Quad/Graphics Reports a Small Net Sales Decline

SUSSEX, WI—August 9, 2011—Quad/Graphics Inc. reported results for its second quarter ending June 30, 2011, and announced a quarterly cash dividend.

Summary:

• Second quarter 2011 net sales were $1.07 billion and adjusted EBITDA was $126.7 million vs. net sales of $1.075 billion and adjusted EBITDA of $148.3 million in the same period of 2010.

• Progress continues on the Worldcolor integration and the Company remains confident it will achieve more than $225 million in synergy savings.

• Declared a cash dividend of $0.20 per share, payable on Sept. 9, 2011, to shareholders of record as of Aug. 29, 2011.

• Completed a $1.5 billion debt refinancing that provides greater borrowing capacity and financial flexibility while reducing cash interest payments by an estimated $16 million to $20 million annually.

• Signed an agreement with Transcontinental to essentially exchange Quad/Graphics’ Canadian assets for Transcontinental’s Mexican assets—a move that is expected to create positive incremental Adjusted EBITDA within 12-24 months of the transaction closing.

Unless otherwise noted, all comparisons are to pro forma measures that assume the company’s July 2, 2010, acquisition of World Color Press was completed on Jan. 1, 2010.

“We knew that the comparisons to second quarter 2010 were going to be difficult due to temporary cost reduction activities initiated by Worldcolor primarily during its bankruptcy. As a result, a decline this quarter from 2010 was expected,” said Joel Quadracci, chairman, president and CEO.

“The company experienced net sales declines in our book segment and continuing headwinds from industry pricing pressures. Operationally, we continued to experience temporary frictional costs resulting from the continued rapid ramp-up of facilities receiving work from those undergoing consolidation. Despite the headwinds we face, we are confident in our ability to manage short-term challenges and believe we are well-positioned for long-term success.”

Quad continues to make progress on 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 closing the Worldcolor acquisition,” Quadracci said. “As we move forward with this very large and complex integration and enter the busiest season of the year, we are proactively managing frictional costs to achieve our profitability targets and better serve our customers.”

Given rapidly evolving changes in the book publishing industry, the company continues to keep a close watch on industry action and activities, and is adjusting its business accordingly.

“During the quarter, we saw declines in the books segment fueled by publishers reducing or altogether canceling orders in the face of Borders’ liquidation. In addition, product mix preferences continue to change between hard cover and soft cover books. We continue to make the necessary and desired investments to meet our customers’ changing needs, including shorter runs and highly advanced digital printing capabilities for print-on-demand,” the company’s chief exec added.

John Fowler, executive vice president and chief financial officer, reiterated that despite the operational challenges the company faced in the quarter, it was on plan through the first half of the year. “We remain committed to achieving our full-year projections for Adjusted EBITDA of slightly in excess of $700 million. However, given the concerns we have seen in the economy, the headwinds we see from the revenue decline in the books segment and the continuing frictional costs from plant consolidations, we believe it is prudent to adjust our full-year Adjusted EBITDA projection to a range of $660 million to $700 million,” he said.

Quad continues to use its strong cash flow to pay down debt and, since the close of the Worldcolor acquisition, has reduced its outstanding debt balances by $233 million. Additionally, its pension and post-retirement liability decreased by $145 million, further deleveraging its balance sheet.

“We recently completed a very successful $1.5 billion debt refinancing,” Fowler said. “Our improved balance sheet metrics, combined with improvements in the credit markets, made this an ideal time to refinance. We are very pleased with the outcome of our refinancing, which resulted in a structure that gives us greater capacity and financial flexibility to support our future growth plans. The new credit agreement will also significantly reduce cash interest payments by an estimated $16 million to $20 million annually, with a payback on the costs to refinance the agreement of well under one year.”

Looking ahead, Quadracci shared that the company continues to explore growth opportunities—both organic and through acquisitions—that will strengthen its market position, expand its capabilities for customers and create value for shareholders. A key component of its expansion strategy is investing in geographies and segments where it can be a market leader through a diverse product offering, and a superior, efficient operating platform.

“We are being selective about where we choose to invest our capital so that we can achieve our business goals and drive profitable growth,” Quadracci explained. “For example, our recently announced agreement with Transcontinental expands our presence in Mexico where we believe we can create value through developing an industry-leading print platform in an economy with a higher growth rate than that of Canada. We expect the transaction will create immediate value to Quad/Graphics with Transcontinental’s assumption of the $75 million in pension and post-retirement obligations and positive incremental Adjusted EBITDA within 12-24 months following the close.”

Quadracci underscored the company’s commitment to advancing the power of print in a changing media landscape. “We believe in print and believe it has a strong future. We’re pushing print forward, making it more immediate and relevant, and strengthening how it complements and connects to emerging media channels. We are leveraging our advanced technology, superior manufacturing and distribution platform, and the immense talent of our employees to better position print long into the future.”

Three Months

For the three months ended June 30, 2011, as reported net sales were $1.07 billion compared to pro forma net sales of $1.075 billion in the same period in 2010. As reported Adjusted EBITDA and adjusted EBITDA margin were $126.7 million and 11.8 percent, compared to pro forma adjusted EBITDA and pro forma adjusted EBITDA margin of $148.3 million and 13.8 percent in the same period in 2010.

As reported net sales were $1.070 billion compared to as reported net sales of $394.3 million in the same period in 2010. On an as reported basis, adjusted EBITDA was $126.7 million compared to $57.3 million in the same period in 2010.

As reported 2011 net loss attributable to common shareholders in the three months was $10.3 million, vs. as reported net loss of $35.7 million in the same period in 2010. The second quarter results include restructuring, impairment and transaction-related charges of $23.4 million and $31.3 million in 2011 and 2010, respectively.

Excluding the effects of restructuring, impairment and transaction-related charges and utilizing a 40 percent pro forma normalized effective tax rate in both years, net earnings would have been $5.8 million for the three months ended June 30, 2011, vs. net loss of $2.9 million in the same period in 2010.

Year-to-Date

For the six months ended June 30, 2011, as reported net sales were $2.17 billion, compared to pro forma net sales of $2.17 billion in the same period in 2010. As reported adjusted EBITDA and adjusted EBITDA margin were $267.4 million and 12.3 percent compared to pro forma Adjusted EBITDA and pro forma Adjusted EBITDA margin of $288.5 million and 13.3 percent in the same period in 2010. As reported net sales were $2.17 billion, compared to as reported net sales of $797.9 million in the same period of 2010. On an as reported basis, adjusted EBITDA was $267.4 million vs. $119.6 million in the same period in 2010.

As reported 2011 net loss attributable to common shareholders in the six months was $17.6 million, vs. as reported net loss of $44.2 million in the same period of 2010. The year-to-date results include restructuring, impairment and transaction-related charges of $58.2 million and $37.6 million in 2011 and 2010, respectively.

Excluding the effects of restructuring, impairment and transaction-related charges, and utilizing a 40 percent pro forma normalized effective tax rate in both years, net earnings would have been $18.3 million for the six months ended June 30, 2011, vs. net loss of $3.2 million in the same period in 2010.

About Quad/Graphics
Quad/Graphics (NYSE: QUAD) is a global provider of print and related multichannel solutions for consumer magazines, special interest publications, catalogs, retail inserts/circulars, direct mail, books, directories, and commercial and specialty products, including in-store signage. Headquartered in Sussex, Wis. (just west of Milwaukee), the Company has approximately 24,000 full-time equivalent employees working from more than 60 print-production facilities as well as other support locations throughout the United States, Canada, Latin America and Europe. As a printing industry innovator, Quad/Graphics is redefining the power of print in today’s multimedia world by helping its clients use print as the foundation of multichannel communications strategies to drive their top-line revenues.

Source: Quad/Graphics.