SUSSEX, WI, October 31, 2018 — Quad/Graphics, Inc. (NYSE: QUAD) (“Quad/Graphics,” “Quad” or the “Company”) today reported results for its third quarter ending September 30, 2018. For full financial results, please see the accompanying information.
Financial highlights
- Increased third quarter 2018 net sales 2.4% to $1.0 billion.
- Increased third quarter 2018 net earnings by 18% to $23 million and improved third quarter diluted earnings per share by 21% to $0.46.
- Achieved third quarter 2018 Non-GAAP Adjusted EBITDA and Margin of$105 million and 10.2%, respectively, and generated third quarter 2018 Non-GAAP Adjusted Diluted Earnings Per Share of $0.45.
- Narrows full-year 2018 guidance for net sales to be approximately $4.2 billion, Adjusted EBITDA of $410 million to $430 million, and Free Cash Flow of approximately $200 million.
- Announces acquisition of LSC Communications (“LSC”), a leader in print and digital media solutions.
- Declares quarterly dividend of $0.30 per share.
“Our third quarter results were in-line with our expectations, and reflect our consistent, disciplined focus to sustainably reduce costs, win profitable new business and expand our relationships with existing clients as we continue to strengthen our integrated marketing solutions offering,” said Joel Quadracci, Chairman, President & CEO of Quad/Graphics. “The acquisition of LSC is a natural and strategic fit, and will help us further strengthen the role of print, which is a proven and trusted media form in today’s multichannel world. When combined, our companies’ complementary platforms will be operated by the printing industry’s most experienced operators and innovators, providing our clients with flexibility and enhanced production and distribution efficiencies. As we move forward, we will continue to leverage our strong print foundation as part of a much larger, more robust integrated marketing solutions offering that not only helps clients plan and produce programs, but also physically execute and measure them across traditional and digital channels. Our offering helps clients reduce the complexity of working with multiple specialized agencies, while improving process efficiencies and enhancing marketing spend effectiveness. At a time of incredible media disruption, we remain confident in the value-creating potential of our integrated marketing solutions strategy.”
Summary results
Net sales increased 2.4% during the third quarter 2018 to $1 billion, reflecting the impact of the Ivie & Associates and Rise Interactive investments. Organic sales declined 3.2% after excluding acquisition sales impact of 4.6%, increased pass-through paper sales of 1.6% and a 0.6% unfavorable foreign exchange impact. The organic results reflect ongoing print industry volume and pricing pressures and are consistent with the Company’s expectations. Net earnings attributable to Quad/Graphics common shareholders increased 18% during the third quarter 2018 to $23 million, and diluted earnings per share improved by $0.08 to $0.46 compared to $0.38 in 2017. Third quarter 2018 Non-GAAP Adjusted EBITDA was $105 million compared to $113 million in the third quarter of 2017, and Adjusted EBITDA Margin was 10.2% compared to 11.2% in 2017. Non-GAAP Adjusted Diluted Earnings Per Share for the third quarter 2018 was $0.45 per share compared to $0.46 per share in the third quarter 2017.
Net sales increased 1.5% during the nine months ended September 30, 2018. Organic sales declined 3.6% after excluding acquisition sales impact of 4.3%, increased pass-through paper sales of 1.0% and a 0.2% unfavorable foreign exchange impact, reflecting ongoing print industry volume and pricing pressures. Net earnings attributable to Quad/Graphics common shareholders for the nine months ended September 30, 2018, decreased $23 million to $29 million, or $0.57 per share, and included a special non-cash charge of $22 million for an employee stock ownership plan contribution as part of the benefit of tax reform and $18 million in higher restructuring charges. Excluding the special contribution and restructuring charges, Non-GAAP Adjusted Diluted Earnings Per Share improved 3% to $1.26 per share during the nine months ended September 30, 2018, compared to $1.22 per share for 2017. Year-to-date Non-GAAP Adjusted EBITDA was $305 million compared to $326 million for 2017, and Adjusted EBITDA margin was 10.1% compared to 11.0% in 2017, reflecting the aforementioned pass-through paper sales and volume and pricing pressures.
Net cash provided by operating activities was $47 million for the first nine months of 2018 compared to $180 million in 2017, and Free Cash Flow was negative $38 million. The year-over-year decline was primarily attributable to expected timing differences in 2018 versus 2017 for cash generated from working capital which includes an intentional build-up of paper inventories that will be reduced in the fourth quarter. As a reminder, the Company generates the majority of its Free Cash Flow in the fourth quarter of the year, which is its seasonal peak.
“Our third-quarter results were in-line with expectations as we continue executing on our strategic priorities to achieve our narrowed full-year 2018 guidance,” said Dave Honan, Executive Vice President & Chief Financial Officer. “We expect our Debt Leverage Ratio of 2.46x as of September 30 to decrease to the low end of our long-term targeted range of 2.0x to 2.5x by the end of the year due to our anticipated strong fourth quarter Free Cash Flow. The strength of our balance sheet provides us with the ability to deploy our capital between investing back into our business, making strategic acquisitions like LSC and returning capital to our shareholders through our consistent dividend and share repurchases. We will continue to find innovative ways to reduce our cost structure while generating the strong Free Cash Flow that serves as the foundation of our historically strong balance sheet.”
Added Honan: “The LSC transaction presents a compelling opportunity for the achievement of the $135 million in net synergies, excluding non-recurring integration costs, in less than two years through the elimination of duplicative functions, capacity rationalization, greater operational efficiencies and greater efficiencies in supply chain management. We anticipate the significant level of synergies will result in a more profitable combined company, and that the all-stock transaction structure will allow us to maintain a strong and healthy balance sheet, which creates future value for all shareholders.”
Quad/Graphics’ next quarterly dividend of $0.30 per share will be payable on December 7, 2018, to shareholders of record as of November 19, 2018.
Guidance
Quad/Graphics narrows its 2018 financial guidance as follows:
| U.S. $ | Previous 2023 Guidance Range | Narrowed Guidance Range |
| Net Sales | $4.0 billion – $4.2 billion | Approximately $4.2 billion |
| Adjusted EBITDA | $410 million – $450 million | $410 million – $430 million |
| Free Cash Flow | $200 million – $240 million | Approximately $200 million |
Conference call & webcast
In light of today’s transaction announcement, Quad/Graphics will hold a joint conference call and webcast with LSC Communications today at 8:30 a.m. ET / 7:30 a.m. CT to discuss the business combination. Quad/Graphics also will discuss its third quarter financial results on this call.
Participants can pre-register for today’s conference call and webcast by navigating to http://dpregister.com/10124442. Participants will be given a unique PIN to gain immediate access to the call, bypassing the live operator. Participants may pre-register at any time, including up to and after the call start time.
Alternatively, participants may dial into the conference call at least 10 minutes prior as follows:
- U.S. Toll-Free: 1-877-328-5508
- International Toll: 1-412-317-5424
Presentation materials will be available in the investor relations section of each company’s website at http://investors.qg.com and http://investor.lsccom.com/.
Telephone playback will be available shortly after the conference call ends, accessible as follows:
- U.S. Toll-Free: 1-877-344-7529
- International Toll: 1-412-317-0088
- Replay Access Code: 10124442
The playback will be available until December 1, 2018.
Forward-looking statements
This communication contains certain forward-looking statements with respect to the financial condition, results of operations and business of Quad/Graphics and the combined businesses of Quad/Graphics and LSC Communications and certain plans and objectives of Quad/Graphics with respect thereto, including the expected benefits of the proposed merger transaction. These forward-looking statements can be identified by the fact that they do not relate only to historical or current facts. Forward-looking statements often use words such as “anticipate”, “target”, “expect”, “estimate”, “intend”, “plan”, “goal”, “believe”, “hope”, “aim”, “continue”, “will”, “may”, “would”, “could” or “should” or other words of similar meaning or the negative thereof. There are several factors which could cause actual plans and results to differ materially from those expressed or implied in forward-looking statements. Such factors include, but are not limited to: (1) the ability to complete the proposed transaction between Quad/Graphics and LSC Communications on the anticipated terms and timetable; (2) the ability to obtain approval by the shareholders of Quad/Graphics and the stockholders of LSC Communications related to the proposed transaction and the ability to satisfy various other conditions to the closing of the proposed transaction contemplated by the merger agreement; (3) the ability to obtain governmental approvals of the proposed transaction on the proposed terms and schedule, and any conditions imposed on the combined entities in connection with consummation of the proposed transaction; (4) the risk that the cost savings and any other synergies from the proposed transaction may not be fully realized or may take longer to realize than expected; (5) disruption from the proposed transaction making it more difficult to maintain relationships with customers, employees or suppliers; (6) risks relating to any unforeseen liabilities of LSC Communications or Quad/Graphics; (7) consumer demand for our products; (8) our ability to manage disruptions in credit markets or changes to our credit rating; (9) the success or timing of completion of ongoing or anticipated capital or maintenance projects; (10) the reliability of processing units and other equipment; (11) business strategies, growth opportunities and expected investment; (12) the adequacy of our capital resources and liquidity, including but not limited to, availability of sufficient cash flow to execute our business plans, including within the expected timeframe; (13) the effect of restructuring or reorganization of business components; (14) the potential effects of judicial or other proceedings on our businesses, financial condition, results of operations and cash flows; (15) continued or further volatility in and/or degradation of general economic, market, industry or business conditions; (16) the anticipated effects of actions of third parties such as competitors, activist investors or federal, foreign, state or local regulatory authorities or plaintiffs in litigation; (17) the ability to implement integration plans for the proposed transaction, including with respect to sales forces, cost containment, asset realization, systems integration and other key strategies; (18) the risk that the anticipated tax treatment of the proposed transaction is not obtained; (19) unexpected costs, charges or expenses resulting from the proposed transaction; (20) the impact of adverse market conditions or other similar risks to those identified herein affecting Quad/Graphics and LSC
Communications and (21) the factors set forth under the heading “Risk Factors” in Quad/Graphics’ and LSC Communications’ respective Annual Reports on Form 10-K for the year ended December 31, 2017, filed with the SEC.
These forward-looking statements are based on numerous assumptions and assessments made by Quad/Graphics in light of its experience and perception of historical trends, current conditions, business strategies, operating environment, future developments and other factors that it believes appropriate. By their nature, forward-looking statements involve known and unknown risks and uncertainties because they relate to events and depend on circumstances that will occur in the future. The factors described in the context of such forward-looking statements in this communication could cause actual results, performance or achievements, industry results and developments to differ materially from those expressed in or implied by such forward-looking statements. Although it is believed that the expectations reflected in such forward-looking statements are reasonable, no assurance can be given that such expectations will prove to have been correct and persons reading this communication are therefore cautioned not to place undue reliance on these forward-looking statements which speak only as at the date of this communication. Quad/Graphics does not assume any obligation to update the information contained in this communication (whether as a result of new information, future events or otherwise), except as required by applicable law. A further list and description of risks and uncertainties can be found in Quad/Graphics’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017 and in its reports filed on Form 10-Q and Form 8-K.
Non-GAAP financial measures
This press release contains financial measures not prepared in accordance with generally accepted accounting principles (referred to as Non-GAAP), specifically Adjusted EBITDA, Adjusted EBITDA Margin, Free Cash Flow, Debt Leverage Ratio and Adjusted Diluted Earnings Per Share. Adjusted EBITDA is defined as net earnings (loss) attributable to Quad/Graphics common shareholders excluding interest expense, income tax expense (benefit), depreciation and amortization, restructuring, impairment and transaction-related charges, net pension income, employee stock ownership plan contributions, loss (gain) on debt extinguishment, equity in (earnings) loss of unconsolidated entity and net earnings (loss) attributable to noncontrolling interests. Adjusted EBITDA Margin is defined as Adjusted EBITDA divided by net sales. Free Cash Flow is defined as net cash provided by operating activities less purchases of property, plant and equipment. Debt Leverage Ratio is defined as total debt and capital lease obligations divided by the last twelve months of Adjusted EBITDA. Adjusted Diluted Earnings Per Share is defined as earnings before income taxes and equity in (earnings) loss of unconsolidated entity excluding restructuring, impairment and transaction-related charges, employee stock ownership plan contributions, loss (gain) on debt extinguishment, and adjusted for income tax expense at a normalized tax rate, divided by diluted weighted average number of common shares outstanding.
The Company believes that these Non-GAAP measures, when presented in conjunction with comparable GAAP measures, provide additional information for evaluating Quad/Graphics’ performance and are important measures by which Quad/Graphics’ management assesses the profitability and liquidity of its business. These Non-GAAP measures should be considered in addition to, not as a substitute for or superior to, net earnings (loss) as a measure of operating performance or to cash flows provided by operating activities as a measure of liquidity. These Non- GAAP measures may be different than Non-GAAP financial measures used by other companies. Reconciliation to the GAAP equivalent of these Non-GAAP measures are contained in tabular form on the attached unaudited financial statements.
About Quad/Graphics
Quad/Graphics (NYSE:QUAD) is a leading marketing solutions provider. The Company leverages its strong print foundation as part of a much larger, robust integrated marketing services platform that helps marketers and content creators improve the efficiency and effectiveness of their marketing spend across offline and online media channels. With a consultative approach, worldwide capabilities, leading-edge technology and single-source simplicity, Quad/Graphics has the resources and knowledge to help a wide variety of clients in multiple vertical industries, including retail, publishing and healthcare. Quad/Graphics provides a diverse range of digital and print and related products, services and solutions from multiple locations throughout North America, South America and Europe, and strategic partnerships in Asia and other parts of the world. For additional information visit www.QG.com.
Additional information and where to find it
The proposed transaction involving Quad/Graphics and LSC Communications will be submitted to the holders of class A and class B common stock of Quad/Graphics and to the holders of common stock of LSC Communications for their consideration. In connection with the proposed transaction, Quad/Graphics will prepare a registration statement on Form S-4 that will include a joint proxy statement/prospectus to be filed with the Securities and Exchange Commission (the “SEC”), and each of Quad/Graphics and LSC Communications will mail the joint proxy statement/prospectus to their respective shareholders and file other documents regarding the proposed transaction with the SEC. Quad/Graphics urges investors and shareholders to read the joint proxy statement/prospectus when it becomes available, as well as other documents filed with the SEC, because they will contain important information. Investors and shareholders will be able to obtain the registration statement containing the joint proxy statement/prospectus and other documents free of charge at the SEC’s web site, http://www.sec.gov, from Quad/Graphics Corporate Communications upon request to Claire Ho, at 414-566-2955 or cho@qg.com, or from LSC Communications Investor Relations, Janet Halpin, at investor.relations@lsccom.com or 773-272-9275.
Participants in solicitation
Quad/Graphics, LSC Communications and certain of their respective directors and executive officers and other members of management and employees may be deemed to be participants in the solicitation of proxies in connection with the proposed transaction under the rules of the SEC. Information regarding the persons who may, under the rules of the SEC, be deemed participants in the solicitation of proxies in connection with the proposed transaction will be set forth in the joint proxy statement/prospectus when it is filed with the SEC. You can find information about Quad/Graphics’s directors and executive officers in its Annual Report for the year ended December 31, 2017 on Form 10-K filed with the SEC on February 21, 2018 and the definitive proxy statement relating to its 2018 Annual Meeting of Shareholders filed with the SEC on April 4, 2018. You can find information about LSC Communication’s directors and executive officers in its Annual Report for the year ended December 31, 2017 on Form 10-K filed with the SEC on February 22, 2018 and the definitive proxy statement relating to its 2018 Annual Meeting of Shareholders filed with the SEC on April 10, 2018. These documents can be obtained free of charge from the sources indicated above.
Non-solicitation
This communication does not constitute an offer to sell or the solicitation of an offer to buy any securities, nor shall there be any sale of securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction. No offer of securities shall be made except by means of a prospectus meeting the requirements of Section 10 of the Securities Act of 1933, as amended. This communication is not a solicitation of a proxy from any investor or shareholder.
Investor relations contact
Kyle Egan
Director of Investor Relations and Assistant Treasurer, Quad/Graphics
414-566-2482
kegan@qg.com
Media contact
Claire Ho
Manager of Corporate Communications, Quad/Graphics
414-566-2955
cho@qg.com
