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Quad/Graphics Reports Flat Revenues

Friday, November 11, 2011

Press release from the issuing company

Quad/Graphics, Inc. ("Quad/Graphics" or the "Company"), today reported results for its third quarter ending September 30, 2011, and declared a cash dividend of $0.20 per share, payable on December 10, 2011, to shareholders of record as of November 30, 2011. The results reported below include the Company's Canadian operations, which are in the process of being sold, unless otherwise noted.

Third quarter 2011 net sales were $1,186 million versus $1,209 million for the same period in 2010. The results reflect moderate declines in volume primarily due to macroeconomic pressures, including continuing industry softness in the book market, and an aggressive pricing environment. Adjusted EBITDA for the third quarter was $173.6 million versus $159.2 million in the same period in 2010. The increase in Adjusted EBITDA was mostly attributable to Worldcolor transaction synergy savings and lower incentive compensation. Adjusted EBITDA was adversely affected by volume and pricing pressures, as well as temporary productivity declines associated with transitioning work from plants being consolidated as part of the Worldcolor integration.

"The volume declines we began to see late in the second quarter accelerated during the third quarter, and included continued weakness in the book market," said Joel Quadracci, Chairman, President & CEO. "This, along with temporary productivity declines and ongoing competitive pricing pressures, resulted in Adjusted EBITDA below what we had anticipated for the quarter. Given this environment, we remain focused on performing well for our customers, improving productivity and aggressively managing costs to produce results that drive shareholder value."

John Fowler, Executive Vice President & Chief Financial Officer, explained that the circumstances that led Adjusted EBITDA to be lower than anticipated in the quarter are expected to continue through the remainder of the year. As a result, the Company is revising its Adjusted EBITDA outlook for 2011. "Based on our third quarter results, as well as anticipated softer volume in the fourth quarter and continued productivity impacts, we believe full year Adjusted EBITDA will be lower than what we anticipated," Fowler said. "We now project a range of $610 million to $625 million for full year 2011 Adjusted EBITDA. We continue to expect Recurring Free Cash Flow to be $260 million to $300 million."

The Company continues to make progress with the Worldcolor integration. "We remain confident in our ability to achieve more than $225 million in synergy savings on an annual run-rate basis within 24 months of the acquisition closing, and we achieved $32 million in incremental synergy savings during the third quarter 2011," Quadracci said. "Last month we announced the next phase of facility closures in Richmond, Va., and Stillwater, Okla., and will continue to identify additional cost-saving opportunities as we move forward with this very large and complex integration. As an indication of our progress, Adjusted EBITDA margin for the third quarter increased to 14.6%, and excluding the Canadian discontinued operations, the margin increased to 15.6%."

The Company is focused on creating value for its clients and shareholders through innovative solutions that increase efficiencies and cost savings, and provide multichannel marketing opportunities to grow revenue. "During the quarter we introduced a new distributive co-mail model to help our clients achieve extensive distribution efficiencies and postage savings," Quadracci said. "We have 30% more co-mail volume than we did one year ago, and volume is essential to maximizing postage savings, which is critical because postage is our clients' largest production cost category. In addition, our clients benefit from our proprietary co-mail optimization software that enhances savings opportunities. In the quarter, we also introduced a number of interactive print solutions to help our clients more effectively connect print with new and engaging mobile technologies, including augmented reality and near field communication."

The Company continues to manage its outstanding debt and pension liability to maintain a strong balance sheet that provides it with flexibility to adjust to changing economic conditions. "We completed a very successful debt refinancing during the quarter that provided us with an improved maturity schedule, reduced cost of borrowing and additional financial flexibility," Fowler explained. "Our quarter-end leverage ratio of 2.46 times during our peak season for working capital remains within our targeted range of 2.0 to 2.5 times and demonstrates the continued financial strength of our business. We believe our business will continue to generate significant cash flow to support our disciplined capital deployment strategy. The priorities for that capital will be adjusted based on current circumstances and what we think is best for shareholder value creation. For example, during the quarter we began to execute a share repurchase program, and we also have maintained our cash dividend to shareholders, which demonstrates our commitment to providing returns."

In September, the Company completed its acquisition of Transcontinental Inc.'s Mexican business. "This acquisition supports our disciplined strategy to grow profitably in promising, higher-growth geographies and end markets where we can be a leader through a diverse product offering, and a superior and efficient operating platform," Quadracci said. "It also represents a significant step toward realizing our goal of creating the most efficient, productive and integrated printing platform in Latin America to serve clients already in or looking to enter this promising marketplace."

"We are proud to be printers and innovators, and are confident in print's ability to drive business results for publishers and marketers," he said. "Although there are many factors beyond our control, we will work to create additional shareholder value by evaluating the best manner in which to deploy our capital while continuing to remove costs from our structure to be in line with softer volumes, industry pricing pressures and ongoing uncertainty in the economy."

Three Months

For the three months ended September 30, 2011, net sales inclusive of Canadian operations were $1,186 million, compared to net sales of $1,209 million in the same period in 2010. Also inclusive of the Canadian operations, Adjusted EBITDA and Adjusted EBITDA margin were $173.6 million and 14.6%, compared to $159.2 million and 13.2% in the same period in 2010.

Excluding the Canadian operations, which are treated as a discontinued operation for accounting purposes, continuing operations net sales were $1,109 million compared to $1,129 million in the same period in 2010. Continuing operations Adjusted EBITDA and Adjusted EBITDA margin were $173.5 million and 15.6%, compared to $153.2 million and 13.6% in the same period in 2010.

Net loss attributable to common shareholders in the three months ended September 30, 2011, was $(22.4) million, or $(0.48) diluted loss per share, as compared to $(232.5) million or $(5.01) diluted loss per share in the same period in 2010. The third quarter net loss includes restructuring, impairment and transaction-related charges of $48.3 million and $74.0 million in 2011 and 2010, respectively, and a $34.0 million loss on debt extinguishment in 2011. Excluding the effects of restructuring, impairment and transaction-related charges and loss on debt extinguishment, and utilizing a 40% normalized effective tax rate in both years, net earnings would have been $37.8 million or $0.80 diluted earnings per share for the three months ended September 30, 2011, as compared to $24.9 million or $0.54 diluted earnings per share in the same period in 2010.

Year-to-Date

For the nine months ended September 30, 2011, net sales inclusive of Canadian operations were $3,359 million compared to net sales of $2,007 million in the same period in 2010. Also inclusive of the Canadian operations, Adjusted EBITDA and Adjusted EBITDA margin were $441.0 million and 13.1% compared to $278.8 million and 13.9% in the same period in 2010.

Excluding the Canadian operations, which are treated as a discontinued operation for accounting purposes, continuing operations net sales were $3,109 million compared to $1,927 million in the same period in 2010. Continuing operations Adjusted EBITDA and Adjusted EBITDA margin were $431.3 million and 13.9%, compared to $272.8 million and 14.2% in the same period in 2010.

Net loss attributable to common shareholders in the nine months ended September 30, 2011, was $(40.0) million, or $(0.85) diluted loss per share, as compared to $(276.7) million or $(8.07) diluted loss per share in the same period of 2010. The year-to-date net loss includes restructuring, impairment and transaction-related charges of $106.5 million and $111.6 million in 2011 and 2010, respectively, and a $34.0 million loss on debt extinguishment in 2011. Excluding the effects of restructuring, impairment and transaction-related charges and loss on debt extinguishment, and utilizing a 40% normalized effective tax rate in both years, net earnings would have been $56.1 million or $1.19 diluted earnings per share for the nine months ended September 30, 2011, as compared to $21.7 million or $0.63 diluted earnings per share in the same period in 2010.

 

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