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Quad/Graphics reports Q4 net sales up

Friday, March 11, 2011

Press release from the issuing company

Sussex, Wis. - Quad/Graphics, Inc., today reported results for its fourth quarter ending December 31, 2010. The quarter's results include the July 2, 2010, acquisition of World Color Press Inc. To assist in comparisons, references to pro forma measures assume that the acquisition of Worldcolor was completed on January 1, 2009.

Summary:

- Strong cash flow generation combined with reduction in restricted cash and collateral at legacy Worldcolor was used to pay down $179 million of debt during the fourth quarter;
- Integration-related closures of eight North American manufacturing facilities, Worldcolor's Montreal headquarters and other restructuring actions have resulted in the net reduction of approximately 3,000 employees to date;
- Fourth Quarter 2010 net sales increased to $1.39 billion from pro forma net sales of $1.36 billion in fourth quarter 2009 and net sales of $1.21 billion in third quarter 2010;
- Fourth Quarter 2010 Adjusted EBITDA of $224.2 million compared to pro forma Adjusted EBITDA of $235.5 million in fourth quarter 2009 and Adjusted EBITDA of $159.2 million in third quarter 2010;
- Fourth Quarter 2010 Adjusted EBITDA margin of 16.2% compared to pro forma Adjusted EBITDA margin of 17.3% in fourth quarter 2009 and Adjusted EBITDA margin of 13.2% in third quarter 2010.

"We are very pleased with our results for fourth quarter 2010, which is our second quarter reporting as a combined company," said Joel Quadracci, Chairman, President & CEO of Quad/Graphics. "Net sales were up slightly over pro forma 2009 despite continued pricing pressures and the downward trajectory of Worldcolor revenues." Given the industry's ongoing competitive pricing environment, Mr. Quadracci noted that the company will continue its historic focus on improving operational excellence through lean manufacturing and continuous improvement initiatives as well as reinvesting in its platform. "We are rapidly deploying lean manufacturing across our entire organization to achieve improved efficiencies, reduce waste, lower overall operating costs, enhance quality and timeliness, and create a safer work environment for our employees. As a result of our effective integration efforts and synergy achievements along with aggressive cost management, our Adjusted EBITDA of $224.2 million and Adjusted EBITDA margin of 16.2% marked a solid finish to our year."

"Our cash flow during the fourth quarter was very strong and allowed us to pay down $179 million of debt and continue to strengthen our balance sheet," said John Fowler, Executive Vice President & CFO. "Of the $179 million, approximately $132 million was cash generated from operating activities and $60 million was from the reduction in restricted cash and collateral at Worldcolor, offset by the assumption of $13 million of debt in the HGI acquisition. This debt pay down results from our efforts to deleverage our balance sheet and, over time, return to investment grade. We view cash flow generation as one of the most important measures of a printing company's financial success and it has been a focus of how we've managed our business over many years."

The Company continues to make significant progress in the integration. "We moved quickly, but deliberately, to focus on each and every customer as we transitioned work to new plants," said Mr. Quadracci. "Moving each title is a very exacting process as no two titles and no two issues within a title are the same. We focused heavily on sustainable, repeatable processes, training and multi-point communication, and ensured that there were appropriate timelines and resources in place. During our busiest season of the year, we transitioned nearly 400 titles from closing facilities onto our more efficient and modern platform with minimal disruption to customers. To date, we retained 97% of revenues associated with those transitioned titles and are very pleased with and thankful for our customers' support throughout this process. We believe that our high retention rate is a significant achievement and speaks to the thoughtful planning and preparation that has gone into our integration. We also successfully managed the costs and timeline as we ramped down the plants we are closing."

By year end 2010, the Company had closed six North American plants and Worldcolor's Montreal headquarters. In early 2011, the Company already announced or completed two additional North American plant closures. The impact of these and other restructuring actions will result in the closure of approximately 3.6 million square feet of manufacturing and warehousing space, and a gross reduction of 4,400 employees. Currently, the Company has realized a net reduction of approximately 3,000 full-time equivalent employees. "Overall, the integration process is moving forward as expected, but we are not finished as this is a 24-month journey," Mr. Quadracci stated. "We are now confident that we'll achieve somewhat more than the $225 million in synergy savings on an annual run-rate basis within 24 months of closing the Worldcolor acquisition. We continue looking for additional cost-savings opportunities to build upon our integration synergy savings."

"We are in the midst of a complex integration with many moving pieces," Mr. Fowler said. "In addition, the company we acquired was in a downward trajectory as a result of its bankruptcy. Given these facts, we are making an exception to our limited guidance policy and will provide adjusted EBITDA guidance for 2011. We anticipate full year 2011 Adjusted EBITDA to be slightly in excess of $700 million, and will be dependent on the extent to which volumes and the competitive pricing environment affect the economic recovery in the print market. Additionally, as we make further progress on our integration and other cost reduction efforts, we expect that there will be frictional costs associated with those activities, as was the case in 2010."

Mr. Quadracci affirmed that the Company will continue to invest in opportunities to expand its print and print-related products and services as well as grow diversified and profitable streams of revenue. "We have a clear vision for building our business by leveraging our strengths and core competencies to help our customers and prospective customers," he said. "We will continue to move the business forward through strategic initiatives that enhance our service offering, benefit our clients and their business goals, and create shareholder value."

Three Months

For the three months ended December 31, 2010, as reported net sales were $1,385.1 million compared to pro forma net sales of $1,360.6 million in the same period in 2009. As reported, Adjusted EBITDA and Adjusted EBITDA margin were $224.2 million and 16.2% compared to pro forma Adjusted EBITDA and pro forma Adjusted EBITDA margin of $235.5 million and 17.3% in the same period in 2009. As reported net sales were $1,385.1 million compared to as reported net sales of $512.6 million in the same period in 2009. On an as reported basis, Adjusted EBITDA was $224.2 million compared to $103.3 million in the same period in 2009.

As reported 2010 net income attributable to common shareholders in the three months was $26.6 million, or $0.55 diluted earnings per share, versus income of $36.1 million or $1.24 diluted earnings per share in the same period in 2009. The fourth quarter results include restructuring, impairment and transaction-related charges of $50.9 million and $1.2 million in 2010 and 2009, respectively. Excluding the effects of restructuring, impairment and transaction-related charges and utilizing a 39% pro forma normalized effective tax rate in both years, net earnings would have been $64.3 million or $1.33 diluted earnings per share in the three months ended December 31, 2010, versus net earnings of $23.9 million or $0.82 diluted earnings per share in the same period last year.

Year-to-Date

For the twelve months ended December 31, 2010, pro forma net sales were $4,764.7 million compared to $4,872.5 million in the same period in 2009. Pro forma Adjusted EBITDA and Pro forma Adjusted EBITDA margin were $671.9 million and 14.1% compared to $653.1 million and 13.4% in the same period in 2009. As reported net sales were $3,391.7 million compared to as reported net sales of $1,788.5 million in the same period of 2009. On an as reported basis, Adjusted EBITDA was $503.0 million compared to $326.3 million in the same period in 2009.

As reported 2010 net loss attributable to common shareholders in the twelve months was $250.1 million, or ($6.67) per share, versus as reported net income of $52.8 million or $1.81 diluted earnings per share in the same period of 2009. The year-to-date results include restructuring, impairment and transaction-related charges of $162.5 million and $11.2 million in 2010 and 2009, respectively, as well as a $200.5 million non-cash tax adjustment in 2010. Excluding the effects of restructuring, impairment and transaction-related charges, and utilizing a 39% pro forma normalized effective tax rate in both years, net earnings would have been $86.2 million or $2.30 diluted earnings per share for the full year 2010 versus net earnings of $42.3 million or $1.45 diluted earnings 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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