Quad reports fourth quarter and full-year 2018 results

SUSSEX, WI, February 19, 2019 — Quad/Graphics, Inc. (NYSE: QUAD) (“Quad” or the “Company”) today reported results for its fourth quarter and full year ending December 31, 2018.

Financial highlights

• Increased full-year 2018 net sales 1.5% to $4.2 billion with integrated services revenue now accounting for approximately 20% of net sales.
• Achieved full-year 2018 net earnings of $8 million, diluted earnings per share of $0.16, Non-GAAP Adjusted Diluted Earnings Per Share of $1.79, and full-year 2018 Non-GAAP Adjusted EBITDA and Adjusted EBITDA Margin of $415 million and 9.9%, respectively.
• Generated cash flow from operations of $261 million and Free Cash Flow of $164 million for full-year 2018, which reflects the Company’s decision to increase long-term strategic investments.
• Reduced debt and capital leases by $24 million during 2018 and Debt Leverage Ratio to 2.11x, net of excess cash, which is at the low end of Company’s long-term targeted range of 2.0x to 2.5x.
• Provides 2019 guidance, which includes the acquisition of Periscope, one of the nation’s top five independent creative agencies by annual revenue.
• Declares quarterly dividend of $0.30 per share.

“2018 was a truly pivotal year in our Quad 3.0 transformation as reflected by last week’s announcement to evolve our brand from Quad/Graphics to Quad,” said Joel Quadracci, Chairman, President & CEO of Quad. “While maintaining our focus on preserving our high-quality, low-cost producer status, we made strategic investments to accelerate our transformation as a marketing solutions partner by acquiring Ivie & Associates, increasing our investment in Rise Interactive to a majority ownership and, in January 2019, acquiring Periscope. Our integrated services revenue, including Periscope, has grown to approximately 20% of our net sales, and represents over 40% growth since 2017.”

Quadracci added: “Our Quad 3.0 strategy creates more value for clients by expanding our offering beyond print and content production to include an integrated stack of higher margin marketing services, which, in turn, drives incremental revenue across our print product categories. This integrated marketing solutions platform helps our clients reduce the complexity of working with multiple agency and vendor partners, while improving process efficiencies and enhancing marketing spend effectiveness. At a time of incredible media disruption, we remain confident that our Quad 3.0 strategy will create greater value for our clients and shareholders over the long-term.”

“We expect to complete the acquisition of LSC Communications in mid-2019,” Quadracci said. “We remain enthusiastic about the value this transaction will create for all clients and shareholders. This business combination will enhance our highly efficient print platform to fuel our Quad 3.0 transformation and strengthen the role of print in a multichannel media world.”

Fourth quarter 2018 summary results

Net sales increased 1.5% during the fourth quarter 2018 to $1.2 billion, reflecting the impact of the Ivie & Associates and Rise Interactive investments as part of Quad’s continuing transformation as a marketing solutions partner. Organic sales declined 4.6% for the quarter after excluding acquisition sales impact of 4.3%, increased pass-through paper sales of 2.5%, and a 0.7% 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’s common shareholders decreased during the fourth quarter of 2018 to a loss of $21 million, and diluted earnings per share declined to a loss of $0.42 per share as compared to an earnings per share of $1.06 in 2017. Excluding restructuring costs, Non-GAAP Adjusted Diluted Earnings Per Share for the fourth quarter 2018 was $0.53 per share compared to $0.57 per share in the fourth quarter 2017. Fourth quarter 2018 Non-GAAP Adjusted EBITDA was $110 million compared to $122 million in the fourth quarter of 2017, and Adjusted EBITDA Margin was 9.3% compared to 10.5% in 2017. The Adjusted EBITDA variance to prior-year primarily reflects the impact from the organic sales decline of 4.6%, a $10 million impact from strategic investments made to increase hourly production employees’ wages, partially offset by the earnings impact from the growth in Quad’s integrated services revenues and a $6 million gain from a sales tax litigation settlement in Peru.

Full-year 2018 summary results

Net sales increased 1.5% during the year ended December 31, 2018, to $4.2 billion. Organic sales declined 3.8%, as expected, after excluding acquisition sales impact of 4.3%, increased pass-through paper sales of 1.4%, and a 0.4% unfavorable foreign exchange impact, reflecting ongoing print industry volume and pricing pressures.

Net earnings attributable to Quad common shareholders for the year ended December 31, 2018, decreased to $9 million, or $0.16 per share. Excluding a non-cash charge of $22 million for an employee stock ownership plan contribution as part of the benefit of tax reform and restructuring charges, Non-GAAP Adjusted Diluted Earnings Per Share was $1.79 per share during the year ended December 31, 2018, which is flat as compared to 2017. 2018 Non-GAAP Adjusted EBITDA was $415 million compared to $448 million for 2017, and Adjusted EBITDA Margin was 9.9% compared to 10.8% in 2017. The Adjusted EBITDA variance to prior-year primarily reflects the impact from the organic sales decline of 3.8%, a $20 million impact from strategic investments in hourly production wages and marketing talent and infrastructure to support Quad 3.0 transformation, partially offset by the earnings impact from the growth in Quad’s integrated services revenues and cost savings initiatives.

Net cash provided by operating activities was $261 million for the year ended December 31, 2018, compared to $344 million in 2017, and Free Cash Flow was $164 million as compared to $258 million. Free Cash Flow decreased due to the Company’s long-term strategic investment decisions to increase capital expenditures in manufacturing automation, increase wages for hourly production employees in the Company’s most competitive labor markets, and transaction-related costs for the pending acquisition of LSC. Additionally, given paper supply pressures, the Company intentionally increased paper inventories to ensure uninterrupted client service.

“We are pleased to report that our Net Sales and Adjusted EBITDA full-year results were in-line with our expectations as we continued to invest in our business and execute on our strategic priorities for long-term growth and shareholder value,” said Dave Honan, Executive Vice President & Chief Financial Officer of Quad. “Our Debt Leverage Ratio, net of excess cash, was 2.11x as of December 31, 2018, which is at the low end of our long-term targeted range of 2.0x to 2.5x. The strength of our balance sheet provides us with the ability to deploy our capital between investing back into our business, making strategic acquisitions and returning capital to our shareholders through our consistent dividend and share repurchases.”

Quad’s next quarterly dividend of $0.30 per share will be payable on March 8, 2019, to shareholders of record as of February 25, 2019.

2019 guidance

The Company provided the following 2019 financial guidance:

(1) LSC-related payments are expected to be between $20 million – $30 million and are primarily related to incremental interest expense associated with the amended financing and transaction costs expected to be incurred prior to completing the acquisition.

“Our 2019 guidance does not reflect the pending acquisition of LSC,” Honan said. “We will continue to execute on our strategic priorities and work toward the successful completion of the LSC transaction, which represents a compelling opportunity for the achievement of $135 million in net synergies, excluding non-recurring integration costs, in less than two years. In anticipation of the mid-2019 closing, we recently announced the successful completion of the amendment and extension of our debt facilities, which will provide us with the appropriate liquidity and structural flexibility to complete our pending acquisition and maintain a strong, flexible balance sheet to create future value for all shareholders.”

Forward-looking statements

This press release contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements regarding, among other things, our current expectations about the Company’s future results, financial condition, revenue, earnings, free cash flow, margins, objectives, goals, strategies, beliefs, intentions, plans, estimates, prospects, projections and outlook of the Company and can generally be identified by the use of words or phrases such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “plan,” “foresee,” “project,” “believe,” “continue” or the negatives of these terms, variations on them and other similar expressions. These forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual results to be materially different from those expressed in or implied by such forward-looking statements. Forward-looking statements are based largely on the Company’s expectations and judgments and are subject to a number of risks and uncertainties, many of which are unforeseeable and beyond our control.

The factors that could cause actual results to materially differ include, among others: the impact of decreasing demand for printed materials and significant overcapacity in the highly competitive environment creates downward pricing pressures and potential underutilization of assets; the impact of digital media and similar technological changes, including digital substitution by consumers; the impact of fluctuations in costs (including labor and labor-related costs, energy costs, freight rates and raw materials) and the impact of fluctuations in the availability of raw materials; the failure to successfully identify, manage, complete and integrate acquisitions and investments, including the proposed acquisition of LSC Communications, Inc. (“LSC”); the inability of the Company to reduce costs and improve operating efficiency rapidly enough to meet market conditions; the impact of increased business complexity as a result of the Company’s transformation into a marketing solutions provider; the impact of regulatory matters and legislative developments or changes in laws, including changes in cyber-security, privacy and environmental laws; the impact of changing future economic conditions; the failure of clients to perform under contracts or to renew contracts with clients on favorable terms or at all; the failure to attract and retain qualified talent across the enterprise; significant capital expenditures may be needed to maintain the Company’s platforms and processes and to remain technologically and economically competitive; the impact of changes in postal rates, service levels or regulations; the fragility and decline in overall distribution channels, including newspaper distribution channels; the impact of the various restrictive covenants in the Company’s debt facilities on the Company’s ability to operate its business; the impact of risks associated with the operations outside of the United States, including costs incurred or reputational damage suffered due to improper conduct of its employees, contractors or agents; the impact on the holders of Quad’s class A common stock of a limited active market for such shares and the inability to independently elect directors or control decisions due to the voting power of the class B common stock; the impact of an other than temporary decline in operating results and enterprise value that could lead to non-cash impairment charges due to the impairment of property, plant and equipment and intangible assets; the impacts that the proposed acquisition of LSC may have on the Company, both prior to and following consummation of that acquisition; and the other risk factors identified in the Company’s most recent Annual Report on Form 10-K, which may be amended or supplemented by subsequent Quarterly Reports on Form 10-Q or other reports filed with the Securities and Exchange Commission.

Except to the extent required by the federal securities laws, the Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

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 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 (loss) 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’s performance and are important measures by which Quad’s 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

Quad (NYSE: QUAD) is a worldwide marketing solutions partner dedicated to creating a better way for its clients through a data-driven, integrated marketing platform that helps clients reduce complexity, increase efficiency and enhance marketing spend effectiveness. Quad provides its clients with unmatched scale for client on-site services and expanded subject expertise in marketing strategy, creative solutions, media deployment and marketing management services. With a client-centric approach that drives its expanded offering, combined with leading-edge technology and single-source simplicity, Quad believes it has the resources and knowledge to help a wide variety of clients in multiple vertical industries, including retail, publishing and healthcare. Quad has 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.QUAD.com.

Investor relations contact

Kyle Egan
Director of Investor Relations and Assistant Treasurer, Quad
414-566-2482
kegan@quad.com

Media contact

Claire Ho
Manager of Corporate Communications, Quad
414-566-2955
cho@quad.com