marketing spend effectiveness
across all channels through data-driven consumer insights, media planning, and
creative and campaign strategy.
•Organic growth, in which the Company leverages knowledge from existing client
relationships in key growth vertical industries to develop complementary
products and services that help brand owners market more efficiently and
effectively across media channels. Quad is also focused on ensuring it has the
right talent in the right positions to facilitate strategic marketing
conversations with its clients that lead to a better understanding of their
needs, developing tailored solutions and growing market share.
•Disciplined investments, that take many different forms. For example, the
Company intends to continue to pursue acquisitions that help accelerate Quad 3.0
as well as value-driven industry consolidating acquisitions that meet its
disciplined acquisition criteria. In addition, the Company intends to continue
making the long-term investments in its talent, such as hiring marketing talent,
that will accelerate its transformation as a marketing solutions partner, as
well as investments to increase productivity, such as through increased hourly
production employees' wages.
40-------------------------------------------------------------------------------- Table of Contents Strengthen the Core Quad uses a disciplined return on capital framework and historically has made significant investments in its print manufacturing platform and data management capabilities that have resulted in what it believes is the most integrated, automated, efficient, innovative and modern manufacturing platform and distribution network in the printing industry. The Company's continued focus to strengthen its core manufacturing platform through investments that streamline, automate and improve efficiencies and throughput, while reducing labor costs, promotes sustainable cash flow and continued value creation. Further, Quad's disciplined culture of holistic Continuous Improvement and commitment to Lean Manufacturing methodologies is a high priority throughout the Company and supports its goal of strengthening the production and distribution functions for core product lines so that Quad can remain the printing industry's high-quality, low-cost producer. Quad also strengthens its core print offering through continually enhancing its product portfolio, especially in the direct marketing and packaging space, with innovations that support clients' ability to stand out in the mailbox or on the store shelf.
Empower Employees
Quad's strategy to empower employees throughout their career journey builds on key aspects of the Company's distinct corporate culture, which the Company uses to fuel Quad 3.0. These aspects include strong and lasting Company values and an organization-wide entrepreneurial spirit and opportunity-seeking mentality. Employees are encouraged to take pride and ownership in their work, take advantage of continuous learning programs to advance in their careers and improve leadership skills, share knowledge by mentoring others and innovate solutions to drive performance. With the encouragement to do things differently, to be something greater and to create a better way, the Company believes its employees are more fully engaged in producing better results for clients and advancing the Company's strategic goals, while supporting community activities, initiatives and organizations that impact the quality of life near Quad's facilities and where employees work on site at client locations. As Quad continues to expand its integrated marketing platform, the Company believes this creates possibilities for each employee that are advantageously distinct from other employers.
Enhance Financial Strength and Create Shareholder Value
Quad follows a disciplined approach to maintaining and enhancing financial strength to create shareholder value, which is essential given ongoing media disruption and printing industry challenges. This strategy is centered on the Company's ability to maximize net earnings, Free Cash Flow and operating margins; maintain consistent financial policies to ensure a strong balance sheet, liquidity level and access to capital; and retain the financial flexibility needed to strategically allocate and deploy capital as circumstances change. The priorities for capital allocation and deployment are adjusted based on prevailing circumstances and what the Company thinks is best for shareholder value creation at any particular point in time. Those priorities currently include the following: (1) deleveraging the Company's balance sheet through debt and pension liability reductions; (2) making compelling investments that drive profitable organic growth and productivity in the Company's print manufacturing and distribution operations, as well as expansion into higher-growth marketing services that help accelerate Quad 3.0, and pursuing value-driven industry consolidation; and (3) over the long-term, returning capital to shareholders through dividends and share repurchases. To provide ongoing improvement in manufacturing productivity, the Company applies holistic Continuous Improvement and Lean Manufacturing methodologies to simplify and streamline processes and to ultimately maximize operating margins. These same methodologies are applied to its selling, general and administrative functions to create a truly Lean Enterprise. The Company has been working diligently to lower its cost structure by consolidating its manufacturing platform into its most efficient facilities, as well as realizing purchasing, mailing and logistics efficiencies by centralizing and consolidating print manufacturing volumes and eliminating redundancies in its administrative and corporate operations. Quad believes that its focused efforts to be the high-quality, low-cost producer generates increased Free Cash Flow and allows the Company to maintain a strong balance sheet through debt and pension liability reduction. The Company's disciplined financial approach also allows it to maintain sufficient liquidity and to reduce refinancing risk, with the nearest significant debt maturity not occurring untilMay 2022 . 41 -------------------------------------------------------------------------------- Table of Contents Segments The Company's operating and reportable segments are aligned with how the chief operating decision maker of the Company currently manages the business. As a result of the decision to sell the Company's United States Book business, all United States Print and Related Services segment amounts have been recast to exclude the Book business discontinued operations. The Company's operating and reportable segments, including their product and service offerings, and a "Corporate" category are summarized below. •The United States Print and Related Services segment is predominantly comprised of the Company'sUnited States printing operations and is managed as one integrated platform. This includes retail inserts, publications, catalogs, special interest publications, journals, direct mail, directories, in-store marketing and promotion, packaging, newspapers, custom print products, other commercial and specialty printed products and global paper procurement, together with marketing and other complementary services, including consumer insights, audience targeting, personalization, media planning and placement, process optimization, campaign planning and creation, pre-media production, videography, photography, digital execution, print execution and logistics. This segment also includes the manufacture of ink. The United States Print and Related Services segment accounted for approximately 90% of the Company's consolidated net sales during the three and six months endedJune 30, 2020 . •The International segment consists of the Company's printing operations inEurope andLatin America , including operations inEngland ,France ,Germany ,Poland ,Argentina ,Colombia ,Mexico andPeru , as well as investments in printing operations inBrazil andIndia . This segment provides printed products and marketing and other complementary services consistent withthe United States Print and Related Services segment. The International segment accounted for approximately 10% of the Company's consolidated net sales during the three and six months endedJune 30, 2020 . •Corporate consists of unallocated general and administrative activities and associated expenses including, in part, executive, legal and finance, as well as certain expenses and income from frozen employee retirement plans, such as pension benefit plans.
Key Performance Metrics Overview
The Company's management believes the ability to generate net sales growth,
profit increases and positive cash flow, while maintaining the appropriate level
of debt, are key indicators of the successful execution of the Company's
business strategy and will increase shareholder value. The Company uses
period-over-period net sales growth, EBITDA, EBITDA margin, net cash provided by
operating activities, Free Cash Flow and Debt Leverage Ratio as metrics to
measure operating performance, financial condition and liquidity. EBITDA, EBITDA
margin, Free Cash Flow and Debt Leverage Ratio are non-GAAP financial measures
(see the definitions of EBITDA, EBITDA margin and the reconciliation of net
earnings (loss) attributable to Quad common shareholders to EBITDA in the
"Results of Operations" section below, and see the definitions of Free Cash Flow
and Debt Leverage Ratio, the reconciliation of net cash provided by operating
activities to Free Cash Flow, and the calculation of Debt Leverage Ratio in the
"Liquidity and Capital Resources" section below).
Net sales growth. The Company uses period-over-period net sales growth as a key
performance metric. The Company's management assesses net sales growth based on
the ability to generate increased net sales through increased sales to existing
clients, sales to new clients, sales of new or expanded solutions to existing
and new clients and opportunities to expand sales through strategic investments,
including acquisitions.
EBITDA and EBITDA margin. The Company uses EBITDA and EBITDA margin as metrics
to assess operating performance. The Company's management assesses EBITDA and
EBITDA margin based on the ability to increase revenues while controlling
variable expense growth.
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Net cash provided by operating activities. The Company uses net cash provided by
operating activities as a metric to assess liquidity. The Company's management
assesses net cash provided by operating activities based on the ability to meet
recurring cash obligations while increasing available cash to fund cash
restructuring requirements related to cost reduction activities, as well as to
fund capital expenditures, debt service requirements, World Color Press single
employer pension plan contributions, World Color Press MEPPs withdrawal
liabilities, acquisitions and other investments in future growth, shareholder
dividends and share repurchases. Net cash provided by operating activities can
be significantly impacted by the timing of non-recurring or infrequent receipts
or expenditures.
Free Cash Flow. The Company uses Free Cash Flow as a metric to assess liquidity
and capital deployment. The Company's management assesses Free Cash Flow as a
measure to quantify cash available for strengthening the balance sheet (debt and
pension liability reduction), for strategic capital allocation and deployment
through investments in the business (acquisitions and strategic investments) and
for returning capital to the shareholders (dividends and share repurchases). The
Company's priorities for capital allocation and deployment will change as
circumstances dictate for the business, and Free Cash Flow can be significantly
impacted by the Company's restructuring activities and other unusual items.
Debt Leverage Ratio. The Company uses the Debt Leverage Ratio as a metric to
assess liquidity and the flexibility of its balance sheet. Consistent with other
liquidity metrics, the Company monitors the Debt Leverage Ratio as a measure to
determine the appropriate level of debt the Company believes is optimal to
operate its business, and accordingly, to quantify debt capacity available for
strengthening the balance sheet (debt and pension liability reduction), for
strategic capital allocation and deployment through investments in the business
(capital expenditures, acquisitions and strategic investments), and for
returning capital to the shareholders (dividends and share repurchases). The
priorities for capital allocation and deployment will change as circumstances
dictate for the business, and the Debt Leverage Ratio can be significantly
impacted by the amount and timing of large expenditures requiring debt
financing, as well as changes in profitability.
The Company remains disciplined with its debt leverage. The Company's
consolidated debt and finance lease obligations decreased $65 million during the
six months ended June 30, 2020 , primarily due to the use of cash proceeds from
the sale of the Omaha packaging plant to reduce debt obligations and the
redemption of certain of its senior notes under the Master Note and Security
Agreement, at par (the outstanding principal balance as of the date of payment).
Since the Company completed the World Color Press acquisition in July 2010 , the
Company has reduced debt and finance lease obligations by $692 million and has
reduced the obligations for pension, postretirement and MEPPs by $452 million ,
for a total obligation reduction since July of 2010 of over $1.1 billion .
The Company believes that a disciplined approach for capital management and a
strong balance sheet are critical to be able to invest in profitable growth
opportunities and technological advances, thereby providing the highest return
for shareholders. Management balances the use of cash between deleveraging the
Company's balance sheet (through reduction in debt and pension obligations),
compelling investment opportunities (through capital expenditures, acquisitions
and strategic investments) and returns to shareholders (through share
repurchases and quarterly dividends). Due to uncertainty in client demand as a
result of the COVID-19 pandemic, the Company's Board of Directors made the
proactive decision to temporarily suspend the Company's quarterly dividend of
$0.15 per share. The Company remains committed to paying a dividend over the
long-term and will seek to resume the dividend following stabilization of its
operating environment and after the Covenant Relief Period.
The Company is subject to seasonality in its quarterly results as net sales and
operating income are higher in the third and fourth quarters of the calendar
year as compared to the first and second quarters. The fourth quarter is
typically the highest seasonal quarter for cash flows from operating activities
and Free Cash Flow due to the reduction of working capital requirements that
reach peak levels during the third quarter. Seasonality is driven by increased
magazine advertising page counts, retail inserts, and catalogs primarily due to
back-to-school and holiday-related advertising and promotions. The Company
expects this seasonality impact to continue in future years. Due to the
uncertainty surrounding the timing and nature of the COVID-19 pandemic, the
Company anticipates this seasonality will be further impacted in 2020 and in
future periods, as the Company is heavily dependent on consumer demand.
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Overview of Trends Affecting Quad
As consumer media consumption habits change, marketing services providers face
increased demand to offer end-to-end marketing services, from strategy and
creative through execution, across all media channels. As new marketing and
advertising channels emerge, marketing services providers must expand their
services beyond traditional channels such as television, newspapers, print
publications and radio, to digital channels such as mobile, internet search,
internet display and video, to create effective multichannel campaigns for their
clients. This trend greatly influences Quad's ongoing efforts to redefine the
future of integrated marketing and create greater value for its clients who are
looking for less complexity, greater transparency and accountability from their
business partners.
The Company leverages its data-driven print expertise as part of an integrated
marketing platform that helps its clients not only plan and produce marketing
programs, but also deploy, manage and measure them across all media channels.
Competition in the printing industry remains highly fragmented and intense, and
the Company believes that there are indicators of heightened competitive
pressures. The industry has excess manufacturing capacity created by continued
declines in industry volumes which, in turn, has created accelerated downward
pricing pressures. In addition, digital delivery of documents and data,
including the online distribution and hosting of media content and mobile
technologies, offer alternatives to traditional delivery of printed documents.
Increasing consumer acceptance of digital delivery of content has resulted in
marketers and publishers allocating their marketing and advertising spend across
the expanding selection of digital delivery options, which further reduces
printing demand and contributes to print industry overcapacity. The Company also
faces competition from print management firms, which look to streamline
processes and reduce the overall print spend of the Company's clients, as well
as from strategic marketing firms focused on helping businesses integrate
multiple channels into their marketing campaigns.
The Company continues to make progress on integrating and streamlining all
aspects of its business, thereby lowering its cost structure by consolidating
its manufacturing platform into its most efficient facilities, as well as
realizing purchasing, mailing and logistics efficiencies by centralizing and
consolidating print manufacturing volumes and eliminating redundancies in its
administrative and corporate operations. The Company has continued to evolve its
manufacturing platform, equipping facilities to be product line agnostic, which
enables the Company to maximize equipment utilization. Quad believes that the
large plant size of certain of its key printing facilities allows the Company to
drive savings in certain product lines (such as publications and catalogs) due
to economies of scale and from investments in automation and technology. The
Company continues to focus on proactively aligning its cost structure to the
realities of the top-line pressures it faces in the printing industry through
Lean Manufacturing and sustainable continuous improvement programs.
Restructuring actions initiated by the Company beginning in 2010 have resulted
in the announcement of 47 plant closures through June 30, 2020 .
The Company believes it will continue to drive productivity improvements and
sustainable cost reduction initiatives into the future through an engaged
workforce and ongoing adoption of the latest manufacturing automation and
technology. Through this strategy, the Company believes it can maintain the
strongest, most efficient print manufacturing platform to remain a high-quality,
low-cost producer.
Integrated distribution with the postal service is an important component of the
Company's business. Any material change in the current service levels provided
by the postal service could impact the demand that clients have for print
services. The United States Postal Service ("USPS") continues to experience
financial problems. Without increased revenues or action by Congress to reform
the USPS' cost structure, these losses will continue into the future. Because of
these financial difficulties, the USPS has come under increased pressure to
adjust its postal rates and service levels. Additional price increases may
result in clients reducing mail volumes and exploring the use of alternative
methods for delivering a larger portion of their products, such as continued
diversion to the internet and other alternative media channels to ensure that
they stay within their expected postage budgets.
Current federal law limits postal rate increases (outside of an "exigent
circumstance") to the increase in the Consumer Price Index ("CPI"). This cap
works to ensure funding stability and predictability for mailers. However, that
same federal statute requires the Postal Regulatory Commission ("PRC") to
conduct a review of the overall rate-making structure for the USPS . The PRC
proposed a new rate-making structure that would provide the USPS with additional
pricing flexibility over the current CPI cap, and which may result in a
substantially altered rate structure for mailers. Any newly revised rates that
would be effective because of new rules issued by the PRC may include a higher
rate cap, or potentially the elimination of a rate cap altogether, which will
result in no restrictions on the USPS' ability to increase rates from year to
year. This may lead to price spikes for mailers and may also reduce the
incentive for the USPS to continue to take out costs and instead continue to
rely on postage to cover the costs of an outdated postal service that does not
reflect the industry's ability or willingness to pay. The result may be
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reduced demand for printed products as clients may move more aggressively into
other delivery methods, such as the many digital and mobile options now
available to consumers.
The Company's results of operations have been and continue to be adversely
impacted as a result of the COVID-19 pandemic. Through the Company's Crisis
Management Team, including executive and operations leadership, the Company has
been executing business continuity plans focused on protecting the health and
well-being of our employees, while also continuing to service clients, and
protect the long-term financial health of the Company as the COVID-19 pandemic
evolves. As a part of the business continuity plans, the Company implemented
cost reduction and cash conservation initiatives, including implementing a
COVID-19 Temporary Furlough Program through which employees take an unpaid leave
of absence - the length of which varies upon business needs; temporary salary
reductions for leaders through the end of July, including a 50% salary reduction
for the Chief Executive Officer and a 35% salary reduction for named executive
officers; a temporary 50% reduction in retainer fees for the Company's
non-employee directors; temporarily suspending use of vacation and vacation
payouts through the end of June; temporarily suspending production at several
manufacturing facilities where declining client volume or other effects of the
pandemic impacted the Company's ability to operate; suspending quarterly
dividend payments until further notice; and delaying capital spending projects.
While the Company has resumed, or expects to resume, production at most of its
manufacturing facilities, it has also announced the permanent closure of the
retail facility in Taunton, Massachusetts , during the second quarter of 2020.
The Company also amended its Senior Secured Credit Facility to provide for
certain financial covenant relief through a Covenant Relief Period. The Company
is continuing to evaluate its cost structure and expects to implement additional
cost reduction measures as necessary. As the pandemic continues to rapidly
evolve, the extent of the impact on the Company's business, financial condition,
cash flows, results of operations and supply chain will depend on future
developments, all of which are highly uncertain and cannot be predicted.
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Results of Operations for the Three Months Ended June 30, 2020 , Compared to the
Three Months Ended June 30, 2019 Summary Results
The Company's operating income (loss) from continuing operations, operating margin, net loss attributable to Quad common shareholders (computed using a 25% normalized tax rate for all items subject to tax) and diluted loss per share attributable to Quad common shareholders for the three months endedJune 30, 2020 , changed from the three months endedJune 30, 2019 , as follows (dollars in millions, except margin and per share data): Diluted Loss Net Loss Per Share Operating Attributable to Attributable Income (Loss) from Quad Common to Quad Common Continuing Operations Operating Margin Shareholders Shareholders For the Three Months Ended June 30, 2019 $ 18.7 2.0 % $ (14.8)$ (0.30) Restructuring, impairment and transaction-related charges (1) (7.0) (1.8) % (5.3) (0.10) Interest expense (2) N/A N/A 7.2 0.15 Net pension income (3) N/A N/A 0.9 0.02 2020 loss on debt extinguishment (4) N/A N/A (1.8) (0.04) Income taxes (5) N/A N/A (2.2) (0.04) Loss from discontinued operations, net of tax (6) N/A N/A 2.9 0.06 Investments in unconsolidated entity and noncontrolling interests, net of tax (7) N/A N/A 0.5 0.01 Operating loss from continuing operations (8) (14.5) (0.7) % (10.9) (0.22) For the Three Months Ended June 30, 2020 $ (2.8) (0.5) % $ (23.5)$ (0.46)
______________________________
(1)Restructuring, impairment and transaction-related charges increased
a.A
b.A$1.3 million increase in impairment charges from$0.4 million during the three months endedJune 30, 2019 , to$1.7 million during the three months endedJune 30, 2020 ;
c.A
d.A
e.A
The Company expects to incur additional restructuring and integration costs in future reporting periods in connection with eliminating excess manufacturing capacity and properly aligning its cost structure in conjunction with the Company's acquisitions and strategic investments, and other cost reduction programs. (2)Interest expense decreased$9.6 million ($7.2 million , net of tax) during the three months endedJune 30, 2020 , to$16.2 million . This change was due to a lower average debt levels and lower weighted average interest rate on borrowings in the three months endedJune 30, 2020 , as compared to the three months endedJune 30, 2019 . 46
-------------------------------------------------------------------------------- Table of Contents (3)Net pension income increased$1.1 million ($0.9 million , net of tax) during the three months endedJune 30, 2020 , to$2.6 million . This was due to a$1.0 million decrease from interest cost on pension plan liabilities and a$0.1 million increase from the expected long-term return on pension plan assets. (4)A$2.4 million loss on debt extinguishment ($1.8 million , net of tax) was recognized during the three months endedJune 30, 2020 , relating to the fourth amendment to the Company'sApril 28, 2014 Senior Secured Credit Facility, completed onJune 29, 2020 . (5)The$2.2 million decrease in income tax benefit on continuing operations as calculated in the following table is primarily due to a$3.7 million decreased income tax benefit from a lower projected annual effective income tax rate in 2020, partially offset by a$0.8 million income tax expense for discrete nondeductible expenses in 2019 that did not repeat in 2020 and a$0.6 million income tax benefit related to the CARES Act net operating loss carry back provisions: Three Months Ended June 30, 2020 2019 $ Change
Loss from continuing operations before income taxes
and equity in loss of unconsolidated entity
$ (5.6) $ (13.2) Normalized tax rate 25.0 % 25.0 % Income tax benefit at normalized tax rate (4.7) (1.4) (3.3) Income tax benefit from the condensed consolidated statements of operations (4.3) (3.2) (1.1) Impact of income taxes$ (0.4) $ 1.8 $ (2.2) (6)The decrease in loss from discontinued operations, net of tax, of$2.9 million during the three months endedJune 30, 2020 , was primarily due to the following: (1) a$5.0 million increase in income tax benefit; (2) a$4.3 million decrease in depreciation and amortization; and (3) increases in operating margins due to productivity improvements and cost reduction activities. These decreases were partially offset by a$10.3 million increase in restructuring, impairment and transaction-related charges recorded during the three months endedJune 30, 2020 . (7)The increase from investments in unconsolidated entity and noncontrolling interests, net of tax, of$0.5 million during the three months endedJune 30, 2020 , was primarily related to a$0.3 million increase in loss attributed to noncontrolling interests in the Company's condensed consolidated statements of operations related to the Company's majority ownership of Rise and a$0.2 million decrease in loss at the Company's investment in Plural Industria Gráfica Ltda. ("Plural"), the Company's Brazilian joint venture. (8)Operating income from continuing operations, excluding restructuring, impairment and transaction-related charges, decreased$14.5 million ($10.9 million , net of tax) primarily due to the following: (1) lower print volume and pricing due to ongoing industry pressures from excess capacity in the printing industry, including the ongoing impacts from the COVID-19 pandemic; (2) a$3.0 million increase in production hourly wages in our most competitive labor markets; and (3) an$2.4 million decrease in paper byproduct recoveries. These decreases were partially offset by savings from cost reduction initiatives and a$6.2 million decrease in depreciation and amortization expense. 47 -------------------------------------------------------------------------------- Table of Contents Operating Results from Continuing Operations The following table sets forth certain information from the Company's condensed consolidated statements of operations on an absolute dollar basis and as a relative percentage of total net sales for each noted period, together with the relative percentage change in such information between the periods set forth below: Three Months Ended June 30, 2020 2019 (dollars in millions) % of % of % Amount Sales Amount Sales $ Change Change Net sales: Products$ 447.7 76.6 %$ 743.5 78.4 %$ (295.8) (39.8) % Services 136.8 23.4 % 205.4 21.6 % (68.6) (33.4) % Total net sales 584.5 100.0 % 948.9 100.0 % (364.4) (38.4) % Cost of sales: Products 362.9 62.1 % 624.5 65.8 % (261.6) (41.9) % Services 98.0 16.8 % 147.0 15.5 % (49.0) (33.3) % Total cost of sales 460.9 78.9 % 771.5 81.3 % (310.6) (40.3) % Selling, general & administrative expenses 63.3 10.8 % 96.4 10.1 % (33.1) (34.3) % Depreciation and amortization 46.7 8.0 % 52.9 5.6 % (6.2) (11.7) % Restructuring, impairment and transaction-related charges 16.4 2.8 % 9.4 1.0 % 7.0 74.5 % Total operating expenses 587.3 100.5 % 930.2 98.0 % (342.9) (36.9) % Operating income (loss) from continuing operations$ (2.8) (0.5) %$ 18.7 2.0 %$ (21.5) (115.0) % Net Sales Product sales decreased$295.8 million , or 39.8%, for the three months endedJune 30, 2020 , compared to the three months endedJune 30, 2019 , primarily due to the following: (1) a$149.6 million decrease in sales in the Company's print product lines due to ongoing industry volume and pricing pressures, including the ongoing impacts from the COVID-19 pandemic; (2) a$123.3 million decrease from pass-through paper sales; (3) a$19.2 million decrease in sales due to the divestiture of the Company'sOmaha packaging plant; and (4)$3.7 million in unfavorable foreign exchange impacts. Service sales, which primarily consist of logistics, distribution, marketing services, imaging and medical services, decreased$68.6 million , or 33.4%, for the three months endedJune 30, 2020 , compared to the three months endedJune 30, 2019 , primarily due to the following: (1) a$42.8 million decrease in logistics sales; (2) a$16.6 million decrease in sales of marketing services, primarily related to print management; (3) a$7.1 million decrease in print imaging services; and (4) a$2.1 million decrease in sales of QuadMed external medical services. Cost of Sales Cost of product sales decreased$261.6 million for the three months endedJune 30, 2020 , compared to the three months endedJune 30, 2019 , primarily due to the following: (1) lower print volume; (2) a decrease in pass-through paper costs; (3) the impact from the divestiture of theOmaha packaging plant; and (4) other cost reduction initiatives. These decreases were partially offset by a$3.0 million increase in production hourly wages in our most competitive labor markets and a$2.4 million decrease in paper byproduct recoveries. Cost of product sales as a percentage of total net sales decreased to 62.1% for the three months endedJune 30, 2020 , compared to 65.8% for the three months endedJune 30, 2019 , primarily due to the reasons provided above. Cost of service sales decreased$49.0 million , or 33.3%, for the three months endedJune 30, 2020 , compared to the three months endedJune 30, 2019 , primarily due to lower freight costs and lower service sales. 48 -------------------------------------------------------------------------------- Table of Contents Cost of service sales as a percentage of total net sales increased to 16.8% for the three months endedJune 30, 2020 , compared to 15.5% for the three months endedJune 30, 2019 , primarily due to the reasons provided above.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased$33.1 million , or 34.3%, for the three months endedJune 30, 2020 , compared to the three months endedJune 30, 2019 , primarily due to the following: (1) a$26.6 million decrease in employee-related costs; (2) the receipt of a$1.6 million COVID-19 related government subsidy inPoland ; (3) a$1.5 million increase in foreign translation gains; and (4) other cost reduction initiatives. Selling, general and administrative expenses as a percentage of net sales increased to 10.8% for the three months endedJune 30, 2020 , compared to 10.1% for the three months endedJune 30, 2019 .
Depreciation and Amortization
Depreciation and amortization decreased$6.2 million , or 11.7%, for the three months endedJune 30, 2020 , compared to the three months endedJune 30, 2019 , due to a$4.8 million decrease in depreciation expense, primarily related to property, plant and equipment becoming fully depreciated over the past year, and a$1.4 million decrease in amortization expense.
Restructuring, Impairment and Transaction-Related Charges
Restructuring, impairment and transaction-related charges increased$7.0 million for the three months endedJune 30, 2020 , compared to the three months endedJune 30, 2019 , primarily due to the following: Three Months
Ended
2020 2019 $ Change
Employee termination charges $ 9.5 $ 3.3 $ 6.2
Impairment charges (a) 1.7 0.4 1.3
Transaction-related charges 0.3 2.7 (2.4)
Integration costs 0.4 0.8 (0.4)
Other restructuring charges
Vacant facility carrying costs and lease exit charges 2.4 1.9 0.5
Equipment and infrastructure removal costs 0.4 - 0.4
Gains on the sale of facilities (b) - (2.5) 2.5
Other restructuring activities (c) 1.7 2.8 (1.1)
Other restructuring income 4.5 2.2 2.3
Total restructuring, impairment and transaction-related charges
$ 16.4 $ 9.4 $ 7.0 ______________________________
(a)Includes$1.7 million and$0.4 million of impairment charges for machinery and equipment no longer being utilized in production as a result of facility consolidations, as well as other capacity reduction restructuring activities during the three months endedJune 30, 2020 and 2019, respectively. (b)Includes a$2.5 million gain on the sale of theFranklin, Kentucky facility during the three months endedJune 30, 2019 . (c)Includes$2.3 million in charges related to a value-added tax assessment for a closed facility during the three months endedJune 30, 2019 . 49 -------------------------------------------------------------------------------- Table of Contents EBITDA and EBITDA Margin-Consolidated
EBITDA and EBITDA margin for the three months ended
Three Months Ended June 30,
2020 2019
Amount % of Net Sales Amount % of Net Sales
(dollars in millions)
EBITDA and EBITDA margin (non-GAAP) $ 35.1 6.0 % $ 60.7 6.4 %
EBITDA decreased $25.6 million for the three months ended June 30, 2020 ,
compared to the three months ended June 30, 2019 , primarily due to the
following: (1) lower print volume, pricing and print service sales;
(2) $7.0 million of increased restructuring, impairment and transaction-related
charges; (3) a $3.0 million increase in production hourly wages in our most
competitive labor markets; (4) a $2.4 million decrease in paper byproduct
recoveries. The decrease was partially offset by savings from cost reduction
initiatives and a $2.9 million decrease in loss from discontinued operations,
net of tax.
EBITDA is defined as net earnings (loss) attributable to Quad common
shareholders, excluding (1) interest expense, (2) income tax expense (benefit)
and (3) depreciation and amortization. EBITDA margin represents EBITDA as a
percentage of net sales. EBITDA and EBITDA margin are presented to provide
additional information regarding Quad's performance. Both are important measures
by which Quad gauges the profitability and assesses the performance of its
business. EBITDA and EBITDA margin are non-GAAP financial measures and should
not be considered alternatives to net earnings (loss) as a measure of operating
performance, or to cash flows provided by operating activities as a measure of
liquidity. Quad's calculation of EBITDA and EBITDA margin may be different from
the calculations used by other companies, and therefore, comparability may be
limited.
A reconciliation of EBITDA to net loss attributable to Quad common shareholders
for the three months ended
Three Months Ended June 30,
2020 2019
(dollars in millions)
Net loss attributable to Quad common shareholders (1) $ (23.5) $ (14.8)
Interest expense 16.2 25.8
Income tax benefit (4.3) (3.2)
Depreciation and amortization 46.7 52.9
EBITDA (non-GAAP) $ 35.1 $ 60.7 ______________________________
(1)Net loss attributable to Quad common shareholders included the following: a.Restructuring, impairment and transaction-related charges of$16.4 million and$9.4 million for the three months endedJune 30, 2020 and 2019, respectively; b.Net pension income of$2.6 million and$1.5 million for the three months endedJune 30, 2020 and 2019, respectively; c.Loss on debt extinguishment of$2.4 million for the three months endedJune 30, 2020 ; d.Equity in loss of unconsolidated entity of$0.5 million and$0.7 million for the three months endedJune 30, 2020 and 2019, respectively; e.Loss from discontinued operations, net of tax, of$8.7 million and$11.6 million for the three months endedJune 30, 2020 and 2019, respectively; and f.Net loss attributable to noncontrolling interests of$0.2 million and net earnings attributable to noncontrolling interests of$0.1 million for the three months endedJune 30, 2020 and 2019, respectively. 50 -------------------------------------------------------------------------------- Table of Contents United States Print and Related Services
The following table summarizes net sales, operating income from continuing operations, operating margin and certain items impacting comparability within the United States Print and Related Services segment:
Three Months Ended June 30,
2020 2019
(dollars in millions)
Amount Amount $ Change % Change
Net sales:
Products $ 393.0 $ 653.0 $ (260.0) (39.8) %
Services 133.5 201.0 (67.5) (33.6) %
Operating income from continuing operations
(including restructuring, impairment and
transaction-related charges) 8.3 33.5 (25.2) (75.2) %
Operating margin 1.6 % 3.9 % N/A N/A
Restructuring, impairment and
transaction-related charges $ 13.4 $ 3.3 $ 10.1 306.1 %
Net Sales
Product sales for the United States Print and Related Services segment decreased
$260.0 million , or 39.8%, for the three months ended June 30, 2020 , compared to
the three months ended June 30, 2019 , primarily due to the following: (1) a
$136.2 million decrease in sales in the Company's print product lines due to
ongoing industry volume and pricing pressures, including the ongoing impacts
from the COVID-19 pandemic; (2) a $104.6 million decrease from pass-through
paper sales; and (3) a $19.2 million decrease in sales due to the divestiture of
the Company's Omaha packaging plant
Service sales for the United States Print and Related Services segment decreased
$67.5 million , or 33.6%, for the three months ended June 30, 2020 , compared to
the three months ended June 30, 2019 , primarily due to the following:
(1) a $41.7 million decrease in logistics sales; (2) a $16.6 million decrease in
sales of marketing services, primarily related to print management;
(3) a $7.1 million decrease in print imaging services; and (4) a $2.1 million
decrease in sales of QuadMed external medical services.
Operating Income from Continuing Operations
Operating income from continuing operations for the United States Print and Related Services segment decreased$25.2 million , or 75.2%, for the three months endedJune 30, 2020 , compared to the three months endedJune 30, 2019 , primarily due to the following: (1) lower print volume and pricing due to ongoing industry pressures, including the ongoing impacts from the COVID-19 pandemic; (2) a$10.1 million increase in restructuring, impairment and transaction-related charges; (3) lower print service sales; (4) a$3.0 million increase in production hourly wages in our most competitive labor markets; and (5) a$2.4 million decrease in paper byproduct recoveries. The decrease was partially offset by savings from other cost reduction initiatives.
Operating margin for the United States Print and Related Services segment
decreased to 1.6% for the three months ended
51
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Restructuring, Impairment and Transaction-Related Charges
Restructuring, impairment and transaction-related charges for the United States
Print and Related Services segment increased $10.1 million for the three months
ended June 30, 2020 , compared to the three months ended June 30, 2019 , primarily
due to the following:
Three Months Ended June 30,
2020 2019 $ Change
Employee termination charges $ 8.3 $ 2.6 $ 5.7
Impairment charges (a) 1.7 0.4 1.3
Transaction-related charges 0.1 - 0.1
Integration costs 0.4 0.8 (0.4)
Other restructuring charges (income) (b) 2.9 (0.5) 3.4
Total restructuring, impairment and transaction-related charges
$ 13.4 $ 3.3 $ 10.1 ______________________________
(a)Includes$1.7 million and$0.4 million of impairment charges for machinery and equipment no longer being utilized in production as a result of facility consolidations, as well as other capacity reduction restructuring activities during the three months endedJune 30, 2020 and 2019, respectively. (b)Includes a$2.5 million gain on the sale of theFranklin, Kentucky facility during the three months endedJune 30, 2019 .
International
The following table summarizes net sales, operating income (loss) from
continuing operations, operating margin, certain items impacting comparability
and equity in loss of unconsolidated entity within the International segment:
Three Months Ended June 30,
2020 2019
(dollars in millions)
Amount Amount $ Change % Change
Net sales:
Products $ 54.7 $ 90.5 $ (35.8) (39.6) %
Services 3.3 4.4 (1.1) (25.0) %
Operating income (loss) from continuing
operations (including restructuring, impairment
and transaction-related charges) (0.7) 0.3 (1.0) (333.3) %
Operating margin (1.2) % 0.3 % N/A N/A
Restructuring, impairment and
transaction-related charges $ 2.8 $ 3.4 $ (0.6) (17.6) %
Equity in loss of unconsolidated entity 0.5 0.7 0.2 28.6 %
Net Sales
Product sales for the International segment decreased $35.8 million , or 39.6%,
for the three months ended June 30, 2020 , compared to the three months ended
June 30, 2019 , primarily due to the following: (1) an $18.7 million decrease in
pass-through paper sales; (2) an $13.4 million decrease in volume, primarily in
Europe , Mexico , Colombia and Peru ; and (3) $3.7 million in unfavorable foreign
exchange impacts, primarily in Europe and Mexico .
Service sales for the International segment decreased $1.1 million , or 25.0%,
for the three months ended June 30, 2020 , compared to the three months ended
June 30, 2019 , primarily due to a decrease in logistics sales in Europe .
52
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Operating Income (Loss) from Continuing Operations
Operating income from continuing operations for the International segment
decreased $1.0 million for the three months ended June 30, 2020 , compared to the
three months ended June 30, 2019 , primarily due to a $3.2 million decrease in
operating income, primarily in Europe and Mexico , partially offset by the
receipt of a $1.6 million COVID-19 related government subsidy and a $0.6 million
decrease in restructuring, impairment and transaction-related charges.
Restructuring, Impairment and Transaction-Related Charges
Restructuring, impairment and transaction-related charges for the International segment decreased$0.6 million , or 17.6%, for the three months endedJune 30, 2020 , compared to the three months endedJune 30, 2019 , primarily due to the following: Three Months Ended June 30, 2020 2019 $ Change Employee termination charges$ 1.2 $ 0.7 $ 0.5 Other restructuring charges (a) 1.6 2.7 (1.1)
Total restructuring, impairment and transaction-related charges
$ 2.8 $ 3.4 $ (0.6)
______________________________
(a)Includes
Equity in Loss of Unconsolidated Entity
Investments in entities where Quad has the ability to exert significant influence, but not control, are accounted for using the equity method of accounting. The Company holds a 49% ownership interest in Plural, a commercial printer based inSão Paulo, Brazil . The equity in loss of unconsolidated entity in the International segment decreased$0.2 million for the three months endedJune 30, 2020 , compared to the three months endedJune 30, 2019 , due to an increase in earnings at the Company's investment in Plural.
Unrestricted Subsidiaries
As of
Corporate
The following table summarizes unallocated operating expenses presented as
Corporate:
Three Months Ended June 30,
2020 2019
(dollars in millions)
Amount Amount $ Change % Change
Operating expenses (including
restructuring, impairment and transaction-related
charges) $ 10.4 $ 15.1 $ (4.7) (31.1) %
Restructuring, impairment and transaction-related
charges 0.2 2.7 (2.5) (92.6) %
Operating Expenses
Corporate operating expenses decreased $4.7 million , or 31.1%, for the three
months ended June 30, 2020 , compared to the three months ended June 30, 2019 ,
primarily due to the following: (1) a $2.5 million decrease in restructuring,
impairment and transaction-related charges; (2) a $0.6 million decrease in
employee-related costs; and (3) other cost reduction initiatives.
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Restructuring, Impairment and Transaction-Related Charges
Corporate restructuring, impairment and transaction-related charges decreased
$2.5 million for the three months ended June 30, 2020 , compared to the three
months ended June 30, 2019 , primarily due to a decrease in transaction-related
charges, including professional service fees related to business acquisition and
divestiture activities.
54-------------------------------------------------------------------------------- Table of Contents Results of Operations for the Six Months EndedJune 30, 2020 , Compared to the Six Months EndedJune 30, 2019
Summary Results
The Company's operating income from continuing operations, operating margin, net loss attributable to Quad common shareholders (computed using a 25% normalized tax rate for all items subject to tax) and diluted loss per share attributable to Quad common shareholders for the six months endedJune 30, 2020 , changed from the six months endedJune 30, 2019 , as follows (dollars in millions, except margin and per share data): Diluted Loss Net Loss Per Share Operating Attributable to Attributable Income from Quad Common to Quad Common Continuing Operations Operating Margin Shareholders Shareholders For the six months ended June 30, 2019 $ 35.1 1.8 % $ (37.3)$ (0.75) Restructuring, impairment and transaction-related charges (1) (22.2) (1.9) % (16.6) (0.32) Interest expense (2) N/A N/A 10.0 0.21 Net pension income (3) N/A N/A 1.7 0.03 2020 gain on debt extinguishment (4) N/A N/A (1.4) (0.03) 2019 loss on debt extinguishment (4) N/A N/A 11.9 0.24 Income taxes (5) N/A N/A (5.7) (0.11) Loss from discontinued operations, net of tax (6) N/A N/A 9.2 0.18 Investments in unconsolidated entity and noncontrolling interests, net of tax (7) N/A N/A 0.3 0.01 Operating income from continuing operations (8) (10.7) 0.3 % (8.0) (0.17) For the six months ended June 30, 2020 $ 2.2 0.2 % $ (35.9)$ (0.71)
______________________________
(1)Restructuring, impairment and transaction-related charges increased
a.A
b.A$2.1 million increase in impairment charges from$2.1 million during the six months endedJune 30, 2019 , to$4.2 million during the six months endedJune 30, 2020 ;
c.A
d.A$0.5 million decrease in integration costs from$1.6 million during the six months endedJune 30, 2019 , to$1.1 million during the six months endedJune 30, 2020 ; and
e.A
The Company expects to incur additional restructuring and integration costs in future reporting periods in connection with eliminating excess manufacturing capacity and properly aligning its cost structure in conjunction with the Company's acquisitions and strategic investments, and other cost reduction programs. (2)Interest expense decreased$13.3 million ($10.0 million , net of tax) during the six months endedJune 30, 2020 , to$34.3 million . This change was due to a lower average debt levels and lower weighted average interest rate on borrowings in the six months endedJune 30, 2020 , as compared to the six months endedJune 30, 2019 .
(3)Net pension income increased
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(4)The $1.8 million loss on debt extinguishment ($1.4 million , net of tax)
recognized during the six months ended June 30, 2020 , relates to a $2.4 million
loss on debt extinguishment from the fourth amendment to the Company's April 28,
2014 Senior Secured Credit Facility, completed on June 29, 2020 , partially
offset by a $0.6 million gain on debt extinguishment recorded during the first
quarter of 2020, primarily related to the repurchase of the Company's unsecured
7.0% senior notes due May 1, 2022 . The $15.9 million loss on debt extinguishment
($11.9 million , net of tax) recognized during the six months ended June 30,
2019 , related to the third amendment to the Company's April 28, 2014 Senior
Secured Credit Facility, completed on January 31, 2019 .
(5)The $5.7 million decrease in income tax benefit on continuing operations as
calculated in the following table is primarily due to the following: (1) a
$5.5 million decreased income tax benefit from equity award activity; (2) a $3.1
million decreased income tax benefit from a lower projected annual effective
income tax rate in 2020; (3) a $1.2 million decreased income tax benefit for
preliminary 2019 return-to-provision adjustments; and (4) a $1.1 million
decreased income tax benefit from increased losses in foreign jurisdictions
where the Company does not receive an income tax benefit. These decreases were
partially offset by a $5.2 million income tax benefit related to the CARES Act
net operating loss carry back provisions:
Six Months Ended
2020 2019 $ Change
Loss from continuing operations before income taxes
and equity in loss of unconsolidated entity
25.0 % 25.0 %
Income tax benefit at normalized tax rate (7.2) (6.4) (0.8)
Income tax benefit from the condensed consolidated
statements of operations (5.5) (10.4) 4.9
Impact of income taxes $ (1.7) $ 4.0 $ (5.7)
(6)The decrease in loss from discontinued operations, net of tax, of
$9.2 million during the six months ended June 30, 2020 , was primarily due to a
$6.5 million decrease in the operating loss from the discontinued operations due
to productivity improvements and cost reduction activities and a $2.7 million
increase in income tax benefit.
(7)The increase in investments in unconsolidated entity and noncontrolling
interests, net of tax, of
(8)Operating income from continuing operations, excluding restructuring, impairment and transaction-related charges, decreased$10.7 million ($8.0 million , net of tax impact) during the six months endedJune 30, 2020 , primarily due to the following: (1) lower print volume, pricing and print service sales; (2) an$11.4 million decrease in paper byproduct recoveries; (3) a$7.4 million increase in production hourly wages in our most competitive labor markets; and (4) a$4.2 million increase in credit loss expense primarily due to specific client credit reviews. These increases were partially offset by the following: (1) a$9.4 million net benefit from a change in the hourly production employee vacation policy; (2) a$6.0 million net reduction in the cost of worker's compensation claims from improved production safety initiatives; and (3) savings from other cost reduction initiatives. 56 -------------------------------------------------------------------------------- Table of Contents Operating Results from Continuing Operations The following table sets forth certain information from the Company's condensed consolidated statements of operations on an absolute dollar basis and as a relative percentage of total net sales for each noted period, together with the relative percentage change in such information between the periods set forth below: Six Months Ended June 30, 2020 2019 (dollars in millions) % of % of % Amount Sales Amount Sales $ Change Change Net sales: Products$ 1,092.7 77.7 %$ 1,504.9 78.8 %$ (412.2) (27.4) % Services 314.3 22.3 % 405.0 21.2 % (90.7) (22.4) % Total net sales 1,407.0 100.0 % 1,909.9 100.0 % (502.9) (26.3) % Cost of sales: Products 886.6 63.0 % 1,270.7 66.5 % (384.1) (30.2) % Services 222.0 15.8 % 289.1 15.2 % (67.1) (23.2) % Total cost of sales 1,108.6 78.8 % 1,559.8 81.7 % (451.2) (28.9) % Selling, general & administrative expenses 162.9 11.5 % 190.9 10.0 % (28.0) (14.7) % Depreciation and amortization 94.1 6.7 % 107.1 5.6 % (13.0) (12.1) % Restructuring, impairment and transaction-related charges 39.2 2.8 % 17.0 0.9 % 22.2 130.6 % Total operating expenses 1,404.8 99.8 % 1,874.8 98.2 % (470.0) (25.1) % Operating income from continuing operations$ 2.2 0.2 %$ 35.1 1.8 %$ (32.9) (93.7) % Net Sales Product sales decreased$412.2 million , or 27.4%, for the six months endedJune 30, 2020 , compared to the six months endedJune 30, 2019 , primarily due to the following: (1) a$191.6 million decrease in sales in the Company's print product lines due to ongoing industry volume and pricing pressures, including the ongoing impacts from the COVID-19 pandemic; (2) a$182.8 million decrease from pass-through paper sales; (3) a$30.6 million decrease in sales due to the divestiture of the Company'sOmaha packaging plant; and (4)$7.2 million in unfavorable foreign exchange impacts. Service sales, which primarily consist of logistics, distribution, marketing services, imaging and medical services, decreased$90.7 million , or 22.4%, for the six months endedJune 30, 2020 , compared to the six months endedJune 30, 2019 , primarily due to the following: (1) a$52.8 million decrease in logistics sales; (2) a$21.5 million decrease of sales of marketing services; (3) a$13.0 million decrease in print imaging services; and (4) a$3.4 million decrease in sales of QuadMed external medical services.
Cost of Sales
Cost of product sales decreased$384.1 million , or 30.2%, for the six months endedJune 30, 2020 , compared to the six months endedJune 30, 2019 , primarily due to the following: (1) a decrease in pass-through paper costs; (2) lower print volume; (3) the impact from the divestiture of theOmaha packaging plant; (4) a$9.4 million net benefit from a change in the hourly production employee vacation policy; (5) a$6.0 million net reduction in the cost of worker's compensation claims from improved production safety initiatives; and (6) other cost reduction initiatives. These decreases were partially offset by an$11.4 million decrease in paper byproduct recoveries and a$7.4 million increase in production hourly wages in our most competitive labor market. Cost of product sales as a percentage of total net sales decreased to 63.0% for the six months endedJune 30, 2020 , from 66.5% for the six months endedJune 30, 2019 , primarily due to the reasons provided above. 57 -------------------------------------------------------------------------------- Table of Contents Cost of service sales decreased$67.1 million , or 23.2%, for the six months endedJune 30, 2020 , compared to the six months endedJune 30, 2019 , primarily due to lower freight costs and lower service sales. Cost of service sales as a percentage of total net sales increased to 15.8% for the six months endedJune 30, 2020 , from 15.2% for the six months endedJune 30, 2019 , primarily due to the reasons provided above.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased$28.0 million , or 14.7%, for the six months endedJune 30, 2020 , compared to the six months endedJune 30, 2019 , primarily due to the following: (1) a$35.0 million decrease in employee-related costs; (2) savings from other cost reduction initiatives; and (3) the receipt of a$1.6 million COVID-19 related government subsidy inPoland . These decreases were partially offset by a$5.3 million increase from foreign translation losses and a$4.3 million increase in credit loss expense primarily due to specific client credit reviews. Selling, general and administrative expenses as a percentage of net sales increased to 11.5% for the six months endedJune 30, 2020 from 10.0% for the six months endedJune 30, 2019 , primarily due to the reasons stated above.
Depreciation and Amortization
Depreciation and amortization decreased$13.0 million , or 12.1%, for the six months endedJune 30, 2020 , compared to the six months endedJune 30, 2019 , due to a$9.9 million decrease in depreciation expense primarily from property, plant and equipment becoming fully depreciated over the past year, and a$3.1 million decrease in amortization expense.
Restructuring, Impairment and Transaction-Related Charges
Restructuring, impairment and transaction-related charges increased
Six Months Ended June 30,
2020 2019 $ Change
Employee termination charges $ 22.1 $ 7.6 $ 14.5
Impairment charges (a) 4.2 2.1 2.1
Transaction-related charges 0.8 4.2 (3.4)
Integration costs 1.1 1.6 (0.5)
Other restructuring charges
Vacant facility carrying costs and lease exit charges 5.1 3.2 1.9
Equipment and infrastructure removal costs 1.0 0.1 0.9
Gains on the sale of facilities (b) (0.8) (6.0) 5.2
Other restructuring activities (c) 5.7 4.2 1.5
Other restructuring charges 11.0 1.5 9.5
Total restructuring, impairment and transaction-related charges
$ 39.2 $ 17.0 $ 22.2
______________________________
(a)Includes$4.2 million and$2.1 million of impairment charges for machinery and equipment no longer being utilized in production as a result of facility consolidations, as well as other capacity reduction restructuring activities during the six months endedJune 30, 2020 and 2019, respectively. (b)Includes a$0.8 million gain on the sale of theShakopee, Minnesota facility during the six months endedJune 30, 2020 ; and includes a$3.5 million gain on the sale of theHazleton, Pennsylvania facility and a$2.5 million gain on the sale of theFranklin, Kentucky facility during the six months endedJune 30, 2019 . (c)Includes a $2.9 million loss on the sale of a business during the six months endedJune 30, 2020 , and$2.3 million in charges related to a value-added tax assessment for a closed facility during the six months endedJune 30, 2019 . 58 -------------------------------------------------------------------------------- Table of Contents EBITDA and EBITDA Margin-Consolidated
EBITDA and EBITDA margin for the six months ended
Six Months Ended June 30,
2020 2019
Amount % of Net Sales Amount % of Net Sales
(dollars in millions)
EBITDA and EBITDA margin (non-GAAP) $ 87.0 6.2 % $ 107.0 5.6 %
EBITDA decreased $20.0 million for the six months ended June 30, 2020 , compared
to the six months ended June 30, 2019 , primarily due to the following: (1) lower
print volume, pricing and print service sales; (2) $22.2 million of increased
restructuring, impairment and transaction-related charges; (3) an $11.4 million
decrease in paper byproduct recoveries; (4) a $7.4 million increase in
production hourly wages in our most competitive labor markets; and (5) a
$4.3 million increase in credit loss expense primarily due to specific client
credit reviews. These decreases were partially offset by the following: (1) a
$9.4 million net benefit from a change in the hourly production employee
vacation policy; (2) a $6.0 million reduction in the cost of worker's
compensation claims from improved production safety initiatives; (3) a
$9.2 million decrease in loss from discontinued operations, net of tax; and (4)
savings from other cost reduction initiatives.
EBITDA is defined as net earnings (loss) attributable to Quad common
shareholders, excluding (1) interest expense, (2) income tax expense (benefit)
and (3) depreciation and amortization. EBITDA margin represents EBITDA as a
percentage of net sales. EBITDA and EBITDA margin are presented to provide
additional information regarding Quad's performance. Both are important measures
by which Quad gauges the profitability and assesses the performance of its
business. EBITDA and EBITDA margin are non-GAAP financial measures and should
not be considered alternatives to net earnings (loss) as a measure of operating
performance, or to cash flows provided by operating activities as a measure of
liquidity. Quad's calculation of EBITDA and EBITDA margin may be different from
the calculations used by other companies, and therefore, comparability may be
limited.
A reconciliation of EBITDA to net loss attributable to Quad common shareholders
for the six months ended
Six Months Ended
2020 2019
(dollars in millions)
Net loss attributable to Quad common shareholders (1) $ (35.9) $ (37.3)
Interest expense 34.3 47.6
Income tax benefit (5.5) (10.4)
Depreciation and amortization 94.1 107.1
EBITDA (non-GAAP) $ 87.0 $ 107.0 ______________________________
(1)Net loss attributable to Quad common shareholders included the following: a.Restructuring, impairment and transaction-related charges of$39.2 million and$17.0 million for the six months endedJune 30, 2020 and 2019, respectively; b.Net pension income of$5.3 million and$3.0 million for the six months endedJune 30, 2020 and 2019, respectively; c.Loss on debt extinguishment of$1.8 million and$15.9 million for the six months endedJune 30, 2020 and 2019, respectively; d.Equity in loss of unconsolidated entity of$0.5 million and$0.8 million for the six months endedJune 30, 2020 and 2019, respectively; e.Loss from discontinued operations, net of tax, of$12.5 million and$21.7 million for the six months endedJune 30, 2020 and 2019, respectively; and f.Net loss attributable to noncontrolling interests of$0.2 million for both the six months endedJune 30, 2020 and 2019. 59 -------------------------------------------------------------------------------- Table of Contents United States Print and Related Services
The following table summarizes net sales, operating income from continuing operations, operating margin and certain items impacting comparability within the United States Print and Related Services segment:
Six Months Ended June 30,
2020 2019
(dollars in millions)
Amount Amount $ Change % Change
Net sales:
Products $ 956.6 $ 1,312.6 $ (356.0) (27.1) %
Services 306.5 396.4 (89.9) (22.7) %
Operating income from continuing operations
(including restructuring, impairment and
transaction-related charges) 24.6 62.8 (38.2) (60.8) %
Operating margin 1.9 % 3.7 % N/A N/A
Restructuring, impairment and
transaction-related charges $ 34.2 $ 7.8 $ 26.4 338.5 %
Net Sales
Product sales for the United States Print and Related Services segment decreased
$356.0 million , or 27.1%, for the six months ended June 30, 2020 , compared to
the six months ended June 30, 2019 , primarily due to the following: (1) a
$170.6 million decrease in sales in the Company's print product lines due to
ongoing volume and pricing pressures from excess capacity in the printing
industry, including the ongoing impacts from the COVID-19 pandemic;
(2) a $154.8 million decrease in pass-through paper sales; and
(3) a $30.6 million decrease in sales due to the divestiture of the Company's
Omaha packaging plant.
Service sales for the United States Print and Related Services segment decreased
$89.9 million , or 22.7%, for the six months ended June 30, 2020 , compared to the
six months ended June 30, 2019 , primarily due to the following:
(1) a $52.0 million decrease in logistics sales; (2) a $21.5 million decrease of
sales of marketing services; (3) a $13.0 million decrease in print imaging
services; and (4) a $3.4 million decrease in sales of QuadMed external medical
services.
Operating Income from Continuing Operations
Operating income from continuing operations for the United States Print and Related Services segment decreased$38.2 million , or 60.8%, for the six months endedJune 30, 2020 , compared to the six months endedJune 30, 2019 , primarily due to the following: (1) lower print volume and pricing due to ongoing industry pressures, including the ongoing impacts from the COVID-19 pandemic; (2) a$26.4 million increase in restructuring, impairment and transaction-related charges; (3) an$11.4 million decrease in paper byproduct recoveries; (4) a$7.4 million increase in production hourly wages in our most competitive labor markets; and (5) lower print service sales. These decreases were partially offset by: (1) a$9.4 million net benefit from a change in the hourly production employee vacation policy; (2) a$6.0 million net reduction in the cost of worker's compensation claims from improved production safety initiatives; and (3) savings from other cost reduction initiatives.
Operating margin for the United States Print and Related Services segment
decreased to 1.9% for the six months ended
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Restructuring, Impairment and Transaction-Related Charges
Restructuring, impairment and transaction-related charges for the United States
Print and Related Services segment increased $26.4 million for the six months
ended June 30, 2020 , compared to the six months ended June 30, 2019 , primarily
due to the following:
Six Months Ended June 30,
2020 2019 $ Change
Employee termination charges $ 20.4 $ 6.7 $ 13.7
Impairment charges (a) 4.2 2.1 2.1
Transaction-related charges 0.1 - 0.1
Integration costs 1.1 1.6 (0.5)
Other restructuring charges (income) (b) 8.4 (2.6) 11.0
Total restructuring, impairment and transaction-related charges
$ 34.2 $ 7.8 $ 26.4
______________________________
(a)Includes$4.2 million and$2.1 million of impairment charges for machinery and equipment no longer being utilized in production as a result of facility consolidations, as well as other capacity reduction restructuring activities during the six months endedJune 30, 2020 andJune 30, 2019 , respectively. (b)Includes a$2.9 million loss on the sale of a business, net of a$0.8 million gain on the sale of theShakopee, Minnesota facility during the six months endedJune 30, 2020 , and includes a$3.5 million gain on the sale of theHazleton, Pennsylvania facility and a$2.5 million gain on the sale of theFranklin, Kentucky facility during the six months endedJune 30, 2019 .
International
The following table summarizes net sales, operating income (loss) from
continuing operations, operating margin, certain items impacting comparability
and equity in loss of unconsolidated entity within the International segment:
Six Months Ended June 30,
2020 2019
(dollars in millions)
Amount Amount $ Change % Change
Net sales:
Products $ 136.1 $ 192.3 $ (56.2) (29.2) %
Services 7.8 8.6 (0.8) (9.3) %
Operating income (loss) from continuing
operations (including restructuring, impairment
and transaction-related charges) (0.4) 2.2 (2.6) (118.2) %
Operating margin (0.3) % 1.1 % N/A N/A
Restructuring, impairment and
transaction-related charges $ 4.1 $ 5.0 $ (0.9) (18.0) %
Equity in loss of unconsolidated entity 0.5 0.8 0.3 37.5 %
Net Sales
Product sales for the International segment decreased $56.2 million , or 29.2%,
for the six months ended June 30, 2020 , compared to the six months ended
June 30, 2019 , primarily due to the following: (1) a $28.0 million decrease in
pass-through paper sales; (2) a $21.0 million decrease in volume, primarily in
Europe , Peru and Colombia , including the ongoing impacts from the COVID-19
pandemic; and (3) $7.2 million in unfavorable foreign exchange impacts,
primarily in Argentina , Europe and Mexico .
Service sales for the International segment decreased $0.8 million , or 9.3%, for
the six months ended June 30, 2020 , compared to the six months ended June 30,
2019 , primarily due to a decrease in logistics sales in Europe .
61
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Operating Income (Loss) from Continuing Operations
Operating income from continuing operations for the International segment
decreased $2.6 million , or 118.2%, for the six months ended June 30, 2020 ,
compared to the six months ended June 30, 2019 , primarily due to a $5.1 million
decrease in operating income, primarily in Europe , Colombia and Argentina ,
partially offset by the receipt of a $1.6 million COVID-19 related government
subsidy in Poland and a $0.9 million decrease in restructuring, impairment and
transaction-related charges.
Restructuring, Impairment and Transaction-Related Charges
Restructuring, impairment and transaction-related charges for the International segment decreased$0.9 million , or 18.0%, for the six months endedJune 30, 2020 , compared to the six months endedJune 30, 2019 , primarily due to the following: Six Months Ended June 30, 2020 2019 $ Change Employee termination charges$ 1.5 $ 1.0 $ 0.5 Other restructuring charges (a) 2.6 4.0 (1.4)
Total restructuring, impairment and transaction-related charges
$ 4.1 $ 5.0 $ (0.9)
______________________________
(a)Includes
Equity in Loss of Unconsolidated Entity
Investments in entities where Quad has the ability to exert significant influence, but not control, are accounted for using the equity method of accounting. The Company holds a 49% ownership interest in Plural, a commercial printer based inSão Paulo, Brazil . The equity in loss of unconsolidated entity in the International segment decreased$0.3 million for the six months endedJune 30, 2020 , compared to the six months endedJune 30, 2019 , due to an increase in earnings at the Company's investment in Plural.
Unrestricted Subsidiaries
As of
Corporate
The following table summarizes unallocated operating expenses presented as
Corporate:
Six Months Ended June 30,
2020 2019
(dollars in millions)
Amount Amount $ Change % Change
Operating expenses (including
restructuring, impairment and transaction-related
charges) $ 22.0 $ 29.9 $ (7.9) (26.4) %
Restructuring, impairment and transaction-related
charges 0.9 4.2 (3.3) (78.6) %
Operating Expenses
Corporate operating expenses decreased
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Restructuring, Impairment and Transaction-Related Charges
Corporate restructuring, impairment and transaction-related charges decreased
$3.3 million for the six months ended June 30, 2020 , compared to the six months
ended June 30, 2019 , primarily due to the following:
Six Months Ended June 30,
2020 2019 $ Change
Employee termination charges $ 0.2 $ (0.1) $ 0.3
Transaction-related charges 0.7 4.2 (3.5)
Other restructuring charges - 0.1 (0.1)
Total restructuring, impairment and transaction-related
charges $ 0.9 $ 4.2 $ (3.3) Liquidity and Capital Resources
The Company utilizes cash flows from operating activities and borrowings under its credit facilities to satisfy its liquidity and capital requirements. The Company had total liquidity of$534.7 million as ofJune 30, 2020 , which consisted of up to$464.5 million of unused capacity under its revolving credit arrangement, net of$35.5 million of issued letters of credit, and cash and cash equivalents of$70.2 million . Total liquidity is reduced to$434.8 million under the Company's most restrictive debt covenants, and consists of$70.2 million in cash and cash equivalents and$364.6 million available under its revolving credit arrangement. There were no borrowings under the$500.0 million revolving credit facility as ofJune 30, 2020 , and peak borrowings were$150.0 million during the three and six months endedJune 30, 2020 . The Company implemented cost reduction and cash conservation initiatives as previously described herein in response to the impact of the COVID-19 pandemic on its business. These actions include, among many others, delaying capital spending projects and temporarily suspending the Company's quarterly dividend. The Company believes that its cost reduction and cash preservation initiatives, combined with its current liquidity and capital resources, are sufficient to fund ongoing operating requirements and service debt and pension requirements.
Net Cash Provided by Operating Activities
Six Months Ended
Net cash provided by operating activities increased$50.9 million , from$16.3 million provided by operating activities for the six months endedJune 30, 2019 , to$67.2 million provided by operating activities for the six months endedJune 30, 2020 . This increase was due to a$39.6 million increase in cash flows provided by changes in operating assets and liabilities and a$11.3 million increase in cash from earnings.
Net Cash Provided by (Used in) Investing Activities
Six Months Ended
Net cash provided by investing activities increased$186.7 million , from$180.6 million used in investing activities for the six months endedJune 30, 2019 , to$6.1 million provided by investing activities for the six months endedJune 30, 2020 . The increase was primarily due to the following: (1) a$119.2 million decrease from cash used in the acquisition of businesses; (2) a$40.1 million increase in proceeds from the sale of business; (3) a$36.6 million decrease in purchases of property, plant and equipment; and (4) a$1.8 million increase in cash provided by other investing activities. These increases were partially offset by a$10.7 million decrease in proceeds from the sale of property, plant, and equipment and a$0.3 million decrease in proceeds from property insurance claims. 63 -------------------------------------------------------------------------------- Table of Contents Net Cash Provided by (Used in) Financing Activities
Six Months Ended
Net cash used in financing activities increased$186.1 million , from$104.6 million provided by financing activities for the six months endedJune 30, 2019 , to$81.5 million used in financing activities for the six months endedJune 30, 2020 . The increase was primarily due to a$233.0 million decrease in net borrowings of debt and lease obligations in 2020 as compared to 2019, and a$6.4 million increase in cash used in changes in ownership of noncontrolling interests. This increase was partially offset by the following: (1) a$24.8 million decrease in payments of cash dividends; (2) a$17.5 million decrease in payments of debt issuance costs and financing fees; (3) a$5.6 million decrease in equity awards redeemed to pay employees' tax obligations, and (4) a$5.4 million decrease in cash used in other financing activities. Free Cash Flow
Free Cash Flow is defined as net cash provided by operating activities less purchases of property, plant and equipment, plus LSC-related payments.
The Company's management assesses Free Cash Flow as a measure to quantify cash available for (1) strengthening the balance sheet (debt reduction), (2) strategic capital allocation and deployment through investments in the business (acquisitions and strategic investments) and (3) returning capital to the shareholders (dividends and share repurchases). The priorities for capital allocation and deployment will change as circumstances dictate for the business, and Free Cash Flow can be significantly impacted by the Company's restructuring activities and other unusual items. Free Cash Flow is a non-GAAP financial measure and should not be considered an alternative to cash flows provided by operating activities as a measure of liquidity. Quad's calculation of Free Cash Flow may be different from similar calculations used by other companies, and therefore, comparability may be limited.
Free Cash Flow for the six months ended
Six Months Ended June 30,
2020 2019
(dollars in millions)
Net cash provided by operating activities $ 67.2 Less: purchases of property, plant and equipment (38.0)
(74.6)
Plus: LSC-related payments (1) - 8.5 Free Cash Flow (Non-GAAP)$ 29.2 $ (49.8)
______________________________
(1)LSC-related payments include transaction-related costs associated with the proposed, but now terminated, acquisition of LSC and incremental interest payments associated with the 2019 amended debt refinancing.
Free Cash Flow increased$79.0 million for the six months endedJune 30, 2020 , compared to the six months endedJune 30, 2019 , primarily due to a$50.9 million increase in net cash provided by operating activities and a$36.6 million decrease in capital expenditures, partially offset by a$8.5 million decrease in LSC-related payments. See the "Net Cash Provided by Operating Activities" section above for further explanations of the change in operating cash flows and the "Net Cash Provided by (Used in) Investing Activities" section above for further explanations of the changes in purchases of property, plant and equipment. The above calculation of Free Cash Flow includes the cash flows related to the Book business for all periods presented. 64 -------------------------------------------------------------------------------- Table of Contents Debt Leverage Ratio The Debt Leverage Ratio is defined as total debt and finance lease obligations divided by the trailing twelve months Adjusted EBITDA, comprised of the sum of the following: (1) the last twelve months of EBITDA (see the definition of EBITDA and the reconciliation of net earnings (loss) attributable to Quad common shareholders to EBITDA in the "Results of Operations" section above); (2) restructuring, impairment and transaction-related charges; (3) earnings (loss) from discontinued operations, net of tax; (4) net pension income; (5) employee stock ownership plan contribution; (6) (gain) loss on debt extinguishment; (7) equity in (earnings) loss of unconsolidated entity; (8) Adjusted EBITDA for unconsolidated equity method investments (calculated in a consistent manner with the calculation for Quad); and (9) net earnings (loss) attributable to noncontrolling interests. The Company uses the Debt Leverage Ratio as a metric to assess liquidity and the flexibility of its balance sheet. Consistent with other liquidity metrics, the Company monitors the Debt Leverage Ratio as a measure to determine the appropriate level of debt the Company believes is optimal to operate its business, and accordingly, to quantify debt capacity available for strengthening the balance sheet through debt and pension liability reduction, for strategic capital allocation and deployment through investments in the business, and for returning capital to the shareholders. The priorities for capital allocation and deployment will change as circumstances dictate for the business, and the Debt Leverage Ratio can be significantly impacted by the amount and timing of large expenditures requiring debt financing, as well as changes in profitability. The Debt Leverage Ratio is a non-GAAP measure and should not be considered an alternative to cash flows provided by operating activities as a measure of liquidity. Quad's calculation of the Debt Leverage Ratio may be different from similar calculations used by other companies and, therefore, comparability may be limited. The Debt Leverage Ratio calculated below differs from the Total Leverage Ratio, the Total Net Leverage Ratio and the Senior Secured Leverage Ratio included in the Company's debt covenant calculations (see Note 11, "Debt," to the condensed consolidated financial statements in Item 1, "Condensed Consolidated Financial Statements (Unaudited)," of this Quarterly Report on Form 10-Q for further information on debt covenants). The Total Leverage Ratio included in the Company's debt covenants includes interest rate swap liabilities, letters of credit and surety bonds as debt, excludes non-cash stock-based compensation expense from EBITDA and includes net income (loss) attributable to noncontrolling interests in EBITDA. The Total Net Leverage Ratio includes and excludes the same adjustments as the Total Leverage Ratio, in addition to netting domestic unrestricted cash with debt. Similarly, the Senior Secured Leverage Ratio includes and excludes the same adjustments as the Total LeverageRatio , in addition to the exclusion of the outstanding balance of the Senior Unsecured Notes and surety bonds from debt and netting domestic unrestricted cash with debt.
The Debt Leverage Ratio at
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