Quad Reports Fourth Quarter and Full-Year 2018 Results

Company’s Continued Quad 3.0 Transformation Drives Increased Net Sales


Company Expects to Complete Acquisition of LSC Communications, Inc., in
Mid-2019

SUSSEX, Wis.–(BUSINESS WIRE)–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:


 


 


 


 


 


U.S. $


 


2018 Actuals


 


2019 Guidance Range


Net Sales


 


$4.2 billion


 


$4.05 billion – $4.25 billion


Adjusted EBITDA


 


$415 million


 


$360 million – $400 million


Free Cash Flow before LSC-Related Payments(1)

 


$164 million


 


$145 million – $185 million


(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.


QUAD/GRAPHICS, INC.


CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


For the Three Months Ended December 31, 2018 and 2017


(in millions, except per share data)


(UNAUDITED)


 




 


Three Months Ended December 31,






2018


 


2017


Net sales




$


1,181.6






$


1,164.2












 


Cost of sales




978.5






928.5




Selling, general and administrative expenses




93.6






113.4




Depreciation and amortization




57.1






57.0




Restructuring, impairment and transaction-related charges




63.0


 




37.9


 


Total operating expenses




1,192.2


 




1,136.8


 










 


Operating income (loss)




(10.6


)




27.4












 


Interest expense




19.3






17.5




Net pension income




(3.1


)




(1.8


)










 


Earnings (loss) before income taxes and equity in earnings of
unconsolidated entity




(26.8


)




11.7












 


Income tax benefit




(5.9


)




(42.8


)










 


Earnings (loss) before equity in earnings of unconsolidated entity




(20.9


)




54.5












 


Equity in earnings of unconsolidated entity




(0.3


)




(0.8


)










 


Net earnings (loss)




(20.6


)




55.3












 


Less: net earnings attributable to noncontrolling interests




0.2


 




—


 










 


Net earnings (loss) attributable to Quad common shareholders




$


(20.8


)




$


55.3


 










 


Earnings (loss) per share attributable to Quad common shareholders










Basic




$


(0.42


)




$


1.10


 


Diluted




$


(0.42


)




$


1.06


 










 


Weighted average number of common shares outstanding










Basic




49.4


 




50.1


 


Diluted




49.4


 




52.3


 


QUAD/GRAPHICS, INC.


CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


For the Years Ended December 31, 2018 and 2017


(in millions, except per share data)


(UNAUDITED)


 




 


Year Ended December 31,






2018


 


2017


Net sales




$


4,193.7






$


4,131.4












 


Cost of sales




3,429.3






3,259.4




Selling, general and administrative expenses




372.1






423.8




Depreciation and amortization




230.7






232.5




Restructuring, impairment and transaction-related charges




103.6


 




60.4


 


Total operating expenses




4,135.7


 




3,976.1


 










 


Operating income




58.0






155.3












 


Interest expense




73.3






71.1




Net pension income




(12.4


)




(9.6


)


Loss on debt extinguishment




—


 




2.6


 










 


Earnings (loss) before income taxes and equity in earnings of
unconsolidated entity




(2.9


)




91.2












 


Income tax benefit




(9.8


)




(16.0


)










 


Earnings before equity in earnings of unconsolidated entity




6.9






107.2












 


Equity in earnings of unconsolidated entity




(1.0


)




—


 










 


Net earnings




7.9






107.2












 


Less: net loss attributable to noncontrolling interests




(0.6


)




—


 










 


Net earnings attributable to Quad common shareholders




$


8.5


 




$


107.2


 










 










 


Earnings per share attributable to Quad common shareholders










Basic




$


0.17


 




$


2.16


 


Diluted




$


0.16


 




$


2.07


 










 


Weighted average number of common shares outstanding










Basic




49.8


 




49.6


 


Diluted




51.6


 




51.8


 


QUAD/GRAPHICS, INC.


CONDENSED CONSOLIDATED BALANCE SHEETS


As of December 31, 2018 and 2017


(in millions)


(UNAUDITED)


 




 


December 31,


2018


 


December 31,


2017


ASSETS










Cash and cash equivalents




$


69.5






$


64.4




Receivables, less allowances for doubtful accounts




528.7






552.5




Inventories




300.6






246.5




Prepaid expenses and other current assets




47.8


 




45.1


 


Total current assets




946.6






908.5












 


Property, plant and equipment—net




1,257.4






1,377.6




Goodwill




54.6






—




Other intangible assets—net




112.6






43.4




Equity method investment in unconsolidated entity




4.0






3.6




Other long-term assets




93.9


 




119.3


 


Total assets




$


2,469.1


 




$


2,452.4


 










 


LIABILITIES AND SHAREHOLDERS’ EQUITY










Accounts payable




$


511.0






$


381.6




Accrued liabilities




292.3






316.7




Short-term debt and current portion of long-term debt




42.9






42.0




Current portion of capital lease obligations




5.1


 




5.6


 


Total current liabilities




851.3






745.9












 


Long-term debt




882.6






903.5




Capital lease obligations




10.3






13.7




Deferred income taxes




32.1






41.9




Other long-term liabilities




232.6


 




225.0


 


Total liabilities




2,008.9






1,930.0












 


Shareholders’ Equity










Preferred stock




—






—




Common stock




1.4






1.4




Additional paid-in capital




861.3






861.1




Treasury stock, at cost




(56.6


)




(52.8


)


Accumulated deficit




(211.4


)




(162.9


)


Accumulated other comprehensive loss




(152.2


)




(124.4


)


Quad’s shareholders’ equity




442.5






522.4




Noncontrolling interests




17.7


 




—


 


Total shareholders’ equity and noncontrolling interests




460.2


 




522.4


 


Total liabilities and shareholders’ equity




$


2,469.1


 




$


2,452.4


 


QUAD/GRAPHICS, INC.


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


For the Years Ended December 31, 2018 and 2017


(in millions)


(UNAUDITED)


 




 


Year Ended December 31,






2018


 


2017


OPERATING ACTIVITIES










Net earnings




$


7.9






$


107.2




Adjustments to reconcile net earnings to net cash provided by
operating activities:










Depreciation and amortization




230.7






232.5




Employee stock ownership plan contribution




22.3






—




Impairment charges




26.5






12.0




Loss on debt extinguishment




—






2.6




Stock-based compensation




15.6






16.4




Gain on the sale or disposal of property, plant and equipment




(17.8


)




(6.9


)


Loss on the sale of a business




—






7.7




Gain from property insurance claims




(18.3


)




(5.0


)


Settlement loss on pension benefit plans




—






0.8




Deferred income taxes




(14.5


)




(22.5


)


Other non-cash adjustments to net earnings




2.5






3.5




Changes in operating assets and liabilities




5.7


 




(4.3


)


Net cash provided by operating activities




260.6






344.0












 


INVESTING ACTIVITIES










Purchases of property, plant and equipment




(96.3


)




(85.9


)


Proceeds from the sale of property, plant and equipment




32.7






23.9




Proceeds from the sale of a business




—






14.1




Proceeds from property insurance claims




14.5






8.0




Loan to an unconsolidated entity




—






(7.3


)


Acquisition of businesses—net of cash acquired




(71.4


)




—


 


Net cash used in investing activities




(120.5


)




(47.2


)










 


FINANCING ACTIVITIES










Proceeds from issuance of long-term debt




7.8






375.0




Payments of long-term debt




(33.2


)




(522.9


)


Payments of capital lease obligations




(6.3


)




(7.6


)


Borrowings on revolving credit facilities




2,563.7






718.5




Payments on revolving credit facilities




(2,561.1


)




(736.0


)


Payments of debt issuance costs and financing fees




—






(4.7


)


Purchases of treasury stock




(36.7


)




(3.8


)


Proceeds from stock options exercised




4.2






2.6




Equity awards redeemed to pay employees’ tax obligations




(9.0


)




(6.0


)


Payment of cash dividends




(62.9


)




(62.5


)


Other financing activities




—


 




(4.3


)


Net cash used in financing activities




(133.5


)




(251.7


)










 


Effect of exchange rates on cash and cash equivalents




(1.5


)




0.1


 










 


Net increase in cash and cash equivalents




5.1






45.2












 


Cash and cash equivalents at beginning of year




64.4


 




19.2


 










 


Cash and cash equivalents at end of year




$


69.5


 




$


64.4


 


QUAD/GRAPHICS, INC.


SEGMENT FINANCIAL INFORMATION


For the Three Months and Years Ended December 31, 2018 and 2017


(in millions)


(UNAUDITED)


 




 


Net Sales


 


Operating

Income (Loss)


 


Restructuring,

Impairment and


Transaction-Related


Charges (1)

Three months ended December 31, 2018














United States Print and Related Services




$


1,079.0






$


51.4






$


6.1


International




102.6


 




(9.6


)




17.3


Total operating segments




1,181.6






41.8






23.4


Corporate




—


 




(52.4


)




39.6


Total




$


1,181.6


 




$


(10.6


)




$


63.0














 


Three months ended December 31, 2017














United States Print and Related Services




$


1,059.3






$


37.7






$


35.9


International




104.9


 




4.3


 




1.5


Total operating segments




1,164.2






42.0






37.4


Corporate




—


 




(14.6


)




0.5


Total




$


1,164.2


 




$


27.4


 




$


37.9














 


Year ended December 31, 2018














United States Print and Related Services




$


3,806.6






$


154.0