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Quad/Graphics announces Q3 sales down; outlines closure of six plants

Friday, November 12, 2010

Press release from the issuing company

Sussex, Wis. - Quad/Graphics, Inc., today reported results for its third quarter ending September 30, 2010. This is the first quarter the Company is reporting results that include the July 2, 2010, acquisition of World Color Press, Inc. ("Worldcolor"). To assist in comparisons, references to pro forma measures assume that the acquisition of Worldcolor was completed on January 1, 2009.

Summary:
- Third Quarter 2010 net sales of $1.21 billion compared to pro forma net sales of $1.24 billion in third quarter 2009;
- Third Quarter 2010 Adjusted EBITDA of $159.2 million compared to pro forma Adjusted EBITDA of $197.3 million in third quarter 2009;
- Third Quarter 2010 Adjusted EBITDA margin of 13.2% compared to pro forma Adjusted EBITDA margin of 15.9% in third quarter 2009;
- Strong free cash flow used to pay down $44 million in debt since the Worldcolor acquisition closed; and
- Quick implementation of integration plans including the expected closure of six North American printing plants by year end, impacting approximately 2,400 positions.

"Our results in the third quarter were in line with our expectations," said Joel Quadracci, Chairman, President & CEO of Quad/Graphics. "Revenues were down slightly versus the pro forma $1.24 billion due to lower volumes in the legacy Worldcolor business, contractual pricing inherited from legacy Worldcolor and continued pricing pressures from industry overcapacity. This was partially offset by increased volumes in the legacy Quad/Graphics business, as well as increases in paper and byproduct revenues. The decrease in Adjusted EBITDA and Adjusted EBITDA margin was primarily attributable to lower volumes and pricing, costs associated with catch-up retirement and incentive compensation expenses, and frictional costs associated with plant consolidations, which were partially offset by synergy savings."

"The industry still has significant overcapacity, so Quad/Graphics will continue to remove excess capacity from its newly combined platform," Mr. Quadracci said. "In addition, we plan to maintain our historic economic discipline that allows us to provide a return on capital greater than our cost of capital. This, in turn, allows us to continually reinvest in equipment, and industry-leading research and development and technological innovations to benefit our customers and drive value for our shareholders."

"We are pleased that our strong free cash flow has allowed us to immediately begin reducing debt," said John Fowler, Executive Vice President & CFO of Quad/Graphics. "In fact, even though we are seasonally in our peak need for working capital and are incurring integration-related costs, we have paid down $44 million in debt since the Worldcolor transaction closed. We expect to continue to have strong cash flow in the fourth quarter, which will result in an increased rate of debt repayment through the end of the year."

The Company continues to make significant progress with its integration plans and has moved quickly on implementation. Of the six North American plant closures the Company has announced or accelerated since completing the acquisition, three have closed already and the remaining three are expected to close by year end. In total, these plants represent the consolidation of nearly 2.7 million square feet of production space and impact approximately 2,400 positions. In addition, the Company expects to complete the closure of Worldcolor's Montreal headquarters by the end of 2010, which will result in the reduction of approximately 100 administrative positions.

"We spent a significant amount of time preparing for this extremely complex integration and we were ready to go from the start," Mr. Quadracci said. "At the same time, our focus remains on serving our customers and ensuring their work is produced without disruption throughout this transition. We have been pleased by our customers' favorable response to the acquisition and have been successful at retaining business with no significant loss of work."

"We continue to be confident that we'll achieve the $225 million in synergy savings on an annual run-rate basis within 24 months of closing the Worldcolor acquisition," Mr. Fowler added. "As we move aggressively to close plants, we have begun to realize the anticipated, nonrecurring frictional costs associated with ramping down the plants slated for closure while simultaneously ramping up the facilities to where the work is moving. We expect these frictional costs to be completed by the time we finish the integration.

Mr. Fowler concluded: "Despite the complexities in this quarter due to the Worldcolor transaction and purchase accounting adjustments, we believe that the combination of synergy savings and strong free cash flow will allow us to both continue paying down debt and investing in the business, which will create substantial value for our shareholders."

Simultaneously with its integration initiatives, the Company continues to invest in its platform and expand its products and services for the benefit of its customers. Recent examples include:

- A $23 million investment in its Canadian platform as part of restructuring its Canadian business to achieve efficiencies;
- A $20 million investment in its retail advertising insert platform, which includes two new high-speed presses for the Company's Lomira, Wis., plant to strengthen its Midwest presence;
- A significant investment to expand digital printing capabilities in its U.S. book manufacturing platform; and
- The acquisition of HGI Company, a commercial and specialty products printer, to selectively grow in adjacent segments.

Mr. Quadracci stated that the Company has a clear vision for building its business by driving print as the foundation of coordinated multichannel marketing campaigns; enhancing the most modern, integrated and efficient platform in the industry; creating value for customers through its efficient and innovative distribution network; and empowering and investing in its workforce through training and development. "To do that, our focus has been on shoring up, investing in and moving forward," he said. "We are shoring up our newly acquired assets, investing in opportunities like HGI that grow diversified streams of revenue and expand our print and print-related products and services, and moving the business forward through strategic initiatives in every market segment and geography where we have a presence."

Three Months

For the three months ended September 30, 2010, as reported net sales were $1,208.7 million compared to pro forma net sales of $1,243.6 million in the same period in 2009. As reported Adjusted EBITDA and Adjusted EBITDA margin were $159.2 million and 13.2% compared to pro forma Adjusted EBITDA and pro forma Adjusted EBITDA margin of $197.3 million and 15.9% in the same period in 2009. As reported net sales were $1,208.7 million compared to as reported net sales of $471.6 million in the same period in 2009. On an as reported basis, Adjusted EBITDA was $159.2 million compared to $94.6 million in the same period in 2009.

As reported 2010 net loss attributable to common shareholders in the three months was $232.5 million, or ($5.01) per share, versus income of $28.4 million or $0.98 diluted earnings per share in the same period in 2009. The results for the third quarter of 2010 include $74.0 million in restructuring, impairment and transaction-related charges (of which $10.3 million is non-cash) associated with the Worldcolor acquisition and the recently completed public company registration process as well as a one-time non-cash income tax expense in 2010 of $200.5 million due to the recognition of net deferred tax liabilities as a result of the Company's tax status changing from an S Corporation to a C Corporation. Excluding the effects of restructuring, impairment and transaction-related charges in both years as well as the one-time non-cash tax adjustment in 2010, net earnings would have been $26.9 million or $0.58 diluted earnings per share in the three months ended September 30, 2010, versus net earnings of $20.0 million or $0.69 diluted earnings per share in the same period last year.

Year-to-Date

For the nine months ended September 30, 2010, pro forma net sales were $3,379.6 million compared to $3,511.9 million in the same period in 2009. Pro forma Adjusted EBITDA and pro forma Adjusted EBITDA margin were $447.7 million and 13.2% compared to $417.6 million and 11.9% in the same period in 2009. As reported net sales were $2,006.6 million compared to as reported net sales of $1,275.9 million in the same period of 2009. On an as reported basis, Adjusted EBITDA was $278.8 million compared to $223.0 million in the same period in 2009.

As reported 2010 net loss attributable to common shareholders in the first nine months was $276.7 million, or ($8.07) per share, versus as reported net income of $16.7 million or $0.57 diluted earnings per share in the same period of 2009. The results for the first nine months of 2010 include $111.6 million in restructuring, impairment and transaction-related charges (of which $34.7 million is non-cash) associated with the Worldcolor acquisition and integration and the consolidation of Quad/Graphics' Poland legacy facilities into one location, as well as the one-time non-cash tax adjustment in 2010 of $200.5 million discussed above. Excluding the effects of restructuring, impairment and transaction-related charges in both years as well as the one-time non-cash tax adjustment in 2010, net earnings would have been $23.0 million or $0.67 diluted earnings per share in the first nine months of 2010 versus net earnings of $19.3 million or $0.66 per share in the same period in 2009.

In addition to the financial measures prepared in accordance with generally accepted accounting principles (GAAP), this earnings announcement also contains non-GAAP financial measures, specifically Adjusted EBITDA and Adjusted EBITDA margin. They are presented to provide additional information regarding Quad/Graphics' performance and because both are important measures by which Quad/Graphics gauges the profitability and assesses the performance of its business. These measures should not be considered alternatives to net earnings (loss) as a measure of operating performance or to cash flows from operating activities as a measure of liquidity.

 

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