Quad/Graphics Reports Q3 Sales Drop of 7%, But Increased Earnings and Cash Flow

Joel Quadracci

SUSSEX, Wis. — November 2, 2016 — Quad/Graphics Inc. has reported results for its third quarter ending Sept. 30, 2016.

"We are pleased with our third quarter performance, which reflects our ongoing focus on driving sustainable cost reductions, productivity improvements and operational efficiencies across our platform," says Joel Quadracci, chairman, president and CEO of Quad/Graphics. "Our solid earnings and cash flow in the quarter further strengthened our balance sheet and support our sustainable dividend policy. Because industry pressures continue to impact our top line, our team remains diligent and proactive in matching costs to revenue with the goal of being the low-cost producer while also listening to clients and innovating solutions to position the Company for long-term growth.

Quadracci continues, "Quad/Graphics holds a truly unique position in the industry, offering highly integrated, end-to-end print solutions as well as capabilities to improve both the efficiency and effectiveness of clients' media spend across print, digital, social, mobile and other channels. This customer-centric model gives us a distinct competitive advantage."

Net sales for the three months ended Sept. 30, 2016, were $1.1 billion, a 7.0% decrease from the three months ended Sept. 30, 2015. Organic sales decreased 4.6% due to ongoing industry volume and pricing pressures, after excluding acquisitions (1.0% impact), foreign exchange (-0.5% impact) and pass through paper sales (-2.9% impact). This decrease is consistent with annual guidance of down 4% to 7%. GAAP net earnings improved to $11 million during the three months ended Sept. 30, 2016.

The improvement in earnings year-over-year was due to better operating performance from ongoing improvements in manufacturing productivity and labor management, sustainable cost reductions, lower depreciation and amortization expense and lower restructuring and non-cash impairment charges. Third quarter Adjusted EBITDA increased $2 million to $122 million compared to $120 million in 2015, and Adjusted EBITDA margin improved to 11.5% compared to 10.5% last year. The increase in Adjusted EBITDA and Adjusted EBITDA margin primarily reflect enhanced operational efficiency and sustainable cost reductions.

Net sales for the nine months ended Sept. 30, 2016, were $3.1 billion, a 4.6% decrease from the nine months ended Sept. 30, 2015. Organic sales decreased 3.7% due to ongoing industry volume and pricing pressures, after excluding acquisitions (1.9% impact), foreign exchange (-0.7% impact) and pass through paper sales (-2.1% impact). GAAP net earnings improved to $7 million during the nine months ended Sept. 30, 2016. Year-to-date Adjusted EBITDA increased $26 million to $340 million as compared to $314 million in 2015, and Adjusted EBITDA margin improved to 10.9% as compared to 9.6%. These year-to-date financial trends are consistent with the explanations provided for the third quarter.

GAAP net cash provided by operating activities was $260 million for the first nine months of 2016, an increase of $81 million, or 45%, over 2015. Correspondingly, Free Cash Flow was $202 million compared to $68 million in the first nine months of 2015, an increase of $134 million over 2015. Quad/Graphics generated three times more Free Cash Flow during the first nine months of 2016 than was generated through the same period of 2015. These improvements are due to the beneficial impacts from ongoing improvements in working capital levels, lower ongoing capital expenditures needs and increased earnings.

"Our operational efficiency and cost reduction programs have propelled us to stronger earnings and cash flow generation during the first nine months of 2016," explains Dave Honan, executive VP and CFO. "We've used the strong cash flow to reduce debt by $346 million, or 23%, since peak debt levels at Sept. 30, 2015. The debt reduction, combined with increased earnings, resulted in a significant reduction of the debt leverage ratio from 3.07x at Sept. 30, 2015, to 2.37x at Sept. 30, 2016. Our 2.37x leverage is well within our stated long-term targeted leverage range of 2.0x to 2.5x. We are also committed to our annual dividend of $1.20 per share, which represents less than 25% of Free Cash Flow."

Quad/Graphics' next quarterly dividend of $0.30 per share will be payable on Dec. 9, 2016, to shareholders of record as of Nov. 28, 2016.

About Quad/Graphics
At the forefront of innovation for 45 years, Quad/Graphics (NYSE: QUAD) is a leading print and marketing services provider focused on helping brand owners market their products, services and content more efficiently and effectively across 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 distinct vertical industries, including but not limited to retail, publishing, healthcare, insurance and financial. The Company helps its clients perform better in today's rapidly changing world through the integration of print products with complementary services to improve efficiencies, reduce costs, create engagement, lift response and increase revenue. Quad/Graphics provides a diverse range of 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.

Source: Quad/Graphics.