UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE
13a-16 or 15d-16 OF
THE SECURITIES EXCHANGE ACT OF 1934
For
the month of November 2007
Commission
File Number : 1-14118
2007 THIRD QUARTER RESULTS
QUEBECOR WORLD INC.
(Translation of Registrants Name into English)
612
Saint-Jacques Street, Montreal, Quebec H3C 4M8
(Address of
Principal Executive Office)
Indicate by check mark whether the registrant files or will file annual
reports under cover of Form 20-F or Form 40-F
Indicate by check mark if the registrant is submitting the Form 6-K in
paper as permitted by Regulation S-T Rule 101 (b)(1):
o
Note:
Regulation S-T Rule 101(b)(1) only permits the
submission in paper of a Form 6-K if submitted solely to provide an attached
annual report to security holders.
Indicate by
check mark if the registrant is submitting the Fork 6-K in paper as permitted
by Regulation S-T Rule 101 (b) (7):
o
Note:
Regulation S-T Rule 101(b)(7) only permits the
submission in paper of a Form 6-K if submitted to furnish a report or other
document that the registrant foreign private issuer must furnish and make
public under the laws of the jurisdiction in which the registrant is
incorporated, domiciled or legally organized (the registrants home country),
or under the rules of the home country exchange on which the registrants
securities are traded, as long as the report or other document is not a press
release, is not required to be and has not been distributed to the registrants
security holders, and, if discussing a material event, has already been the
subject of a Form 6-K submission or other filing on EDGAR.
Indicate by check mark whether the registrant by furnishing the
information contained in this form is also thereby furnishing the information
to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act
of 1934. Yes
o
No
x
If Yes is marked, indicate below the file number assigned to the
registrant in connection with Rule 12g3-2(b):
82- .
QUEBECOR WORLD INC.
Filed in this Form 6-K
Documents
index
1.
Press Release dated November 7, 2007;
2.
Managements Discussion and Analysis of
Financial Condition and Results of Operations
3.
Consolidated Financial Statements
2
Quebecor World
November 7, 2007
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29/07
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For immediate release
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QUEBECOR WORLD ANNOUNCES
SALE/MERGER OF EUROPEAN BUSINESS TO RSDB
AND RELEASES THIRD QUARTER RESULTS
HIGHLIGHTS
Sale/merger of European
business to RSDB for approximately $341 million
Transaction will reduce
Quebecor Worlds debt and is expected to improve financial flexibility
Creates leading European
player in combined Roto Smeets Quebecor
Revenue of $1.41 billion in
third quarter compared to $1.55 billion in third quarter 2006
Third quarter results
include non-cash impairment of assets and goodwill charges of $294 million,
primarily related to Europe
Three-year retooling plan
completed with 11 new or relocated presses installed since the end of the
second quarter
Montréal,
Canada
Quebecor World Inc. (TSX:IQW,
NYSE:IQW) and RSDB NV announced that they have signed a definitive Share
Purchase Agreement (SPA) and Implementation Agreement to sell/merge Quebecor
Worlds European operations to RSDB Group. RSDB will buy Quebecor Worlds
European operations and Quebecor World will retain a 29.9% interest in the
merged entity that will be named Roto Smeets Quebecor (RSQ) and will be
listed on Euronext Amsterdam.
Under the terms of the Share Purchase Agreement and Implementation
Agreement, RSDB will deliver to Quebecor World, at closing, cash, a note and
shares valued in the aggregate at approximately 240 million ($341 million),
subject to certain post-closing adjustments. More specifically, the
consideration payable to Quebecor World will be comprised of approximately 150
million ($213 million) in cash, a 35 million ($50 million) note, and
1.4 million shares in
1
RSQ representing approximately 29.9% of the issued and outstanding
shares of the combined business post-closing.
Completion of the merger is conditional, among other things, on the
approval of the shareholders of RSDB and receipt of clearances from the
European Commission. Closing is expected to take place by the end of 2007.
This transaction is a key element of our 5-Point Transformation Plan
and is expected to deliver several significant benefits to our shareholders.
The sale/merger will improve our balance sheet, and will provide additional
financial flexibility and strategic options to create further shareholder
value. We believe that it will also enable us to strategically reposition our
company to focus on growing earnings within our core business in the Americas,
where we are a leader, stated Wes Lucas, President and CEO Quebecor World. We
are pleased that retaining an investment in RSQ may present an upside
opportunity, as Quebecor World will help facilitate the consolidation of the
European print industry and the creation of the leading printer in Europe,
which will benefit our customers and employees going forward. Quebecor World
and RSQ will also work together in the future to serve global customers, Mr.
Lucas added.
John Caris, Chief Executive Officer of RSDB
stated: The combination of Quebecor Worlds European printing business with
RSDB will enable RSDB, through its increased scale and broader footprint
throughout Europe, to play an important role in the consolidation of the
graphic industry in Europe. We see a great opportunity to pool the best
practices and extensive industry experience available in the two businesses and
to benefit from an attractive range of potential synergies.
Roto Smeets Quebecor, the new merged company, will become the leading
player in the European printing industry, and the leader in the European
market. Quebecor Worlds European operations currently include 18 printing and
related facilities employing approximately 4,000 people in Austria, Belgium,
Finland, France, Spain, Sweden, and the United Kingdom. These plants produce
magazines, catalogs, retail inserts, direct mail products, book and directories
for many of Europes leading retailers, publishers and branded goods companies.
RSDB NV (Euronext: RSDB) is a
leading European provider of high-value
graphic printing services
based in Hilversum, The Netherlands.
RSDBs principal business,
Print Productions, produces full service gravure and offset printing material,
with seven printing facilities in The Netherlands and one printing
facility in Hungary, supported by sales offices in seven European countries.
RSDBs Marketing
Communications business focuses on marketing communications solutions and
customer management processes.
2
Specifics of the Transaction
The aggregate consideration
payable by RSDB to Quebecor World in respect of the transaction will amount to
approximately
240 million ($341 million), to be paid in cash, shares and through the
assumption of indebtedness by RSDB, subject to certain post-closing
adjustments.
RSDB will
acquire all shares held by Quebecor World Europe Holding (QWE), a
wholly-owned subsidiary of Quebecor World, and in return will make payment of
150 million ($213 million) in cash to Quebecor World, and will issue a 35
million ($50 million) 8-year note repayable from 2011 to 2015. RSDB will also
issue approximately 1.4 million new RSQ shares to Quebecor World representing
29.9% of its share capital post-closing, on a fully diluted basis. RSDB will
also assume QWEs pension, legal, and other liabilities, subject to
restrictions in accordance with the terms of agreement.
The acquisition is subject to
conditions precedent including the approval of RSDBs shareholders, and receipt
of clearances from The European Commission (the Conditions Precedent). The
transaction is not subject to the approval of Quebecor Worlds shareholders.
The parties have agreed to
arrangements for the provision of certain transitional services and procurement
arrangements in the period between the closing of the sale/merger until the end
of 2008 in order to ensure the smooth transfer of QWE and its business to RSQ.
In the event that the
transaction is not completed as a result of a default of one party (other than
as a result of a failure to satisfy the Conditions Precedent or under other
limited circumstances), the defaulting party is obliged to pay the other party
a break-up fee of 15 million ($21 million).
The Supervisory Board of RSQ
will be comprised of five directors. Two of the five members of the Supervisory
Board will be nominated by QWI. Resolutions of the Supervisory Board are, in
general, adopted by an absolute majority. However upon completion of the
sale/merger, Quebecor World and RSDB have agreed that certain predefined
corporate decisions relating to important strategic matters, such as decisions
relating to mergers and acquisitions, the issuance of new shares and the change
of the dividend policy, will require a four out of five majority vote.
RSDBs current CEO, John Caris,
will lead RSQ. QWEs experienced senior
management team will continue to run the operations in each European country
from which it currently operates. The key members of QWEs existing senior
management team have indicated their support for the transaction and their
continued involvement with the combined business. Their local expertise will be
a valuable asset of the combination of the companies.
3
Quebecor
World Third Quarter Results
In the discussion of our third quarter 2007
results below, we use certain financial measures that are not calculated in
accordance with Canadian generally accepted accounting principles (GAAP) or
United States GAAP to assess our financial performance, including EBITDA
(earnings before interest, tax, depreciation and amortization), Adjusted EBITDA
and operating income before IAROC (impairment of assets, restructuring and
other charges) and goodwill impairment. We use such non-GAAP financial measures
because we believe that they are meaningful measures of our performance. Our
method of calculating these non-GAAP financial measures may differ from the
methods used by other companies and, as a result, the non-GAAP financial
measures presented in this press release may not be comparable to other
similarly titled measures disclosed by other companies. We provide a
reconciliation of these non-GAAP financial measures to the most directly
comparable GAAP financial measures in Figures 5 and 6, Reconciliation of
non-GAAP Measures of our third quarter 2007 managements discussion and
analysis filed with the Canadian securities regulatory authorities at
www.Sedar.com
and with the United States Securities and Exchange Commission at
www.sec.gov
.
A copy of our third quarter 2007 managements discussion and analysis is also
available on the Companys website at
www.quebecorworld.com
.
Quebecor
World Inc. announces that for the third quarter 2007, the Company reported a
net loss of $315 million from continuing operations compared to net income of
$19 million in the third quarter of 2006. On the same basis, diluted loss per
share in the third quarter was $2.42 compared to diluted earnings per share of
$0.09 in the third quarter 2006. Third quarter 2007 results incorporated an
impairment of assets, restructuring and other charges (IAROC) and a goodwill
impairment charge, net of income taxes, of $272 million, or $2.06 per share, compared
with $10 million, or $0.08 per share, in 2006 which resulted in a non-cash
impact mainly due to the European transaction. Excluding these charges,
adjusted diluted loss per share was $0.36 in the third quarter of 2007 compared
to adjusted diluted earnings per share of $0.17 for the same period in 2006.
Consolidated revenues for the quarter were $1.41 billion compared to $1.55
billion in the third quarter of 2006. Operating income before IAROC and
goodwill impairment in the third quarter was $43 million compared to $67
million during the same period last year. On the same basis, EBITDA was $126
million in the third quarter compared to $151 million in the same period last
year.
Considering
the transaction and evaluation of the Companys European operations, Quebecor
World incurred a non-cash goodwill impairment charge of $166 million, $159
million net of taxes or $1.21 per share. In addition, because of the previously
mentioned European transaction with RSDB and because of the retooling plan and
the relocation of existing assets in North America, impairment tests were
triggered that resulted in an impairment of assets restructuring and other
charges of $133 million, $113 million net of taxes or $0.85 per share of which
$128 million was a non-cash impairment of long-lived assets.
4
Our
overall third quarter financial results are disappointing, but we are achieving
three key milestones in the third quarter to turn around our business and to
grow earnings and cash flow: (1) sale/merger of our European business, (2)
refinancing our balance sheet, and (3) completion of the 3-year retooling of
our plants. We firmly believe that the sale/merger of our European platform
combined with other initiatives will strengthen our balance sheet, give us
additional financial flexibility and allow us to focus on our core business in
the Americas, said Wes Lucas, President and CEO, Quebecor World. Now that
our three-year retooling program is completed, we will concentrate on
maximizing our cash flow, optimize the value of our asset base, reduce costs
and further develop value-added initiatives to ensure we succeed in the
marketplace by providing our customers with the best solutions.
Actions on 5-Point Transformation
Plan
Customer
Value:
During the third quarter, Quebecor
World continued to build the capability to increase value to customers by
expanding its value-added services. For example, Quebecor Worlds multi-channel
solution to marketers and retailers offers integrated solutions combining the
multiple forms of media across Quebecor World, to support customers as they
advertise, prospect for sales, drive store traffic, improve brand awareness and
grow their business. As multi-channel marketers continue to target more focused
market segments, they require a key partner to provide a complete solution that
integrates the multiple channels of catalogs, retail fliers, direct mail,
Internet, and other advertising channels, and Quebecor World is positioning
itself to be this key partner. The Company remains committed to achieve its
objective of $300 million in new and higher margin sales, annual run-rate by
year end 2008 from this initiative.
People:
This initiative is
focused on building high-performance teams and increasing the effectiveness of
the organization. During the third quarter of 2007, the Company continued to
make progress in training and organizational development. The Company also
continues to make progress in making its plants a safer place to work, with
10% fewer accidents in its North American platform in the third quarter
.
Execution:
Continuous
improvements in throughput and waste reduction have been the primary areas of
focus as these represent the areas of highest impact with little or no capital
requirement. In addition, gains are being recognized through the sharing of
improved operating practices across the divisions as the projects integrate
across the Company. Latin America will kick off their projects in November 2007
to increase the benefits. Ensuring continued improvements, a total of 153
people have been trained in the Six Sigma/Lean Manufacturing continuous
improvement program. Based on this progress, the Company is on track with
projects already implemented or being implemented to have a $100 million in
annual improvements run-rate by year end 2008, and expects on the same basis to
reach a $35 million run-rate by year end 2007.
5
Retooling
Program:
Quebecor Worlds three-year
retooling initiative was completed in October 2007. This was focused on
installing state-of-the-art technology, in fewer but larger facilities, by
running faster, more efficient next-generation technology. Since the end of the
second quarter, the Company started up 11 new and relocated presses in the
North American book, catalog, retail and Canadian platforms, which negatively
impacted the third quarters results in North America. Management is confident
that the Company will benefit from this retooled network in the future.
Given
the substantial amount of investment during the last three years as part of the
retooling program and the fact that the European operations will no longer be
consolidated, additions to property plant and equipment are expected to be in
the range of $100-to-$150 million per year for the next two years and
normalized longer term to the level of $150-to-$200 million per year.
Balance Sheet:
Quebecor World is committed to a long term
solution to strengthen its balance sheet and ensure financial flexibility. The
European transaction supports this initiative. During the quarter, Quebecor
World also announced a full repurchase of its 8.42%, 8.52%, 8.54% and 8.69%
Private Notes. Other initiatives are being planned to further strengthen the
balance sheet.
North
America
North American
revenues for the third quarter of 2007 were $1.10 billion, down from $1.24
billion in 2006. Excluding the effect of currency translation and the
unfavourable impact of paper sales, revenues decreased by 5.5% in the third
quarter. Revenues in the North American segment continued to be impacted by the
increase in retooling in the third quarter (11 new and relocated press
start-ups), soft volumes and negative price pressures. Due to a very strong
Canadian dollar, the Canada group continued to be affected by less favourable
foreign exchange contracts on sales to its U.S. customers. Operating income in
North America was impacted by the highly competitive market conditions as well
as by inefficiencies and costs related to the finalization of the Companys
retooling plan during the third quarter of 2007. The decrease was partly offset
by the benefits from the retooling completed in 2006 and cost reductions in the
Book & Directory and Magazine groups.
Europe
European
revenues for the third quarter of 2007 were $243 million, down from $244
million in 2006. Excluding the impact of currency translation and paper sales,
revenues were down 6.3% for the third quarter compared to the same period in
2006. Overall, the volume decrease experienced in Europe was mostly the result
of the disposal of the Lille and the Strasbourg French facilities, as well as
press start-up inefficiencies and equipment transfers. This shortfall was
partly offset by increases in facilities re-equipped with new presses in Austria,
Spain and Belgium, with Belgian volume up almost 45% for the nine month period
compared to 2006.
Latin America
Latin Americas revenues for the third quarter of 2007 were $75 million,
up from $61 million in 2006. Excluding the impact of foreign currency and paper
sales, revenues for the third quarter of 2007 were up 5.7% compared to last
year. Significant revenue increases from Colombia and Mexico, during the third
quarter
6
were the result of growing volume. The increase in Colombia and Mexico
mostly came from export sales of bibles and directories, respectively. However,
the impact of these increases in volume on operating income was partly offset
by less favourable pricing on the bibles during the quarter.
Year-to-date
For
the first nine months of 2007, Quebecor World reported a net loss from
continuing operations of $374 million or a diluted loss of $2.96 per share,
compared to net income from continuing operations of $19 million or a diluted loss
of $0.06 per share for the same period in 2006. The results for the first nine
months of 2007 included impairment of assets, restructuring, and other charges
(IAROC) and goodwill impairment (net of taxes) of $321 million or $2.43 per
share compared to $54 million or $0.42 per share in 2006 which resulted in a
non-cash impact mainly due to the European transaction as discussed above.
Excluding impairment of assets, restructuring, and other charges (IAROC), and
goodwill impairment (net of taxes) adjusted diluted loss per share was $0.53
for the first nine months of 2007 compared to adjusted diluted earnings per
share of $0.36 in the same period of 2006. On the same basis, adjusted
operating income in the first nine months of 2007 was $88 million compared to
$167 million in 2006. This decrease reflects lower revenues from plant
closures, and restructuring programs as well as the effect of the poor European
market conditions, which offset the increased profits in divisions where the
retooling has already been completed, such as the U.S. Book and Magazines
Divisions. Consolidated revenues for the first nine months of 2007 were $4.17
billion compared to $4.47 billion in the same period of 2006.
Dividend
The Board of Directors of Quebecor World Inc. declared today a dividend
of CA$0.3845 per share on Series 3 Preferred Shares and CA$0.43125 on Series 5
Preferred Shares. The dividends are payable on December 1, 2007 to shareholders
of record at the close of business on November 19, 2007.
Full
Financial Information
Management Discussion and Analysis (MD&A)
Financial statements are available on the Companys website and through
the SEDAR and SEC filings
SEDAR web address:
www.sedar.com
SEC web address:
www.sec.gov
Conference Call
Quebecor World to include slide presentation
in its Quarterly Investor Conference Call
7
Quebecor World to Webcast Investor Conference
Call and Presentation on November 7, 2007
Quebecor World Inc. will broadcast its third
quarter conference call live over the Internet on
November 7,
2007 at 8:30 AM (Eastern Time).
The conference call and accompanying
PowerPoint presentation will be broadcast live and can be accessed on the
Quebecor World Website:
http://www.quebecorworldinc.com/main.aspx?id=209
The presentation and an archive of the
Webcast will be available on the Quebecor World Web site following the
conference call.
Prior to the call please ensure that you have the appropriate software.
The Quebecor World web address listed above has instructions and a direct link
to download the necessary software, free of charge.
Anyone unable to attend this conference call may listen to the replay
tape by phoning 1-877-293-8133 or 403-266-2079 passcode 516211#, available
from November 7, 2007 to December 7, 2007.
For the European transaction the conversion rate of Euros into U.S.
dollars was at an exchange rate of $1.4219 U.S. dollars for one Euro.
Forward looking statements
This press release may include
forward-looking statements that involve risks and uncertainties. All
statements other than statements of historical facts included in this press
release, including statements regarding the prospects of the industry and
prospects, plans, financial position and business strategy of Quebecor World
Inc. (the Company), may constitute forward-looking statements within the
meaning of the U.S. Private Securities Litigation Reform Act of 1995 and
Canadian securities legislation and regulations. Forward-looking statements
generally can be identified by the use of forward-looking terminology such as
may, will, expect, intend, estimate, anticipate, plan, foresee,
believe or continue or the negatives of these terms or variations of them
or similar terminology. Although the Company believes that the expectations
reflected in these forward-looking statements are reasonable, it can give no
assurance that these expectations will prove to have been correct.
Forward-looking statements do not take into account the effect that transactions
or non-recurring or other special items announced or occurring after the
statements are made have on the Companys business. For example, they do not
include the effect of dispositions, acquisitions, other business transactions,
asset writedowns or other charges announced or occurring after forward-looking
statements are made.
8
Investors and others are cautioned that undue
reliance should not be placed on any forward-looking statements. For more
information on the risks, uncertainties and assumptions that could cause the
Companys actual results to differ from current expectations, please refer to
the Companys public filings available at
www.sedar.com
,
www.sec.gov
and
www.quebecorworld.com
. In particular, further details and
descriptions of these and other factors are disclosed in the Risks and
Uncertainties related to the Companys business section of the Companys
Managements Discussion and Analysis for the year ended December 31, 2006, and
the Risk Factors section of the Companys Annual Information Form for the
year ended December 31, 2006.
The forward-looking statements in this press
release reflect the Companys expectations as of November 7, 2007 and are
subject to change after this date. The Company expressly disclaims any
obligation or intention to update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise, unless
required by the applicable securities laws.
About Quebecor World
Quebecor World Inc. (TSX:IQW, NYSE:IQW) is a world leader in providing
high-value, complete marketing and advertising solutions to leading retailers,
catalogers, branded-goods companies and other businesses with marketing and
advertising activities, as well as complete, full-service print solutions for
publishers. The Company is a market leader in most of its major product
categories, which include advertising inserts and circulars, catalogs, direct
mail products, magazines, books, directories, digital premedia, logistics, mail
list technologies and other value-added services. Quebecor World has
approximately 27,500 employees working in more than 120 printing and related
facilities in the United States, Canada, Argentina, Austria, Belgium, Brazil,
Chile, Colombia, Finland, France, India, Mexico, Peru, Spain, Sweden,
Switzerland and the United Kingdom.
Web address:
www.quebecorworld.com
- 30 -
For further information contact:
Tony Ross
Vice President, Communications
Quebecor World Inc.
(514) 877-5317
(800) 567-7070
9
Roland Ribotti
Vice President, Investor Relations
and Assistant Treasurer
Quebecor World Inc.
(514) 877-5143
(800) 567-7070
10
Quebecor World Inc.
Financial Highlights
(In millions of US dollars,
except per share data)
(Unaudited)
|
|
Three-month periods ended
September 30
|
|
Nine-month periods ended
September 30
|
|
|
|
2007
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|
2006
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2007
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2006
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|
|
|
|
|
|
|
|
|
|
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Consolidated Results from Continuing
Operations
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|
|
|
|
|
|
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Revenues
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|
$
|
1,414.6
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|
$
|
1,546.2
|
|
$
|
4,168.1
|
|
$
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4,465.9
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|
Adjusted EBITDA
|
|
125.6
|
|
150.6
|
|
331.6
|
|
409.7
|
|
Adjusted EBIT
|
|
43.2
|
|
67.3
|
|
88.3
|
|
167.3
|
|
IAROC
|
|
132.7
|
|
11.6
|
|
198.2
|
|
65.1
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|
Goodwill impairment charge
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|
166.0
|
|
|
|
166.0
|
|
|
|
Operating income (loss)
|
|
(255.5
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)
|
55.7
|
|
(275.9
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)
|
102.2
|
|
Net income (loss) from continuing
operations
|
|
(315.1
|
)
|
19.2
|
|
(374.3
|
)
|
19.0
|
|
Net income (loss)
|
|
(315.1
|
)
|
18.9
|
|
(374.3
|
)
|
16.9
|
|
Adjusted EBITDA margin *
|
|
8.9
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%
|
9.7
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%
|
8.0
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%
|
9.2
|
%
|
Adjusted EBIT margin *
|
|
3.1
|
%
|
4.3
|
%
|
2.1
|
%
|
3.7
|
%
|
Operating margin *
|
|
(18.1
|
)%
|
3.6
|
%
|
(6.6
|
)%
|
2.3
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%
|
|
|
|
|
|
|
|
|
|
|
Segmented Information from Continuing
Operations
|
|
|
|
|
|
|
|
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Revenues
|
|
|
|
|
|
|
|
|
|
North America
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$
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1,098.4
|
|
$
|
1,241.1
|
|
$
|
3,224.9
|
|
$
|
3,537.6
|
|
Europe
|
|
242.5
|
|
244.1
|
|
744.6
|
|
758.1
|
|
Latin America
|
|
75.0
|
|
61.2
|
|
202.3
|
|
170.5
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBIT
|
|
|
|
|
|
|
|
|
|
North America
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|
$
|
58.6
|
|
$
|
75.7
|
|
$
|
151.0
|
|
$
|
177.8
|
|
Europe
|
|
(13.1
|
)
|
(6.0
|
)
|
(52.9
|
)
|
(8.6
|
)
|
Latin America
|
|
3.2
|
|
3.4
|
|
7.5
|
|
6.8
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBIT margin *
|
|
|
|
|
|
|
|
|
|
North America
|
|
5.3
|
%
|
6.1
|
%
|
4.7
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%
|
5.0
|
%
|
Europe
|
|
(5.4
|
)%
|
(2.5
|
)%
|
(7.1
|
)%
|
(1.1
|
)%
|
Latin America
|
|
4.2
|
%
|
5.4
|
%
|
3.7
|
%
|
4.0
|
%
|
|
|
|
|
|
|
|
|
|
|
Selected Cash Flow Information
|
|
|
|
|
|
|
|
|
|
Cash (used in) provided by operating
activities
|
|
$
|
(41.8
|
)
|
$
|
51.2
|
|
$
|
133.5
|
|
$
|
205.8
|
|
Free cash flow (outflow) **
|
|
(81.7
|
)
|
(40.5
|
)
|
(12.3
|
)
|
(9.2
|
)
|
|
|
|
|
|
|
|
|
|
|
Per Share Data
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing operations
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(2.42
|
)
|
$
|
0.09
|
|
$
|
(2.96
|
)
|
$
|
(0.06
|
)
|
Adjusted diluted
|
|
$
|
(0.36
|
)
|
$
|
0.17
|
|
$
|
(0.53
|
)
|
$
|
0.36
|
|
|
|
Nine-month
|
|
Twelve-month
|
|
|
|
period ended
September 30
|
|
period ended
December 31
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Financial Position
|
|
|
|
|
|
Working capital
|
|
$
|
(73.1
|
)
|
$
|
(76.0
|
)
|
Total assets
|
|
5,554.9
|
|
5,823.4
|
|
Long-term debt (including convertible
notes)
|
|
2,284.6
|
|
2,132.4
|
|
Shareholders equity***
|
|
1,414.2
|
|
1,882.2
|
|
Debt-to-capitalization***
|
|
62:38
|
|
53:47
|
|
Debt-to-Adjusted-EBITDA ratio (times) ****
|
|
4.6
|
|
3.7
|
|
Interest coverage ratio (times) ****
|
|
2.3
|
|
4.3
|
|
|
|
|
|
|
|
|
|
EBITDA:
Operating income before depreciation and amortization.
IAROC:
Impairment of assets, restructuring and other charges.
Adjusted:
Defined as before IAROC and before goodwill impairment charge.
Debt-to-Ajusted-EBITDA
ratio: Total debt divided by Adjusted EBITDA.
Interest
coverage ratio: Adjusted EBITDA divided by financial expenses.
*
|
Margins calculated on
revenues.
|
**
|
Cash provided by operating
activities, less capital expenditures and preferred share dividends,
|
|
net of proceeds from
disposals of assets and proceeds from business disposals.
|
***
|
Prior periods amount have
been revised. See Note 12 to Consolidated Financial Statements.
|
****
|
For continuing operations.
|
MANAGEMENTS DISCUSSION AND ANALYSIS
THIRD QUARTER 2007
TABLE OF CONTENTS
Subject
|
|
Page
|
Introduction
|
|
3
|
|
|
|
1. Overall performance and
outlook for 2007
|
|
|
1.1 European operations
|
|
4
|
1.2 Third quarter 2007 at a glance
|
|
5
|
1.3 Outlook for remainder of 2007
|
|
6
|
1.4 Impairment of goodwill and long-lived assets
|
|
6
|
|
|
|
2. Financial review
|
|
|
2.1 Third quarter review
|
|
7
|
2.2 Year-to-date review
|
|
9
|
2.3 Quarterly trends
|
|
10
|
2.4 Segment results
|
|
12
|
2.5 Impairment of assets and restructuring initiatives
|
|
13
|
|
|
|
3. Liquidity and capital
resources
|
|
|
3.1 Operating activities
|
|
16
|
3.2 Financing activities
|
|
16
|
3.3 Investing activities
|
|
17
|
|
|
|
4. Financial position
|
|
|
4.1 Free cash flow
|
|
17
|
4.2 Financial ratios, financial covenants and credit ratings
|
|
18
|
4.3 Contractual cash obligations
|
|
19
|
|
|
|
5. Off-balance sheet
arrangements and other disclosures
|
|
|
5.1 Off-balance sheet arrangements
|
|
19
|
5.2 Derivative financial instruments
|
|
20
|
5.3 Related party transactions
|
|
21
|
5.4 Outstanding share data
|
|
21
|
5.5 Controls and procedures
|
|
22
|
|
|
|
6. Critical accounting
estimates and accounting policies
|
|
|
6.1 Critical accounting estimates
|
|
22
|
6.2 Change in accounting policy
|
|
22
|
6.3 Reclassification
|
|
24
|
|
|
|
7. Risks and uncertainties
related to the Companys business
|
|
24
|
|
|
|
8. Additional information
|
|
24
|
2
INTRODUCTION
The following is a discussion of the consolidated financial condition
and results of operations of Quebecor World Inc. (the Company or Quebecor
World) for the three-month and nine-month periods ended September 30, 2007 and
2006, and it should be read together with the Companys corresponding interim
Consolidated Financial Statements and the 2006 annual Managements Discussion
and Analysis (MD&A). The interim Consolidated Financial Statements and
MD&A have been reviewed by the Companys Audit Committee and approved by
its Board of Directors. This discussion contains forward-looking information
that is qualified by reference to, and should be read together with, the
discussion regarding forward-looking statements that is part of this MD&A.
Management determines whether or not information is material based on whether
it believes a reasonable investors decision to buy, sell or hold securities in
the Company would likely be influenced or changed if the information were
omitted or misstated.
A complete review of Quebecor Worlds profile and
strategy can be found in the Overview section of the Companys 2006 annual
MD&A.
Presentation of financial information
Financial data has been prepared in conformity with Canadian generally
accepted accounting principles (Canadian GAAP).
The Company reports on certain non-GAAP measures that are used by
management to evaluate performance of business segments. These measures used in
this discussion and analysis do not have any standardized meaning under
Canadian GAAP, although management believes that such measures are meaningful
and helpful to understanding the Companys affairs, operations and results.
When used, these measures are defined in such terms as to allow the
reconciliation to the closest Canadian GAAP measure. Numerical reconciliations
are provided in Figures 5 and 6. It is unlikely that these measures could be
compared to similar measures presented by other companies.
The Companys reporting currency is the U.S. dollar, and its functional
currency is the Canadian dollar.
Forward-looking statements
This MD&A includes forward-looking statements that involve risks
and uncertainties. All statements other than statements of historical facts
included in this MD&A, including statements regarding the prospects of the
industry, and prospects, plans, financial position and business strategy of the
Company, may constitute forward-looking statements within the meaning of the
U.S. Private Securities Litigation Reform Act of 1995 and Canadian securities
legislation and regulations. Forward-looking statements generally can be
identified by the use of forward-looking terminology such as may, will, expect,
intend, estimate, anticipate, plan, foresee, believe or continue
or the negatives of these terms or variations of them or similar terminology.
Although the Company believes that the expectations reflected in these
forward-looking statements are reasonable, it can give no assurance that these
expectations will prove to have been correct. Forward-looking statements do not
take into account the effect that transactions or non-recurring or other
special items announced or occurring after the statements are made have on the
Companys business. For example, they do not include the effect of
dispositions, acquisitions, other business transactions, asset write-downs or
other charges announced or occurring after forward-looking statements are made.
Investors and others are cautioned that undue reliance should not be placed on
any forward-looking statements.
For more information on the risks, uncertainties and assumptions that
would cause the Companys actual results to differ from current expectations,
please also refer to the Companys public filings available at
www.sedar.com
,
www.sec.gov
and
www.quebecorworld.com
. In particular, further
details and descriptions of these and other factors are disclosed in the Risks
and uncertainties related to the Companys business section in the MD&A
for the year ended December 31, 2006 and in the Risk Factors section of the
Companys Annual Information Form for the year ended December 31, 2006.
The forward-looking statements in this MD&A reflect the Companys
expectations as of November 7, 2007 and are subject to change after this date.
The Company expressly disclaims any obligation or intention to update or revise
any forward-looking statements, whether as a result of new information, future
events or otherwise, unless required by the applicable securities laws.
3
1.
Overall performance and outlook for 2007
1.1
European operations
On
November 7, 2007, Quebecor World announced a sale and merger of its European
operations with Roto Smeets De Boer NV (RSDB). The new merged entity will be
named Roto Smeets Quebecor (RSQ) and will be listed on Euronext Amsterdam.
Under the terms of the merger agreement RSDB will remit to Quebecor World cash
and securities valued at 240 million, subject to certain post closing
adjustments. The consideration for Quebecor World will be comprised of 1.4
million shares in RSDB whereby Quebecor World will acquire a 29.9% stake in the
combined business and 150 million in cash. The net cash proceeds of
approximately 150 million will be used by Quebecor World to repay debt and to
provide a 8-year note of 35 million to RSQ repayable from 2011 to 2015. The
merger would create the largest independent European gravure and offset
printing company. It is conditional on the approval of the shareholders of RSDB
and receipt of clearance from the European Commission, with closing expected to
take place by the end of 2007.
This
merger is a key element of Quebecor Worlds 5-Point Transformation Plan, and
should be a significant benefit for shareholders by reducing debt, and
repositioning its risk profile, while allowing Quebecor World to play a leading
role in the consolidation of the European print industry. The new entity, RSQ,
will have a great opportunity to consolidate the industry, reduce duplicate
costs, capture scale synergies and leverage opportunities in the combined
entity. The merger will improve Quebecor Worlds financial position and provide
additional financial flexibility. It will also enable Quebecor World to
strategically reposition itself to focus on growing earnings within its core
businesses in the Americas.
Quebecor
Worlds European operations currently include 18 printing and related
facilities employing approximately 4,000 people in Austria, Belgium, Finland,
France, Spain, Sweden and the United Kingdom. Quebecor World Europe (QWE)
produces magazines, catalogs, retail inserts, direct mail products, books and
directories for many of the worlds largest retailers, publishers and branded
goods companies.
RSDB
is a leading European provider of high-value graphic printing services based in
Hilversum, the Netherlands with annual revenues of more than 500 million in
2006. RSDBs principal business, Print Productions, produces full service
gravure and offset printing material, with seven printing facilities in the
Netherlands and one printing facility in Hungary, supported by sales offices in
seven European countries. RSDBs Marketing Communications business focuses on
marketing communications solutions and customer management processes.
The
merger is subject to the following conditions precedent: the approval of RSDBs
shareholders, and certain regulatory clearances (the Conditions Precedent).
The transaction is not subject to the approval of Quebecor Worlds
shareholders. Parties have agreed to provide certain transitional services in
the period until the end of 2008 in order to ensure the smooth transition of
QWE and its business from Quebecor World to RSQ. In the event that the
transaction is not completed as a result of a default by one party (other than
as a result of a failure to satisfy the Conditions Precedent or under other
limited circumstances), the defaulting party is obliged to pay the other party
a break-up fee of 15 million.
The
Supervisory Board of Roto Smeets Quebecor will be comprised of five directors.
Two out of five members, including the vice-chairmans role, of the Supervisory
Board will be nominated by Quebecor World. Resolutions of the Supervisory Board
are, in general, adopted by an absolute majority, however, certain predefined
corporate decisions, such as decisions relating to mergers and acquisitions,
the issuance of new shares and the change of the dividend policy, will require
a four out of five majority vote for a period of four years from closing. While
QWI and RSDB have agreed that the Management Board of Roto Smeets Quebecor will
be led by current RSDB management, it is expected that QWEs experienced senior
management team will continue to run the operations in each European country in
which it currently operates. The key members of QWEs existing senior
management team have indicated their support for the transaction and their
continued involvement with the combined business. Their local expertise will be
a valuable asset in the new merged company. This merger could result in an
estimated loss on disposal of $70 million before cumulative translation
adjustment impact. Following this transaction, the basis of accounting for the
investment in RSQ will be the equity method.
4
1.2
Third quarter 2007 at a glance
Quebecor
World continues to build on the initiatives it launched in 2006 with regard to
the Companys Five-Point Transformation Plan. The following was achieved in the
third quarter of 2007:
Customer Value:
During the third
quarter, Quebecor World continued to build the capability to increase value to
customers by expanding its value-added services. For example, Quebecor World is
offering a multi-channel solution to marketers and retailers. This integrated
solution combines the multiple forms of media across Quebecor World, to support
customers as they advertise, improve prospecting, drive store traffic, improve
brand awareness and grow their business. As multi-channel marketers continue to
target more focused market segments, they require a key partner to provide a
complete solution that integrates the multiple channels of catalogs, retail
fliers, direct mail, Internet, and other advertising channels, and Quebecor
World is positioning itself to be this key partner. The Company remains
committed to achieve its objective of $300 million in new and higher margin
sales, annual run-rate by year end 2008 from this initiative.
An important aspect of Quebecor Worlds
customer value initiative is ensuring customers receive a quality product
delivered on-time, every time. In the quarter, the Companys focus on quality
was recognized by the award of 27 Gold Ink Awards, including 4 gold, 2 silver
and 21 pewter awards in the 2007 Gold Ink competition. Now in its 20th year,
the Gold Ink Awards recognizes excellence in print reproduction and is
considered one of the most prestigious and challenging production competitions
in the printing industry. In all, 13 Quebecor World facilities were honoured
this year demonstrating that Quebecor Worlds coast-to-coast North American
platform provides customers with a unique capability to fulfill their
publishing, marketing and advertising needs.
People:
Quebecor Worlds People
initiative is focused on building high performance teams. During the third
quarter of 2007, the Company continued to make progress in training and
organizational development. In addition, the Company added two new members to
its leadership team. Mr. Hughes Bakewell joined as President of the Direct
Marketing Business to support the growth of this attractive business by
providing innovative targeted marketing and advertising solutions to Quebecor
Worlds customers. Mr. Ben Schwartz was appointed as Senior Vice President
People and Leadership to provide his expertise in building high performance
teams and help people develop to the best of their abilities. The Company also
continues to make progress in making its plants a safer place to work;
with
10% fewer lost time accidents in its North American platform in the
third quarter
.
Execution:
The Companys
continuous improvement program realized great progress in the quarter, and
increased its momentum across the North American platform. A total of 153 individuals
have been trained in the Six Sigma/Lean Manufacturing continuous improvement
program. Continuous improvements in throughput and waste reduction have been
the primary areas of focus as these represent the areas of highest impact with
little or no capital requirement. In addition, gains are being recognized
through the sharing of improved operating practices across the divisions as the
trained Belts collaborate across their projects. Latin America will join their
North American colleagues as they begin training in the Six Sigma/Lean
Methodologies in November 2007. Based on these successes, the Company is on
track to have projects already implemented or being implement with $100 million
in annual improvements run-rate by year end 2008.
Retooling:
Quebecor Worlds three-year retooling initiative is focused on
installing state-of-the-art technology, in fewer but larger facilities, by
running faster, more efficient next-generation technology. Since the end of the
second quarter, the Company completed eleven press start-ups consisting of 2
new presses and 9 relocations, including four relocations during the month of
October. New and relocated equipment was installed in the North American book,
catalog, retail, direct mail and Canadian platforms. The Company is pleased
that the retooling effort is now completed. As part of its ongoing operations
to further enhance customer and shareholder value, Quebecor World continues to
explore and evaluate opportunities to deploy the latest press and bindery
technology to maximize value and efficiencies.
This major retooling effort has taken
the last three years to complete and management is confident that the Company
will benefit from this retooled network in the future.
Balance sheet:
Quebecor World is
committed to strengthening its balance sheet in a responsible manner. A key
milestone to improve the Balance Sheet is the sale and merger of its European
operations as discussed above. In addition, during the quarter, Quebecor World
announced a full repurchase of its 8.42%, 8.52%, 8.54% and 8.69% Private Notes.
Also, the Company successfully amended the terms of its revolving credit
facility and agreed to a $750 million commitment limit which will be
reduced to $500 million by July 1, 2008. Also in the quarter, Quebecor World
completed a sale-leaseback transaction for net proceeds of $14.5 million. These
transactions are further discussed in the Liquidity and capital resources
Financing activities section.
5
Overall,
Quebecor Worlds operating income was lower in the third quarter and
year-to-date 2007 when compared to the same period in 2006. A significant
portion of the shortfall was attributable to the Companys European segment
which faced challenging market conditions including excess capacity that is
having an ongoing negative impact on prices. The Companys operations in 2007
were also negatively impacted by the depreciation of the U.S. dollar against
most major currencies. However, the recently retooled Magazine and Book Groups
in North America continued to show improved results year-over-year in 2007. The
results for the first nine-months of 2007 incorporated specific charges that
are non-recurring in nature, including a significant loss on the disposal of
the Lille facility in France in the first quarter. These charges are discussed
in the Financial Review section of this MD&A. Management believes that
the successful implementation of the Companys Five-Point Transformation Plan
as well as the merger of its European operations will promote long-term
earnings growth and create more value for Quebecor Worlds customers, people
and shareholders.
1.3
Outlook for remainder of 2007
The
Company continues to experience a number of challenges and expects to continue
to face difficult and highly competitive market conditions. In response, the
Company is taking measures to implement over time its Five-Point Transformation
Plan, described in the 2006 annual MD&A. The Company believes that it is
making progress on all five points within the transformation plan, in order to
deliver on its targeted benefits. These benefits are expected to be $100
million in reduced costs and higher efficiencies from the Execution initiative,
and $300 million in new revenues from the Customer Value initiative, both
targeted annual run rates to be achieved by the end of 2008.
1.4
Impairment of goodwill and long-lived assets
The
Company completed its annual goodwill impairment testing in the third quarter
of 2007. Taking into account financial information such as the sale and merger
with RSDB (see European Operations section), management determined that the
carrying value of goodwill for its European reporting unit was not recoverable
and that the resulting impairment of such goodwill amounted to its entire
carrying value of $166.0 million at September 30, 2007. Quebecor World also
concluded that the goodwill for its North America and Latin America segments
was fully recoverable.
Quebecor
World also recorded a $128.0 million impairment charge on long-lived assets in
North America and Europe principally applied to machinery and equipment. This
charge was a result of impairment tests being triggered in North America,
because of the retooling plan and the relocation of existing presses into
fewer, but larger and more efficient facilities. As part of the Five-Point
Transformation Plan, the Company is continuously seeking to re-evaluate the
future efficiency of its retooled network and make the necessary adjustments to
its strategic plans. In Europe, the impairment test was triggered as a result
of the merger of Quebecor World Europe with RSDB.
The
Company may be required to take additional goodwill impairment charges and
additional write-downs on the value of its long-lived assets and, in such
event, its financial results and operations could be affected. However, this
would not have any negative impact on Companys bank covenants.
6
2.
Financial review
The
Company assesses performance based on, among other measures, operating income
and Adjusted EBIT (Figure 5). The following financial review focuses on
continuing operations.
2.1
Third quarter review
The
Companys consolidated revenues for the third quarter of 2007 were $1.41
billion, a 8.5% decrease when compared to $1.55 billion for the same period in
2006. Excluding the impact of currency translation (Figure 2), revenues were
$1.38 billion for the quarter, down 10.8% compared to 2006. The decrease in
revenues resulted mostly from lower paper sales, but also from reduced volume
mostly caused by plant closures and temporary restructuring dislocations as
well as continued price pressures, as further discussed in the Segment results
section. In the third quarter of 2007, Adjusted EBIT decreased to $43.2 million
compared to $67.3 million in 2006. Adjusted EBIT margin was 3.1% for the third
quarter, compared to 4.3% for the same period in 2006.
Impact of Foreign Currency
($ millions)
|
|
Three months ended
|
|
Nine months ended
|
|
|
|
September 30, 2007
|
|
September 30, 2007
|
|
|
|
|
|
|
|
Foreign currency favorable impact on
revenues
|
|
$
|
36.0
|
|
$
|
80.7
|
|
|
|
|
|
|
|
Foreign currency unfavorable impact on
operating income
|
|
$
|
(1.2
|
)
|
$
|
(4.3
|
)
|
Paper
sales, excluding the effect of currency translation, decreased by 18.2% for the
third quarter of 2007, compared to the same period in 2006. The paper sales
decrease is mostly explained by plant closures as well as more client supplied
paper. Although the variance in paper sales has an impact on revenues, it has
little impact on operating income because the cost is generally passed on to
the customer. Most of the Companys long-term contracts with its customers
include price-adjustment clauses based on the cost of materials in order to
minimize the effects of fluctuation in the price of paper.
Cost
of sales for the third quarter of 2007 decreased by 9.6% to $1.17 billion
compared to $1.30 billion for the corresponding period in 2006. The decrease,
compared to 2006, is mostly explained by a decrease in sales volume
7
and
labour costs, both partly resulting from plant closures. Gross profit margin
was 17.1% in the third quarter of 2007 compared to 16.2% in 2006. Excluding the
negative impact of currency, gross profit margin increased to 17.3% in the
third quarter of 2007. The improvement in Quebecor Worlds gross profit margin
principally reflects some of the anticipated productivity gains in business
groups where the retooling and restructuring initiatives have been completed.
Selling,
general and administrative expenses for the third quarter of 2007 were $112.2
million compared with $98.5 million in 2006. Excluding the unfavourable
impact of currency translation of $3.2 million, selling, general and administrative
expenses increased by 10.7% compared to the same period last year.
The increase is due in part to investments in continuous
improvement programs.
Securitization fees totalled $8.3 million for the
third quarter of 2007, up from
$8.1 million for the third quarter of 2006. The increase for the quarter was mainly due to higher interest rates underlying the program fees partially offset by
lower usage of the program. Servicing revenues and expenses did not have
a significant impact on the Companys results.
Depreciation
and amortization expenses were $77.2 million in the third quarter of 2007,
compared with $76.4 million in 2006. Excluding the unfavourable impact of
currency translation of $2.0 million, depreciation and amortization expenses
decreased by 1.6% compared to the third quarter of 2006. The replacement and
decommissioning of underperforming assets by investments in state-of-the-art
printing technology mostly offset the decrease in depreciation and amortization
expenses in the third quarter of 2007 caused by plant closures, and sale and
leaseback agreements on land and buildings and equipment.
Loss
on business disposals was $1.7 million in the third quarter of 2007 and was
related to the disposal of an offset facility used in commercial printing in
Nantes, France.
During
the third quarter of 2007, the Company recorded impairment of assets,
restructuring and other charges (IAROC) of $132.7 million, compared to
$11.6 million last year. The charge for the quarter was related to the
impairment of long-lived assets in Europe and in North America. These measures
are described in the Impairment of assets and restructuring initiatives
section.
Quebecor
World completed its annual goodwill impairment test in the third quarter of
2007. As a result, management concluded that, taking into account financial
information such as the sale and merger of its European operations, the entire
carrying amount of goodwill for the European reporting unit was not recoverable
and as such, a pre-tax impairment charge of $166.0 million was taken at the end
of the third quarter. See the European Operations and Impairment of goodwill
and long-lived assets sections for additional information.
Financial expenses were $106.5 million in the third
quarter of 2007, compared to $33.7 million in 2006. The variance of $72.8
million was mainly explained by a one time prepayment premium of $53.1 million
for the early redemption of the Companys outstanding 8.42% Senior Notes,
Series A, due July 15, 2010, 8.52% Senior Notes, Series B, due July 15, 2012,
8.54% Senior Notes, Series C, due September 15, 2015 and 8.69% Senior Notes,
Series D, due September 15, 2020. The increase was also caused by higher
interest rates, a higher average level of debt as well as by the depreciation
of the U.S. currency against the other major currencies.
Income
tax recovery was $49.8 million in the third quarter of 2007, compared to a
charge of $2.7 million in 2006. Income tax recovery before IAROC and goodwill
impairment charge was $23.1 million in the third quarter of 2007, compared to a
charge of $4.0 million for the same period last year. The income tax recovery,
in the third quarter of 2007, was mostly due to impairment of assets and
restructuring charges in North America (recovery of $19.6 million), the
impairment of goodwill in Europe (recovery of $6.8 million) as well as higher
financial expenses as discussed above.
For
the third quarter ended September 30, 2007, the Company reported a loss per
share of $2.42 compared to earnings per share of $0.09 in 2006. These results
incorporated IAROC and goodwill impairment charge, net of income taxes, of
$272.0 million or $2.06 per share compared with $10.3 million or $0.08 per
share in 2006. Excluding these charges, adjusted diluted loss per share was
$0.36 in the third quarter of 2007 compared to adjusted diluted earnings per
share of $0.17 for the same period in 2006.
8
2.2
Year-to-date review
On
a year-to-date basis, the Companys consolidated revenues were $4.17 billion, a
6.7% decrease when compared to $4.47 billion for the same period in 2006.
Excluding the impact of currency translation (Figure 2), revenues were $4.09
billion for the nine months of 2007, down 8.5% compared to 2006. The decrease
in revenues resulted from lower paper sales as well as reduced volume mostly
caused by temporary restructuring dislocations and plant closures as well as
continued price pressures as further discussed in the Segment results
section. On a year-to-date basis, adjusted EBIT decreased to $88.3 million
compared to $167.3 million in 2006. Adjusted EBIT margin was 2.1% for the nine
months of 2007, compared to 3.7% for the same period in 2006. These results
were impacted by significant non-recurring specific charges that are discussed
below.
Paper
sales, excluding the effect of currency translation, decreased by 15.6% on a
year-to-date basis, compared to the same period in 2006. The explanation
provided in the Third Quarter Review section above, outlining the causes behind
the decrease, also applies for the year-to-date variation.
On
a year-to-date basis, cost of sales decreased by 7.1% to $3.49 billion compared
to $3.76 billion for the corresponding period in 2006. The decrease, compared
to 2006, is explained mostly by decreases in sales volume, impacting all
variable costs, but more significantly labour costs. Decreases in variable
costs and sales volume are both partly resulting from plant closures. Gross
profit margin increased to 16.3% for the nine months of 2007 compared to 15.9%
in 2006. Excluding the negative impact of currency, gross profit margin
increased to 16.4% on a year-to-date basis. The improvement in Quebecor Worlds
gross profit margin principally reflects some of the anticipated productivity
gains in business groups where the retooling and restructuring initiatives have
been completed.
Selling,
general and administrative expenses were $329.1 million on a year-to-date basis
compared with $293.4 million in 2006. Excluding the unfavourable impact of
currency translation of $6.6 million, selling, general and administrative
expenses increased by 9.9% compared to the same period last year. The increase
is due in part to investments in continuous improvement programs as well as
charges related to strategic initiatives and changes in the timing of accruals
for compensation charges in 2007 compared to 2006.
Securitization
fees totalled $21.6 million on a year-to-date basis, down from $22.6 million
for the same period in 2006. The decrease for the period was mainly due to
lower usage of the program partially offset by higher interest rates underlying
the program fees. Servicing revenues and expenses did not have a significant
impact on the Companys results.
Depreciation
and amortization expenses were $226.9 million for the first nine months of
2007, compared with $223.4 million in 2006. Excluding the unfavourable
impact of currency translation of $4.5 million, depreciation and amortization
expenses were fairly flat compared to last year. The replacement and decommissioning
of underperforming assets by investments in state-of-the-art printing
technology has mostly offset the decrease in depreciation and amortization
expenses caused by plant closures, and sale and leaseback agreements on land
and buildings and equipment.
Loss
on business disposals was $12.7 million on a year-to-date basis and was related
to the disposal of the Lille and Nantes facilities in France respectively
during the first and the third quarter of 2007. The loss of $2.2 million in
2006 was mainly attributable to the disposal of a facility in North America.
During
the first nine months of 2007, the Company recorded IAROC of
$198.2 million, compared to $65.1 million last year. On a year-to-date
basis, the charge was mainly related to the impairment of long-lived assets in
Europe and North America and to the closure and consolidation of facilities in
North America as well as workforce reductions. Finally, the Company recorded
pension settlement charges related to prior year initiatives. These measures
are described in the Impairment of assets and restructuring initiatives
section.
Quebecor
World completed its annual goodwill impairment test in the third quarter of
2007. As a result, management concluded that, taking into account financial
information such as the sale and merger of its European operations, the entire
carrying amount of goodwill for the European reporting unit was not recoverable
and as such, a pre-tax impairment charge of $166.0 million was taken at the end
of the third quarter. See the European Operations and Impairment of goodwill
and long-lived assets sections for additional information.
9
On a year-to-date basis, financial expenses were
$182.3 million, compared to $94.8 million in 2006. The variance of $87.5
million is partly explained by a one time prepayment premium of $53.1 million,
in the third quarter, for the early redemption of the Companys outstanding
8.42% Senior Notes, Series A, due July 15, 2010, 8.52% Senior Notes, Series B,
due July 15, 2012, 8.54% Senior Notes, Series C, due September 15, 2015 and
8.69% Senior Notes, Series D, due September 15, 2020. The variance is also
explained by a lower amount of interest capitalized to the cost of equipment
due to the finalization of Quebecor Worlds retooling plan as well as the
premium paid and loss incurred on the redemption of the Companys 6.00%
Convertible senior subordinated notes during the second quarter. In addition to
those elements, the increase was also caused by higher interest rates, a higher
average level of debt and the depreciation of the U.S. currency against the
other major currencies.
Income
tax recovery was $89.3 million on a year-to-date basis, compared to $12.0
million in 2006. Income tax recovery before IAROC and goodwill impairment
charge was $46.4 million for the first nine months of 2007, compared to $1.2
million for the same period last year. The income tax recovery in the first
three quarters of 2007 was mainly due to increased losses and the impairment of
long-lived assets in North America.
The
effective tax rate for the first nine months of 2007 was 19.2% compared to a
statutory rate of 33.1%. The decrease of 13.9% was mainly explained by a
valuation allowance on tax losses in Canada and Europe as well as the goodwill
impairment charge in Europe that is mostly non-deductible.
On
a year-to-date basis, the Company reported a loss per share of $2.96 compared
to $0.06 in 2006. These results incorporate IAROC and goodwill impairment
charge, net of income taxes, of $321.3 million or $2.43 per share compared with
$54.3 million or $0.42 per share in 2006. Excluding these charges, adjusted
diluted loss per share was $0.53 for the first nine months of 2007 compared
with adjusted diluted earnings per share of $0.36 in the same period of 2006.
2.3
Quarterly trends
Selected Quarterly Financial Data (Continuing Operations)
($ millions, except per share data)
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
Q3
|
|
Q2
|
|
Q1
|
|
Q4
|
|
Q3
|
|
Q2
|
|
Q1
|
|
Q4
|
|
Consolidated Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
1,414.6
|
|
$
|
1,360.1
|
|
$
|
1,393.4
|
|
$
|
1,620.4
|
|
$
|
1,546.2
|
|
$
|
1,452.2
|
|
$
|
1,467.5
|
|
$
|
1,664.0
|
|
Adjusted EBITDA
|
|
125.6
|
|
114.0
|
|
92.0
|
|
170.2
|
|
150.6
|
|
130.6
|
|
128.5
|
|
167.9
|
|
Adjusted EBIT
|
|
43.2
|
|
33.9
|
|
11.2
|
|
74.2
|
|
67.3
|
|
50.4
|
|
49.6
|
|
87.3
|
|
IAROC
|
|
132.7
|
|
36.0
|
|
29.5
|
|
46.2
|
|
11.6
|
|
31.4
|
|
22.1
|
|
11.9
|
|
Goodwill impairment charge
|
|
166.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
243.0
|
|
Operating income (loss)
|
|
(255.5
|
)
|
(2.1
|
)
|
(18.3
|
)
|
28.0
|
|
55.7
|
|
19.0
|
|
27.5
|
|
(167.6
|
)
|
Operating margin
|
|
(18.1
|
)%
|
(0.2
|
)%
|
(1.3
|
)%
|
1.7
|
%
|
3.6
|
%
|
1.3
|
%
|
1.9
|
%
|
(10.1
|
)%
|
Adjusted EBIT margin
|
|
3.1
|
%
|
2.5
|
%
|
0.8
|
%
|
4.6
|
%
|
4.3
|
%
|
3.5
|
%
|
3.4
|
%
|
5.3
|
%
|
Net income (loss) from
continuing operations
|
|
(315.1
|
)
|
(21.1
|
)
|
(38.1
|
)
|
11.6
|
|
19.2
|
|
(6.5
|
)
|
6.3
|
|
(205.0
|
)
|
Net income (loss)
|
|
(315.1
|
)
|
(21.1
|
)
|
(38.1
|
)
|
11.4
|
|
18.9
|
|
(7.2
|
)
|
5.2
|
|
(210.6
|
)
|
Per Share Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(2.42
|
)
|
$
|
(0.20
|
)
|
$
|
(0.34
|
)
|
$
|
0.03
|
|
$
|
0.09
|
|
$
|
(0.11
|
)
|
$
|
(0.04
|
)
|
$
|
(1.64
|
)
|
Adjusted diluted
|
|
$
|
(0.36
|
)
|
$
|
|
|
$
|
(0.17
|
)
|
$
|
0.28
|
|
$
|
0.17
|
|
$
|
0.10
|
|
$
|
0.09
|
|
$
|
0.21
|
|
IAROC:
Impairment of assets, restructuring and other charges
|
Figure 3
|
Adjusted:
Defined as before IAROC and before goodwill impairment charge
|
|
Adjusted EBITDA
trend
Adjusted
EBITDA for the first nine months of 2007 was, overall, lower than last year due
to price pressures, volume declines and inefficiencies resulting from previous
periods restructuring activities. These more than offset the year-over-year
improvements, achieved in the first nine months of 2007, resulting from the
retooling initiatives and restructuring process.
Overall
performance for the previous eight quarters was also affected by operational
inefficiencies mainly in plants involved in the installation of new equipment
or press closures as well as those due to plant closures. In all four quarters
of 2006, the Company continued to face difficult market conditions, resulting
in price erosion worldwide and decreased volume in certain of the Companys
markets. The retooling benefits, as well as growth in new value added services
such as in Premedia and Logistics, as well as the Companys Five-Point
Transformation Plan are intended to help reverse this negative trend.
10
Seasonal impact
Revenues
generated by the Company are seasonal with a greater part of volume being
realized in the second half of the fiscal year, primarily due to the higher
number of magazine pages, new product launches, back-to-school ads, marketing
by retailers, increased catalog activity, and holiday promotions. Therefore, an
analysis of the consecutive quarters is not a true measurement of the revenue
trend (Figure 3).
IAROC impact
Significant
IAROC have resulted from the Companys focus on cost reduction and retooling
activities undertaken during the previous years that involved a reduction in
workforce, closure or downsizing of facilities, decommissioning of
under-performing assets, lowering of overhead expenses, consolidating corporate
functions and relocating sales and administrative offices into plants. This
determined focus on cost containment has reduced the Companys long-term cost
structure and is expected to improve efficiency across the platform. For the
nine-month period ended September 30, 2007, the Company recorded IAROC of
$198.2 million relating to its European and North American platforms. Of that
amount, $155.8 million was related to an impairment charge of long-lived assets
for European and North American facilities, $37.6 million related to
restructuring charges incurred in the first nine months of 2007 for the closure
of North American facilities and the continuation of prior year initiatives,
and $4.8 million related to pension settlements in North American facilities.
Goodwill
impairment charge impact
Throughout
2005, the European reporting unit suffered from poor market conditions, namely
continued price erosion and decreased volumes, as well as several production
inefficiencies and the loss of an important client in the United Kingdom. As a
result, the Company concluded that the carrying amount of goodwill for the
European reporting unit was not fully recoverable and a pre-tax impairment
charge of $243.0 million was taken at December 31, 2005. Since then, the European
reporting unit continued to be severely impacted by the same poor market
conditions. Quebecor World completed its annual goodwill impairment test in the
third quarter of 2007, taking into account financial information such as the
sale and merger of its European operations. Consequently, management determined
that the entire carrying amount of goodwill for the European reporting unit was
not recoverable and a pre-tax impairment charge of $166.0 million was taken at
the end of the third quarter of 2007.
General market
conditions impact
The
Companys performance for the last eight quarters was primarily affected by the
difficult market environment, which more than offset some of the benefits from
Quebecor Worlds restructuring process and the decreased costs from other
initiatives mentioned above. Competition in the industry remains intense as the
industry is still in the process of consolidation, evidenced by several recent
mergers. The publishing market is largely constant in volumes, while the
primary demand for printed marketing materials is stable with low growth. The
Company is focusing on adding customer value and improving productivity through
continuous improvement projects and the recent deployment of next generation
technology, in order to create an operating network capable of being highly
competitive in this market.
11
2.4
Segment results
The
following is a review of activities by segment which, except as otherwise
indicated, focuses only on continuing operations.
Segment
Results of Continuing Operations ($ millions)
Selected
Performance Indicators
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inter-Segment
and Others
|
|
|
|
|
|
|
|
North America
|
|
Europe
|
|
Latin America
|
|
|
Total
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Three
months ended September 30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
1,098.4
|
|
$
|
1,241.1
|
|
$
|
242.5
|
|
$
|
244.1
|
|
$
|
75.0
|
|
$
|
61.2
|
|
$
|
(1.3
|
)
|
$
|
(0.2
|
)
|
$
|
1,414.6
|
|
$
|
1,546.2
|
|
Adjusted EBITDA
|
|
120.6
|
|
142.4
|
|
3.8
|
|
7.5
|
|
6.5
|
|
6.3
|
|
(5.3
|
)
|
(5.6
|
)
|
125.6
|
|
150.6
|
|
Adjusted EBIT
|
|
58.6
|
|
75.7
|
|
(13.1
|
)
|
(6.0
|
)
|
3.2
|
|
3.4
|
|
(5.5
|
)
|
(5.8
|
)
|
43.2
|
|
67.3
|
|
IAROC
|
|
55.2
|
|
3.3
|
|
77.5
|
|
7.7
|
|
|
|
0.6
|
|
|
|
|
|
132.7
|
|
11.6
|
|
Goodwill
impairment charge
|
|
|
|
|
|
166.0
|
|
|
|
|
|
|
|
|
|
|
|
166.0
|
|
|
|
Operating income (loss)
|
|
3.4
|
|
72.4
|
|
(256.6
|
)
|
(13.7
|
)
|
3.2
|
|
2.8
|
|
(5.5
|
)
|
(5.8
|
)
|
(255.5
|
)
|
55.7
|
|
Adjusted EBITDA
margin
|
|
11.0
|
%
|
11.5
|
%
|
1.5
|
%
|
3.1
|
%
|
8.7
|
%
|
10.2
|
%
|
|
|
|
|
8.9
|
%
|
9.7
|
%
|
Adjusted EBIT
margin
|
|
5.3
|
%
|
6.1
|
%
|
(5.4
|
)%
|
(2.5
|
)%
|
4.2
|
%
|
5.4
|
%
|
|
|
|
|
3.1
|
%
|
4.3
|
%
|
Operating margin
|
|
0.3
|
%
|
5.8
|
%
|
(105.8
|
)%
|
(5.6
|
)%
|
4.2
|
%
|
4.6
|
%
|
|
|
|
|
(18.1
|
)%
|
3.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures (1)
|
|
$
|
43.4
|
|
$
|
51.3
|
|
$
|
18.7
|
|
$
|
27.5
|
|
$
|
0.4
|
|
$
|
2.5
|
|
$
|
|
|
$
|
1.3
|
|
$
|
62.5
|
|
$
|
82.6
|
|
Change in
non-cash balances related to operations, cash flow (outflow)
(1)
|
|
(67.9
|
)
|
(44.2
|
)
|
(18.8
|
)
|
11.1
|
|
(8.2
|
)
|
1.0
|
|
(4.1
|
)
|
(12.9
|
)
|
(99.0
|
)
|
(45.0
|
)
|
Nine
months ended September 30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
3,224.9
|
|
$
|
3,537.6
|
|
$
|
744.6
|
|
$
|
758.1
|
|
$
|
202.3
|
|
$
|
170.5
|
|
$
|
(3.7
|
)
|
$
|
(0.3
|
)
|
$
|
4,168.1
|
|
$
|
4,465.9
|
|
Adjusted EBITDA
|
|
338.4
|
|
372.9
|
|
(6.8
|
)
|
29.8
|
|
17.0
|
|
15.3
|
|
(17.0
|
)
|
(8.3
|
)
|
331.6
|
|
409.7
|
|
Adjusted EBIT
|
|
151.0
|
|
177.8
|
|
(52.9
|
)
|
(8.6
|
)
|
7.5
|
|
6.8
|
|
(17.3
|
)
|
(8.7
|
)
|
88.3
|
|
167.3
|
|
IAROC
|
|
101.7
|
|
29.4
|
|
96.4
|
|
34.5
|
|
0.1
|
|
1.2
|
|
|
|
|
|
198.2
|
|
65.1
|
|
Goodwill
impairment charge
|
|
|
|
|
|
166.0
|
|
|
|
|
|
|
|
|
|
|
|
166.0
|
|
|
|
Operating income
(loss)
|
|
49.3
|
|
148.4
|
|
(315.3
|
)
|
(43.1
|
)
|
7.4
|
|
5.6
|
|
(17.3
|
)
|
(8.7
|
)
|
(275.9
|
)
|
102.2
|
|
Adjusted EBITDA
margin
|
|
10.5
|
%
|
10.5
|
%
|
(0.9
|
)%
|
3.9
|
%
|
8.4
|
%
|
9.0
|
%
|
|
|
|
|
8.0
|
%
|
9.2
|
%
|
Adjusted EBIT
margin
|
|
4.7
|
%
|
5.0
|
%
|
(7.1
|
)%
|
(1.1
|
)%
|
3.7
|
%
|
4.0
|
%
|
|
|
|
|
2.1
|
%
|
3.7
|
%
|
Operating margin
|
|
1.5
|
%
|
4.2
|
%
|
(42.3
|
)%
|
(5.7
|
)%
|
3.7
|
%
|
3.3
|
%
|
|
|
|
|
(6.6
|
)%
|
2.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures (1)
|
|
$
|
141.1
|
|
$
|
134.5
|
|
$
|
52.2
|
|
$
|
58.4
|
|
$
|
2.8
|
|
$
|
26.4
|
|
$
|
1.1
|
|
$
|
(0.3
|
)
|
$
|
197.2
|
|
$
|
219.0
|
|
Change in
non-cash balances related to operations, cash flow
(outflow) (1)
|
|
(15.1
|
)
|
(106.9
|
)
|
(57.6
|
)
|
5.1
|
|
(5.8
|
)
|
2.3
|
|
53.7
|
|
35.3
|
|
(24.8
|
)
|
(64.2
|
)
|
IAROC:
Impairment of assets, restructuring and other charges
Adjusted:
Defined as before IAROC and before goodwill impairment charge
|
Figure 4
|
(1)
Including
both continuing and discontinued operations
North America
The
North American segment is comprised of the following business groups: Magazine,
Retail, Catalog, Book & Directory, Direct, Canada, Logistics, Premedia and
other value added services. North American revenues for the third quarter of
2007 were $1,098.4 million, down 11.5% from $1,241.1 million in 2006 and
$3,224.9 million for the nine-month period, down 8.8% from $3,537.6 million for
the same period in 2006. Excluding the effect of currency translation and the
unfavourable impact of paper sales, revenues decreased by 5.5% in the third
quarter and 3.4% on a year-to-date basis compared to the same periods last
year. Revenues in the North American segment continued to be impacted by
negative price pressures. Volume decreased during the third quarter and the
nine first months of 2007, mainly due to restructuring initiatives in the
Catalog, Magazine, Book and Canada groups. Additional volume contracted with
Yellow Book positively impacted the Directory group since the beginning of the
second quarter of 2007. Finally, due to a very strong Canadian dollar, the
Canada group continued to be affected by less favourable foreign exchange
contracts on sales to its U.S. customers.
Operating
income and margin in North America decreased in the third quarter and on a
year-to-date basis compared to 2006. Operating income in North America was
impacted by the highly competitive market conditions as well as inefficiencies
and costs related to the finalization of the Companys retooling plan during
the third quarter of 2007. The decrease was partly offset by the benefits from
the retooling completed in 2006 and cost reductions in the Book & Directory
and Magazine groups over the nine-month period ended on September 30, 2007. In
addition, the Book and Direct groups benefited from the impact of favourable
product mix with higher value added work and services.
In
the third quarter of 2007, the Company completed the start-up of two Timson
book presses in its Buffalo, NY facility (Book & Directory group). Quebecor
World also completed the U.S. Catalog retooling plan in July with the
installation of a Rotoman 64 page press in its Jonesboro, AR facility (Catalog
& Retail group). Although management is considering additional investments
in Quebecor Worlds North American platform, the Company finalized its major
North American retooling plan, as expected, before the 2007 busy season.
The
North American workforce was reduced year-over-year by 1,007 employees, or
4.4%, mostly as a result of the restructuring initiatives completed thus far.
12
Europe
The
European segment operates mainly in the Magazine, Retail, Catalog and Book
markets. European revenues for the third quarter of 2007 were $242.5 million,
down 0.6% from $244.1 million in 2006 and $744.6 million for the nine-month
period, down 1.8% from $758.1 million for the same period in 2006. Excluding
the impact of currency translation and paper sales, revenues were down 6.3% and
6.5% respectively for the third quarter and the year-to-date compared to the
same periods in 2006. Overall, volume decrease experienced in Europe was mostly
the result of the disposal of the Lille and the Strasbourg French facilities,
as well as press start-up inefficiencies and equipment transfers. This
shortfall was however partly offset by increases in facilities re-equipped with
new presses in Austria, Spain and Belgium, with Belgian volume almost up 45%
from last year during the nine-month period of 2007.
On
a year-to-date basis, the operating income and margin for the European segment
decreased compared to the same period in 2006, but increased in Finland and
Sweden. The increased volume in Belgium and Spain did not translate into
increased operating income as their positive effects were offset by press start
up inefficiencies and a negative work mix in the nine-month period of 2007. The
trend in this segments operating income and margin reflects lower demand,
price pressures, temporary inefficiencies experienced with the installation of
new presses and transfer of volumes between plants. Year-over-year, the
European workforce was reduced by 8.0% or 318 employees.
Latin America
Latin
America operates mainly in the Book, Directory, Magazine, Catalog and Retail
markets. Latin Americas revenues for the third quarter of 2007 were $75.0
million, up 22.5% from $61.2 million in 2006 and $202.3 million, on a
year-to-date basis, up 18.6% from $170.5 million for the same period in 2006.
Excluding the impact of foreign currency and paper sales, revenues for the
third quarter of 2007 were up 5.7% compared to last year. Significant revenue
increases from Colombia and Mexico, during the third quarter and the first nine
months, were the result of a growing volume. The increase in Colombia and
Mexico mostly came from export sales of bibles and directories respectively.
However, the impact of these increases in volume on operating income was partly
offset by less favourable pricing on the bibles during the quarter. Overall, in
addition to cost reductions, these factors contributed to the growth in operating
income during the third quarter of 2007 compared to last year.
2.5
Impairment of assets and restructuring initiatives
Quebecor
World has undertaken various restructuring initiatives to increase the
efficiency of the pressroom and the return on capital employed by its
facilities. Restructuring costs are mostly the result of plant closures and
workforce reductions resulting from current and prior years initiatives. A
description of these initiatives is provided in Note 3 to the Consolidated
Financial Statements for the period ended September 30, 2007.
The
2007 restructuring initiatives affected a total of 892 employees, of which 832
positions have been eliminated as of September 30, 2007. The remaining 60
positions will be eliminated in the near future. However, the Company estimates
that 387 new jobs should be created in other facilities with respect to the
2007 initiatives. The execution of prior years initiatives resulted in the
elimination of 773 jobs for the first nine months of 2007 and 209 are still to
come.
As
at September 30, 2007, the balance of the restructuring reserve was $21.9
million. The total cash disbursement related to this reserve is expected to be
$14.4 million for the remainder of 2007. Finally, the Company expects to record
a charge of $13.9 million in upcoming quarters for the restructuring
initiatives that have already been announced at September 30, 2007.
The
Company also recorded an impairment charge on long-lived assets of $128.0
million in the third quarter of 2007 for a total of $155.8 million after nine
months in 2007.
13
Reconciliation of non-GAAP measures
($ millions, except per share data)
|
|
Three months ended
|
|
Nine months ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Operating income from continuing
operations- adjusted
|
|
|
|
|
|
|
|
|
|
Operating income (loss) (EBIT)
|
|
$
|
(255.5
|
)
|
$
|
55.7
|
|
$
|
(275.9
|
)
|
$
|
102.2
|
|
Impairment of assets, restructuring and
other charges (IAROC)
|
|
132.7
|
|
11.6
|
|
198.2
|
|
65.1
|
|
Goodwill impairment charge
|
|
166.0
|
|
|
|
166.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBIT
|
|
$
|
43.2
|
|
$
|
67.3
|
|
$
|
88.3
|
|
$
|
167.3
|
|
Operating income (loss) (EBIT)
|
|
$
|
(255.5
|
)
|
$
|
55.7
|
|
$
|
(275.9
|
)
|
$
|
102.2
|
|
Depreciation of property, plant and
equipment(1)
|
|
77.2
|
|
76.3
|
|
226.9
|
|
223.2
|
|
Amortization of other assets(1)
|
|
5.2
|
|
7.0
|
|
16.4
|
|
19.2
|
|
Operating income (loss) before depreciation
and amortization (EBITDA)
|
|
$
|
(173.1
|
)
|
$
|
139.0
|
|
$
|
(32.6
|
)
|
$
|
344.6
|
|
IAROC
|
|
132.7
|
|
11.6
|
|
198.2
|
|
65.1
|
|
Goodwill impairment charge
|
|
166.0
|
|
|
|
166.0
|
|
|
|
Adjusted EBITDA
|
|
$
|
125.6
|
|
$
|
150.6
|
|
$
|
331.6
|
|
$
|
409.7
|
|
Earnings (loss) per share from continuing
operations
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing
operations
|
|
$
|
(315.1
|
)
|
$
|
19.2
|
|
$
|
(374.3
|
)
|
$
|
19.0
|
|
IAROC (2)
|
|
112.8
|
|
10.3
|
|
162.1
|
|
54.3
|
|
Goodwill impairment charge
(3)
|
|
159.2
|
|
|
|
159.2
|
|
|
|
Adjusted net income (loss) from continuing
operations
|
|
$
|
(43.1
|
)
|
$
|
29.5
|
|
$
|
(53.0
|
)
|
$
|
73.3
|
|
Net income allocated to holders of
preferred shares
|
|
4.7
|
|
7.7
|
|
16.7
|
|
26.4
|
|
Adjusted net income (loss) from continuing
operations available to holders of equity shares
|
|
$
|
(47.8
|
)
|
$
|
21.8
|
|
$
|
(69.7
|
)
|
$
|
46.9
|
|
Diluted average number of equity shares
outstanding (in millions)
|
|
132.0
|
|
131.5
|
|
131.9
|
|
131.3
|
|
Earnings (loss) per share from continuing
operations
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(2.42
|
)
|
$
|
0.09
|
|
$
|
(2.96
|
)
|
$
|
(0.06
|
)
|
Adjusted diluted
|
|
$
|
(0.36
|
)
|
$
|
0.17
|
|
$
|
(0.53
|
)
|
$
|
0.36
|
|
Free Cash Flow
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) operating
activities
|
|
$
|
(41.8
|
)
|
$
|
51.2
|
|
$
|
133.5
|
|
$
|
205.8
|
|
Dividends on preferred shares
|
|
(5.9
|
)
|
(9.7
|
)
|
(17.6
|
)
|
(33.6
|
)
|
Additions to property, plant and equipment
|
|
(62.5
|
)
|
(82.6
|
)
|
(197.2
|
)
|
(219.0
|
)
|
Net proceeds from disposal of assets
|
|
28.5
|
|
0.2
|
|
69.0
|
|
9.2
|
|
Net proceeds from business disposals
|
|
|
|
0.4
|
|
|
|
28.4
|
|
Free cash flow (outflow)
|
|
$
|
(81.7
|
)
|
$
|
(40.5
|
)
|
$
|
(12.3
|
)
|
$
|
(9.2
|
)
|
Adjusted: Defined as before
IAROC and goodwill impairment charge
(1) As reported in the
Consolidated Statements of Cash Flows
(2) Net of income taxes of $19.9 million for
the third quarter of 2007 ($36.1 million year-to-date) and $1.3 million for
the third quarter of 2006 ($10.8 million
year-to-date)
(3) Net of income taxes of $6.8
million in 2007.
14
Reconciliation of non-GAAP measures
($ millions)
|
|
Nine months
|
|
Twelve months
|
|
|
|
ended September 30
|
|
ended December 31
|
|
|
|
2007
|
|
2006
|
|
Debt-to-capitalization
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
47.4
|
|
$
|
30.7
|
|
Long-term debt
|
|
2,237.2
|
|
1,984.0
|
|
Convertible notes
|
|
|
|
117.7
|
|
Total debt
|
|
$
|
2,284.6
|
|
$
|
2,132.4
|
|
Minority interest
|
|
|
|
1.3
|
|
Shareholders equity
|
|
1,414.2
|
|
1,882.2
|
|
Capitalization
|
|
$
|
3,698.8
|
|
$
|
4,015.9
|
|
Debt-to-capitalization
|
|
62:38
|
|
53:47
|
|
Total Debt and Accounts Receivable
Securitization
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
47.4
|
|
$
|
30.7
|
|
Long-term debt
|
|
2,237.2
|
|
1,984.0
|
|
Convertible notes
|
|
|
|
117.7
|
|
Total debt
|
|
$
|
2,284.6
|
|
$
|
2,132.4
|
|
Accounts receivable securitization
|
|
493.8
|
|
579.5
|
|
Total debt and accounts receivable
securitization
|
|
$
|
2,778.4
|
|
$
|
2,711.9
|
|
Minority interest
|
|
|
|
1.3
|
|
Shareholders equity
|
|
1,414.2
|
|
1,882.2
|
|
Capitalization, including securitization
|
|
$
|
4,192.6
|
|
$
|
4,595.4
|
|
Debt-to-capitalization, including
securitization
|
|
66:34
|
|
59:41
|
|
Coverage Ratios from continuing operations
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
331.6
|
|
$
|
579.9
|
|
YTD December previous year
|
|
579.9
|
|
|
|
Nine-month period previous year
|
|
409.7
|
|
|
|
Adjusted EBITDA - Last 12 months
|
|
$
|
501.8
|
|
$
|
579.9
|
|
Financial expenses
|
|
$
|
182.3
|
|
$
|
134.2
|
|
YTD December previous year
|
|
134.2
|
|
|
|
Nine-month period previous year
|
|
94.8
|
|
|
|
Financial expenses adjusted - Last 12
months
|
|
$
|
221.7
|
|
$
|
134.2
|
|
Interest coverage ratio (times)
|
|
2.3
|
|
4.3
|
|
Total debt
|
|
$
|
2,284.6
|
|
$
|
2,132.4
|
|
Debt-to-Adjusted-EBITDA ratio (times)
|
|
4.6
|
|
3.7
|
|
15
3.
Liquidity and capital resources
3.1
Operating activities
|
|
Three months ended
|
|
Nine months ended
|
|
Cash provided by (used in) operating activities
|
|
September 30,
|
|
September 30,
|
|
($ millions)
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
$
|
(41.8
|
)
|
$
|
51.2
|
|
$
|
133.5
|
|
$
|
205.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
decrease in cash from operating activities generated in the third quarter and
the first nine months of 2007 compared to the same period in 2006 was due
mainly to the shortfall attributable to the Companys European segment and the
depreciation of the U.S. dollar.
The
deficiency in working capital was $73.1 million at September 30, 2007, compared
to $76.0 million at December 31, 2006. The improvement was due
mainly to an increase in cash and cash equivalents and inventories, as well as
a lower level of securitization of trade receivables as a result of
modifications to the programs at the end of 2006. The improvement was mainly
offset by a higher current portion of long term debt and higher level of trade
payables and accrued liabilities. Quebecor World maximizes the use of its
accounts receivable securitization programs, since the cost of these programs
is lower than that of its credit facilities. The amount of trade receivables
under securitization varies from month to month, based principally on the
previous months volume (for example, September securitization is based on
receivables at the end of August).
3.2
Financing activities
|
|
Three months ended
|
|
Nine months ended
|
|
Cash provided by financing activities
|
|
September 30,
|
|
September 30,
|
|
($ millions)
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
$
|
96.2
|
|
$
|
38.4
|
|
$
|
64.3
|
|
$
|
14.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In
the third quarter of 2007, Quebecor World paid dividends on preferred shares
classified as equity totalling $5.9 million compared to $9.7 million
during the same period in 2006. On a year-to-date basis, the Company paid
dividends on preferred shares classified as equity of $17.6 million in 2007
compared to $33.6 million in 2006. Quebecor World paid dividends on equity
shares totalling $13.3 million in the third quarter of 2006 and $39.8 million
in the first nine months of 2006. These dividends are designated to be eligible
dividends, as provided under subsection 89(14) of the Income Tax Act (Canada)
and its provincial counterpart.
On
October 29, 2007, Quebecor World redeemed the outstanding Senior Notes (8.42%,
8.52%, 8.54% and 8.69%) for a redemption price of 100% of the outstanding
principal amount of the Notes, plus the accrued and unpaid interest on the
Notes to the redemption date plus the applicable prepayment premium of $53.1
million due on the redemption date. The Notes were classified as long-term
debt, since the Company drew on its syndicated revolving bank credit facility
for the financing of this transaction.
On
October 15, 2007, the Company announced that the fixed dividend rate for its
Series 3 Cumulative Redeemable First Preferred Shares will be equal to 150% of
the yield on five-year non-callable Government of Canada bonds to be determined
on November 9, 2007. Holders of the Series 3 Preferred Shares will also have
the right to convert all or any number of their shares effective as of December
1, 2007, on a one-for-one basis, into Series 2 Cumulative Redeemable First
Preferred Shares.
On
September 28, 2007, the Company finalized new terms for its syndicated
Revolving bank facility. The amendment includes modification of the covenants
to provide financial flexibility through to maturity of the agreement in
January 2009. As part of the new agreement, the Company has agreed to reduce
its facility from $1 billion to $750 million in October 2007, of which a
portion will be secured by a lien on assets in an amount of $135.6 million. The
amendment also includes a commitment to reduce the facility to $500 million by
July 1, 2008 and provides certain restrictions on the use of proceeds and terms
of repayment and it includes certain restrictive covenants, including the obligation
to maintain certain financial ratios.
16
On
September 26, 2007, the Company included additional equipment in its lease
agreement that was announced on December 19, 2006, increasing the total financing
to approximately $100 million. It is expected that, by the end of the current
fiscal year, the lease agreement will be fully drawn.
In
the third quarter of 2007, Quebecor World reimbursed CA$9.8 million ($9.2
million) on the long-term committed Equipment financing credit facility. As of
September 30, 2007, the drawings under this facility amounted to CA$156.0
million ($156.9 million) compared to CA$118.0 million ($105.6 million) at the
same date last year. In October 2007, the credit facility was secured by a lien
on assets in an amount of $34.4 million.
On
June 28, 2007, the Company redeemed all of the 6.00% Convertible Senior
Subordinated Notes due on October 1, 2007 for a redemption price of 100.6% of
the outstanding principal amount of the Notes, plus the accrued and unpaid
interest. The aggregate outstanding principal amount of the Notes was $119.5
million.
3.3
Investing activities
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
|
Cash used in investing activities
|
|
|
|
($ millions)
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
$
|
(34.5
|
)
|
$
|
(87.0
|
)
|
$
|
(138.5
|
)
|
$
|
(196.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to
property, plant and equipment
In
the third quarter of 2007, the Company invested $62.5 million in capital
projects, compared to $82.6 million in 2006. On a year-to-date basis, $197.2
million has been invested in capital projects in 2007, compared to $219.0
million in 2006. Of that amount, approximately 71% represented development
capital, including expenditures for new capacity requirements, but mostly for productivity
improvement. The remaining portion was spent on equipment transferred between
plants and maintenance of the Companys existing structure. In 2006, the
organic growth spending amounted to 76% (87% excluding building purchases).
Key
year-to-date expenditures included approximately $41.3 million in North America
and $47.3 million in Europe as part of the strategic retooling plans and a
customer related project. Other notable projects are related to the Corinth, MS
facility transformation into a dual-process, premier rotogravure and offset
catalog facility.
Given
the substantial amount of investment during the last three years
as part of the
retooling program and the fact that the European
operations will no
longer be consolidated, additions to property, plant
and equipment are
expected to be in the range of $100 to $150 million
per year for the next
two years and normalized longer term to the level
of $150 to $200
million per year.
Proceeds from
business disposals and disposal of assets
In the third quarter of
2007, proceeds on disposal of assets amounted to $28.5 million, compared to
$0.2 million during the same period in 2006. Proceeds in the last quarter were
mainly related to the sale and leaseback of equipment and the sale of four land
and buildings. On a year-to-date basis, proceeds on disposal of assets amounted
to $69.0 million compared to $9.2 million in 2006. The higher proceeds in 2007
included $34.2 million related to the sale and leaseback of land and buildings
of two Canadian facilities completed on March 23, 2007.
4.
Financial position
4.1
Free cash flow
|
|
Three months ended
|
|
Nine months ended
|
|
Free cash flow (outflow)
|
|
September 30,
|
|
September 30,
|
|
($ millions)
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
$
|
(81.7
|
)
|
$
|
(40.5
|
)
|
$
|
(12.3
|
)
|
$
|
(9.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company reports free cash flow because it is a key measure used by management
to evaluate its liquidity (Figure 5). Free cash flow reflects cash flow
available for business acquisitions, dividends on equity shares, repayments of
long-term debt and repurchases of equity securities. Free cash flow is not a
calculation based on Canadian or U.S. GAAP and should not be considered as an
alternative to the Consolidated Statement of Cash Flows. Free cash flow is a
measure that can be used to gauge the Companys performance over time.
Investors should be cautioned that free cash flow as reported by Quebecor World
may not be comparable in all instances to free cash flow as reported by other
companies.
The
decrease in free cash flow in the third quarter of 2007 compared to 2006 is due
mainly to decrease in cash flows from operating activities as described above.
This decrease was partly offset by the lower capital expenditures as the
Company completes its retooling initiative.
17
On
a year-to-date basis, free cash flow was lower in 2007 compared with 2006 as a
result of lower cash flows from operating activities as described above and
higher proceeds from business disposals recorded in 2006. The decrease was
partly offset by higher proceeds from disposal of assets.
4.2
Financial ratios, financial covenants and credit
ratings
Financial
ratios
The
key financial ratios used by management to evaluate the Companys financial
position are the interest coverage ratio, the debt-to-Adjusted-EBITDA ratio,
and the debt-to-capitalization ratio. Calculations of key financial ratios are
presented in Figure 6. At the end of the third quarter of 2007, the
debt-to-capitalization ratio was 62:38, compared to 53:47 at December 31, 2006.
The increase is largely attributable to non-cash impairment of long-lived
assets and goodwill recognized in the third quarter of 2007. As at September
30, 2007, total debt plus accounts receivable securitization was
2,778.4 million, $66.5 million higher compared to December 31, 2006.
Financial
covenants
The
Company is subject to certain financial covenants in some of its major
financing agreements. On September 28, 2007, Quebecor World amended the terms
of its bank facility and its U.S. Securitization program. As at September 30,
2007, the Company was in compliance with all debt covenants as communicated in
compliance reports under the various agreements governing such debts. The
amounts disclosed in Figures 5 and 6 as well as the discussion in the Financial
ratios section may not accurately represent figures used in the calculation of
the actual debt covenants.
Credit ratings
As
at October 29, 2007, the following credit ratings had been attributed to the
senior unsecured debt of the Company:
Rating Agency
|
|
Rating
|
|
Moodys Investors Service
|
|
B3
|
|
Standard and Poors
|
|
B
|
|
Dominion Bond Rating Service Limited
|
|
B
|
|
On August 28, 2007, Moodys
Investors Service and Standard and Poors lowered the Companys credit ratings
from B2 to B3 and from B+ to B, respectively. On August 30, 2007, Dominion Bond
Rating Service Limited (DBRS) lowered the Companys credit rating from BB to
B High, and, on October 4, 2007, from B High to B. The Companys future
borrowing costs may increase as a result of these rating changes.
18
4.3
Contractual cash obligations
The following table sets forth the Companys
contractual cash obligations for the items described therein as at September
30, 2007:
Contractual Cash Obligations
($
millions)
|
|
Remainder of
|
|
|
|
|
|
|
|
|
|
2012 and
|
|
|
|
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
thereafter
|
|
Total
|
|
Long-term debt
|
|
$
|
22.1
|
|
$
|
222.6
|
|
$
|
666.7
|
|
$
|
19.8
|
|
$
|
19.8
|
|
$
|
1,331.4
|
|
$
|
2,282.4
|
|
Capital leases
|
|
1.5
|
|
3.1
|
|
7.8
|
|
1.2
|
|
2.1
|
|
4.5
|
|
20.2
|
|
Interest payments on long-term debt and
capital leases(1)
|
|
42.1
|
|
164.7
|
|
113.5
|
|
108.3
|
|
107.3
|
|
340.8
|
|
876.7
|
|
Operating leases
|
|
38.2
|
|
76.4
|
|
55.0
|
|
36.8
|
|
27.5
|
|
126.2
|
|
360.1
|
|
Capital asset purchase commitments
|
|
102.3
|
|
7.4
|
|
|
|
|
|
|
|
|
|
109.7
|
|
Total contractual cash obligations
|
|
$
|
206.2
|
|
$
|
474.2
|
|
$
|
843.0
|
|
$
|
166.1
|
|
$
|
156.7
|
|
$
|
1,802.9
|
|
$
|
3,649.1
|
|
(1)
Interest payments were calculated using the interest
rate that would prevail should the debt be reimbursed as planned, and the
outstanding balance as at September 30, 2007.
The
Company has major operating leases pursuant to which it has the option to
purchase the underlying equipment (presses and binders) at the end of the term,
and it has historically acquired most of the equipment when it is used for
production. The total terminal value of operating leases expiring between 2008
and 2013 is approximately $45.6 million.
The
Company monitors the funded status of its pension plans very closely. During
the first nine months of 2007, the Company made contributions of $53.1 million
($77.0 million in 2006), which were in accordance with the minimum required
contributions as determined by the Companys actuaries. Minimum required
contributions are estimated at $61.7 million for 2007.
Quebecor
World believes the modified credit facility (as described in the Financing
activities section), combined with other financing initiatives currently
underway, should provide the Company with the required liquidity to execute its
business plan.
5.
Off-balance sheet arrangements and other
disclosures
5.1
Off-balance sheet arrangements
The
Company is party to various off-balance sheet arrangements. The Companys 2006
annual MD&A contains a complete description of these arrangements.
Operating
leases
In October 2007, certain assets under operating lease were purchased for
a consideration of $32.5 million. The Company also expects to purchase
machinery and equipment under operating lease in November 2007 for a
consideration of $42.3 million.
Sales of trade
receivables
As
at September 30, 2007, the amounts outstanding under the Canadian, U.S. and
European securitization programs were CA$47.0 million ($47.2 million), $335.0
million and EUR 78.5 million ($111.6 million), respectively (CA$68.0 million
($60.8 million), $377.0 million and EUR 90.8 million ($115.1 million), as
at September 30, 2006). The Company had a retained interest in the trade
receivables sold of $141.1 million ($129.8 million in 2006), which was recorded
in the Companys trade receivables. As at September 30, 2007, an aggregate
amount of $634.9 million ($682.8 million in 2006) of accounts receivable
had been sold under the three programs. Consistent with its U.S. securitization
agreement, the Company sells all of its U.S. receivables to a wholly-owned
subsidiary, Quebecor World Finance Inc., through a true-sale transaction.
19
Due
to recent DBRS credit rating downgrades, the Company obtained a waiver of
certain covenants until October 15, 2007, at which point Quebecor World
commenced the amortization process set out in the agreement governing the
Canadian securitization program. By virtue of the amortization process, the
Company continues to service past receivables sold under the program, but no
additional receivables or related ownership interest is sold to the Trust. On
October 24, 2007, the Company amended its U.S. program to include receivables
generated by its Canadian operations (now a North American program) and thus
ended the Canadian program. In order to conclude the revised arrangement, CA
$23.6 million ($24.3 million) of receivables which remained outstanding were
repurchased under the Canadian program. On October 24, 2007, due to the
inclusion of the Canadian receivables, the amount outstanding under the North
American program has increased by $72.0 million. On September 28, 2007, the
Company amended the maturity date of its U.S. Securitization program, which is
now January 30, 2009.
In
October 2007, the Company signed an agreement to commence the amortization
process of its European securitization program. As of that date, the Company
continues to service past receivables sold under the program, but no additional
receivables or related ownership interest is sold to the Trust. Quebecor World
does not anticipate that any amounts sold under the European program will
remain outstanding by the end of 2007 and management intends to replace the
facility with an alternate financing source.
The
Company was in compliance with all its covenants under the agreements governing
its securitization programs as of September 30, 2007. See the Financial
ratios, financial covenants and credit ratings section of the present MD&A
for additional information on financial covenants.
5.2
Derivative financial instruments
The
Company uses a number of derivative financial instruments to manage its
exposure to fluctuations in foreign exchange, interest rates and commodity
prices. The Companys 2006 annual MD&A contains a complete description of
these derivative financial instruments. The estimated fair value of derivative
financial instruments at September 30, 2007 is detailed in Figure 8.
Fair Value of Derivative Financial Instruments
(Continuing Operations)
($
millions)
|
|
September 30, 2007
|
|
December 31, 2006
|
|
|
|
Book Value
|
|
Fair Value
|
|
Book Value
|
|
Fair Value
|
|
Derivative financial instruments
|
|
|
|
|
|
|
|
|
|
Interest rate swap agreements
|
|
$
|
(5.2
|
)
|
$
|
(5.2
|
)
|
$
|
|
|
$
|
(7.5
|
)
|
Foreign exchange forward contracts
|
|
(57.1
|
)
|
(57.1
|
)
|
(12.7
|
)
|
(15.5
|
)
|
Commodity swaps
|
|
(8.8
|
)
|
(8.8
|
)
|
(1.4
|
)
|
(13.7
|
)
|
Embedded derivatives
|
|
0.5
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three-month
period ended September 30, 2007, the Company recorded a net loss of $70.4
million on embedded derivatives not closely related to their host contracts and
derivative financial instruments for which hedge accounting was not used (net
gain of $10.0 million in 2006). During the same period, the Company recorded a
net loss of $3.3 million for the ineffective portion of its fair value hedges.
For the first nine months of 2007, the Company recorded a net loss of $104.6
million on embedded derivatives not closely related to their host contracts and
derivative financial instruments for which hedge accounting was not used ($19.0
million in 2006). During the same period, the Company recorded a net loss of
$1.5 million for the ineffective portion of its fair value hedges. A net gain
of $20.4 million related to its cash flow hedges was recorded to other
comprehensive income for the first nine months of 2007 as a result of the
adoption of the new accounting standards for financial instruments and hedges
as at January 1, 2007 (See section Change in accounting policy).
20
5.3
Related party transactions
Related Party Transactions
($ millions)
|
|
Three months ended
|
|
Nine months ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from companies under common
control
|
|
$
|
14.3
|
|
$
|
17.0
|
|
$
|
41.1
|
|
$
|
49.8
|
|
Management fees billed by Quebecor Inc.
|
|
1.3
|
|
1.2
|
|
3.7
|
|
3.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company has entered into transactions with the parent company and its other
subsidiaries, which were accounted for at prices and conditions prevailing in
the market. Intercompany revenues from the parent companys media subsidiaries
mostly involved the printing of magazines. During the second quarter of 2007, a
real estate asset was sold to a shareholder of the parent company at fair value
established based on an independent estimate.
In
October 2007, the Company sold a property to a company under common control,
Quebecor Media Inc., for consideration of CA$62.5 million ($64.0 million).
Simultaneously, the Company entered into a long-term lease over a term of 17 years with Quebecor
Media Inc., to rent a portion of the property sold. Consideration for the two transactions was settled by a cash receipt of
CA$43.9 million ($44.9 million) on the date of the transactions and the Company
assumed a net balance of sale, including interest, of CA$7.0 million ($7.2
million) receivable in 2013.
5.4
Outstanding share data
Figure
10 discloses the Companys outstanding share data as at
October
29, 2007
.
Outstanding Share Data
($
in millions and shares in thousands)
|
|
October 29, 2007
|
|
|
|
Issued and
|
|
|
|
|
|
outstanding shares
|
|
Book value
|
|
Multiple Voting Shares
|
|
46,987
|
|
$
|
93.5
|
|
Subordinate Voting Shares
|
|
85,079
|
|
1,150.7
|
|
First Preferred Shares, Series 3 - Equity
|
|
12,000
|
|
212.5
|
|
First Preferred Shares, Series 5 -
Classified as liability
|
|
7,000
|
|
183.3
|
|
|
|
|
|
|
|
|
As
of October 29, 2007, a total of 7,737,760 options to purchase Subordinate
Voting Shares were outstanding, of which 4,008,064 were exercisable.
21
5.5
Controls and procedures
Managements
report on internal control over financial reporting
This
section should be read in conjunction with Section 6.5, Controls and
procedures of the Companys annual MD&A for the year ended December 31,
2006 containing Managements report on internal control over financial
reporting.
The
Company disclosed in its 2006 annual MD&A that management was not able to
conclude as to the effectiveness of the Companys internal control over
financial reporting, as it had identified a material weakness in the Companys
internal control over financial reporting. Management also disclosed in its
2006 annual MD&A that it has put in place remediation plans intended to
address the conditions leading to the material weakness that had been
identified, which remediation plans consist of :
Developing and
deploying a more exhaustive checklist to identify, capture and communicate the
required information and documentation;
Continuing to
implement additional controls to identify, capture and timely communicate
financial information to apply the Companys policy pertaining to the
impairment of long-term assets;
Continuing to improve
its forecasting systems;
Providing finance
training for managers, process owners and accounting personnel.
Management
continues to make progress in executing the remediation plans it has
established in order to further improve its internal controls in general and
also address the material weakness that was identified during the course of the
fiscal year ending December 31, 2006 in its internal controls over financial
reporting.
No
other changes to internal control over financial reporting have come to
managements attention during the three months ended September 30, 2007 that
have materially adversely affected, or are reasonably likely to materially
adversely affect, the Companys internal control over financial reporting.
6.
Critical accounting estimates and
accounting policies
6.1
Critical accounting estimates
The
preparation of financial statements in conformity with Canadian GAAP requires the
Company to make estimates and assumptions which affect the reported amounts of
assets and liabilities, disclosure with respect to contingent assets and
liabilities at the date of the financial statements and reported amounts of
revenues and expenses during the reporting period. The Ontario Securities
Commission defines critical accounting estimates as those requiring assumptions
made about matters that are highly uncertain at the time the estimate is made,
and when the use of different reasonable estimates or changes to the accounting
estimates would have a material impact on a companys financial condition or
results of operations. A complete discussion of the critical accounting
estimates made by the Company is included in the 2006 annual MD&A. Management
has not made any significant changes to these estimates and assumptions during
the nine-month period ended September 30, 2007, with the exception of the
impairment test on goodwill for the European reporting unit discussed under the
Impairment of goodwill and long-lived assets section. Actual results could
differ from those estimates.
6.2
Change in accounting policy
Financial instruments
Effective January 1, 2007, the Company
adopted CICA Handbook Section 1530, Comprehensive Income, Section 3855, Financial
Instruments Recognition and Measurement and Section 3865, Hedges. Changes in
accounting policies in conformity with these new accounting standards are as
follows:
(a)
Comprehensive income
Section 1530
introduces the concept of comprehensive income, which is calculated by
including other comprehensive income with net income. Other comprehensive
income represents changes in shareholders equity arising from transactions and
other events with non-owner sources such as unrealized gains and losses on
financial assets classified as available-for-sale, changes in translation
adjustment of self-sustaining foreign operations and changes in the fair value
of the effective portion of cash flow hedging instruments. With the adoption of
this section, the consolidated financial statements now include consolidated
statements of comprehensive income. The comparative statements were restated
solely to include the translation adjustment of self-sustaining foreign
operations as provided by transition rules.
22
(b)
Financial instruments
Section 3855
establishes standards for recognizing and measuring financial assets, financial
liabilities and derivatives. Under this standard, financial instruments are now
classified as held-for-trading, available-for-sale, held-to-maturity, loans and
receivables, or other financial liabilities and measurement in subsequent
periods depends on their classification. Transaction costs are expensed as
incurred for financial instruments classified as held-for-trading. For other
financial instruments, transaction costs are capitalized on initial recognition
and presented as a reduction of the underlying financial instruments. Financial
assets and financial liabilities held-for-trading are measured at fair value
with changes recognized in income. Available-for-sale financial assets are
measured at fair value or at cost, in the case of financial assets that do not
have a quoted market price in an active market, and changes in fair value are recorded
in comprehensive income.
Financial
assets held-to-maturity, loans and receivables, and other financial liabilities
are measured at amortized cost using the effective interest method of
amortization. The Company has classified its restricted and unrestricted cash
and cash equivalents and temporary investments as held for trading. Trade
receivables, receivables from related parties, loans and other long-term
receivables included in other assets were classified as loans and receivable.
Portfolio investments were classified as available for sale. All of the Companys
financial liabilities were classified as other financial liabilities.
Derivative
instruments are recorded as financial assets or liabilities at fair value,
including those derivatives that are embedded in financial or non-financial
contracts that are not closely related to the host contracts. Changes in the
fair values of the derivatives are recognized in financial expenses with the
exception of derivatives designated in a cash flow hedge for which hedge
accounting is used. In accordance with the new standards, the Company selected
January 1, 2003 as its transition date for adopting this standard related to
embedded derivatives.
(c)
Hedges
Section 3865
specifies the criteria that must be satisfied in order for hedge accounting to
be applied and the accounting for each of the permitted hedging strategies.
Accordingly,
for derivatives designated as fair value hedges, such as certain cross currency
interest rate swaps used by the Company, changes in the fair value of the
hedging derivative recorded in income are substantially offset by changes in
the fair value of the hedged item to the extent that the hedging relationship
is effective. When a fair value hedge is discontinued, the carrying value of
the hedged item is no longer adjusted and the cumulative fair value adjustments
to the carrying value of the hedged item are amortized to income over the
remaining term of the original hedging relationship.
For derivative
instruments designated as cash flow hedges, such as certain commodity swaps and
forward exchange contracts used by the Company, the effective portion of a
hedge is reported in other comprehensive income until it is recognized in
income during the same period in which the hedged item affects income, while
the ineffective portion is immediately recognized in the consolidated statement
of income. When a cash flow hedge is discontinued, the amounts previously
recognized in accumulated other comprehensive income are reclassified to income
when the variability in the cash flows of the hedged item affects income.
Upon adoption of these new sections, the
transition rules require that the Company adjust either the opening retained
earnings or accumulated other comprehensive income as if the new rules had
always been applied in the past, without restating comparative figures of prior
years. Accordingly, the following adjustments were recorded in the consolidated
financial statements as at January 1, 2007:
Decrease
of other assets by $24.3 million
Decrease
in trade payable and accrued liabilities by $0.6 million
Increase
of other liabilities by $18.9 million
Decrease
of long-term debt by $27.6 million
Decrease
of future income tax liabilities by $7.1 million
Decrease
of retained earnings by $2.2 million
Decrease
of accumulated other comprehensive income by $5.7 million
Finally,
the adoption of the new standards had no material impact on net income in 2007.
23
6.3
Reclassification
During the second quarter of 2007, the
Company reclassified the Series 5 Cumulative Redeemable First Preferred Shares
in the amount of $150.2 million as at December 31, 2006 and of $175.9 million
as at September 30, 2007 from Capital stock and Accumulated other comprehensive
income to preferred shares classified as liability in the balance sheet, to
conform with accounting standards related to such financial instruments (CICA
Handbook section 3861). Dividends on these shares are now presented in the
consolidated statement of income as dividends on preferred shares classified as
liability. This reclassification was not material to the Companys consolidated
financial statements and, as noted in section 4.2, the Company remains in
compliance with all significant debt covenants, including those applicable to
prior periods.
7.
Risks and uncertainties related to the
Companys business
The principal risks and
uncertainties related to the Companys business are set out in its 2006 annual
MD&A that has been previously filed with the Canadian securities regulatory
authorities at
www.sedar.com
and with the U.S. Securities and Exchange
Commission at
www.sec.gov
. The Companys annual MD&A is also
available at
www.quebecorworld.com
.
Additional risks and
uncertainties that the Company is unaware of, or that the Company currently
deems to be immaterial, may also become important factors that affect it. If
any of such risks actually occurs, the Companys business, cash flows,
financial condition or results of operations could be materially adversely
affected.
8.
Additional
information
Additional information
relating to Quebecor World, including its Annual Information Form for the year
ended December 31, 2006, is available on the Companys website at
www.quebecorworld.com
,
on SEDAR at
www.sedar.com
and on EDGAR at
www.sec.gov
.
Montreal, Canada
November 7, 2007
24
Quebecor World
CONSOLIDATED
FINANCIAL STATEMENTS
THIRD QUARTER ENDED SEPTEMBER 30, 2007
CONSOLIDATED
STATEMENTS OF INCOME
Periods ended September 30,
(In millions of US dollars,
except share amounts)
(Unaudited)
|
|
|
|
Three months
|
|
Nine months
|
|
|
|
Note
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
|
|
$
|
1,414.6
|
|
$
|
1,546.2
|
|
$
|
4,168.1
|
|
$
|
4,465.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Cost of
sales
|
|
|
|
1,172.0
|
|
1,295.9
|
|
3,489.5
|
|
3,757.0
|
|
Selling,
general and administrative
|
|
|
|
112.2
|
|
98.5
|
|
329.1
|
|
293.4
|
|
Securitization
fees
|
|
|
|
8.3
|
|
8.1
|
|
21.6
|
|
22.6
|
|
Depreciation
and amortization
|
|
|
|
77.2
|
|
76.4
|
|
226.9
|
|
223.4
|
|
Loss on
business disposals
|
|
6
|
|
1.7
|
|
|
|
12.7
|
|
2.2
|
|
Impairment
of assets, restructuring and other charges
|
|
3
|
|
132.7
|
|
11.6
|
|
198.2
|
|
65.1
|
|
Goodwill
impairment charge
|
|
8
|
|
166.0
|
|
|
|
166.0
|
|
|
|
|
|
|
|
1,670.1
|
|
1,490.5
|
|
4,444.0
|
|
4,363.7
|
|
Operating income (loss)
|
|
|
|
(255.5
|
)
|
55.7
|
|
(275.9
|
)
|
102.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
expenses
|
|
4
|
|
106.5
|
|
33.7
|
|
182.3
|
|
94.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
on preferred shares classified as liability
|
|
12
|
|
2.9
|
|
|
|
5.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) from continuing operations before income taxes
|
|
|
|
(364.9
|
)
|
22.0
|
|
(463.9
|
)
|
7.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
|
|
(49.8
|
)
|
2.7
|
|
(89.3
|
)
|
(12.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) from continuing operations before
minority interest
|
|
|
|
(315.1
|
)
|
19.3
|
|
(374.6
|
)
|
19.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
|
|
|
0.1
|
|
(0.3
|
)
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) from continuing operations
|
|
|
|
(315.1
|
)
|
19.2
|
|
(374.3
|
)
|
19.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from
discontinued operations (net of tax)
|
|
|
|
|
|
(0.3
|
)
|
|
|
(2.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
|
$
|
(315.1
|
)
|
$
|
18.9
|
|
$
|
(374.3
|
)
|
$
|
16.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income allocated to holders of preferred shares
|
|
|
|
4.7
|
|
7.7
|
|
16.7
|
|
26.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) allocated to holders of equity shares
|
|
|
|
$
|
(319.8
|
)
|
$
|
11.2
|
|
$
|
(391.0
|
)
|
$
|
(9.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share:
|
|
5
|
|
|
|
|
|
|
|
|
|
Basic and
diluted:
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
|
|
$
|
(2.42
|
)
|
$
|
0.09
|
|
$
|
(2.96
|
)
|
$
|
(0.06
|
)
|
Discontinued
operations
|
|
|
|
|
|
|
|
|
|
(0.01
|
)
|
|
|
|
|
$
|
(2.42
|
)
|
$
|
0.09
|
|
$
|
(2.96
|
)
|
$
|
(0.07
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of equity shares outstanding:
|
|
5
|
|
|
|
|
|
|
|
|
|
(in
millions)
|
|
|
|
|
|
|
|
|
|
|
|
Basic and
diluted
|
|
|
|
132.0
|
|
131.5
|
|
131.9
|
|
131.3
|
|
See accompanying Notes to
Consolidated Financial Statements.
2
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
Periods ended September 30,
(In millions of US dollars)
(Unaudited)
|
|
|
|
Three months
|
|
Nine months
|
|
|
|
Note
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
(Revised)
|
|
|
|
(Revised)
|
|
Net income (loss)
|
|
|
|
$
|
(315.1
|
)
|
$
|
18.9
|
|
$
|
(374.3
|
)
|
$
|
16.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income, net of income tax:
|
|
14, 15
|
|
|
|
|
|
|
|
|
|
Unrealized
(loss) gain on foreign currency translation adjustment
|
|
12
|
|
(42.4
|
)
|
3.1
|
|
(90.4
|
)
|
(11.6
|
)
|
Portion
of foreign currency translation adjustment recognized in income as a result
of a reduction in self-sustaining foreign operations
|
|
|
|
|
|
|
|
|
|
2.5
|
|
Unrealized
net gain on derivative financial instruments related to cash flow hedges
|
|
|
|
2.9
|
|
|
|
9.8
|
|
|
|
Reclassification
of realized net loss on derivative financial instruments to the statements of
income
|
|
|
|
0.9
|
|
|
|
3.9
|
|
|
|
Comprehensive income (loss)
|
|
|
|
$
|
(353.7
|
)
|
$
|
22.0
|
|
$
|
(451.0
|
)
|
$
|
7.8
|
|
See accompanying Notes to
Consolidated Financial Statements.
CONSOLIDATED
STATEMENTS OF RETAINED EARNINGS
Periods ended September 30,
(In millions of US dollars)
(Unaudited)
|
|
|
|
Three months
|
|
Nine months
|
|
|
|
Note
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
beginning of period, as previously reported:
|
|
|
|
$
|
340.8
|
|
$
|
428.4
|
|
$
|
398.3
|
|
$
|
475.6
|
|
Cumulative
effect of change in 2006 accounting policy
|
|
|
|
|
|
|
|
|
|
|
|
-
Evaluation of misstatement policy
|
|
|
|
|
|
(31.8
|
)
|
|
|
(31.8
|
)
|
Cumulative
effect of change in accounting policy
|
|
|
|
|
|
|
|
|
|
|
|
-
Financial instruments
|
|
2
|
|
|
|
|
|
(2.2
|
)
|
|
|
Balance,
beginning of period, revised
|
|
|
|
$
|
340.8
|
|
$
|
396.6
|
|
$
|
396.1
|
|
$
|
443.8
|
|
Net
income (loss)
|
|
|
|
(315.1
|
)
|
18.9
|
|
(374.3
|
)
|
16.9
|
|
Redemption
of convertible notes
|
|
10
|
|
|
|
|
|
15.9
|
|
|
|
Dividends:
|
|
|
|
|
|
|
|
|
|
|
|
Equity
shares
|
|
|
|
|
|
(13.3
|
)
|
|
|
(39.8
|
|
Preferred
shares
|
|
12
|
|
(4.7
|
)
|
(7.7
|
)
|
(16.7
|
)
|
(26.4
|
)
|
Balance, end of period
|
|
|
|
$
|
21.0
|
|
$
|
394.5
|
|
$
|
21.0
|
|
$
|
394.5
|
|
See
accompanying Notes to Consolidated Financial Statements.
3
CONSOLIDATED
STATEMENTS OF CASH FLOWS
Periods ended September 30,
(In millions of US dollars)
(Unaudited)
|
|
|
|
Three months
|
|
Nine months
|
|
|
|
Note
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
|
|
$
|
(315.1
|
)
|
$
|
18.9
|
|
$
|
(374.3
|
)
|
$
|
16.9
|
|
Adjustments
for:
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
of property, plant and equipment
|
|
|
|
77.2
|
|
76.3
|
|
226.9
|
|
223.2
|
|
Impairment
of assets and non-cash portion of
restructuring and
other charges
|
|
3
|
|
128.0
|
|
|
|
160.6
|
|
9.8
|
|
Goodwill
impairment charge
|
|
8
|
|
166.0
|
|
|
|
166.0
|
|
|
|
Future
income taxes
|
|
|
|
(57.0
|
)
|
(9.5
|
)
|
(96.1
|
)
|
(11.6
|
)
|
Amortization
of other assets
|
|
|
|
5.2
|
|
7.0
|
|
16.4
|
|
19.2
|
|
Loss on
business disposals
|
|
6
|
|
1.7
|
|
|
|
12.7
|
|
3.8
|
|
Prepayment
premium on the early redemption of debts
|
|
9
|
|
53.1
|
|
|
|
53.1
|
|
|
|
Other
|
|
|
|
(1.9
|
)
|
3.5
|
|
(7.0
|
)
|
8.7
|
|
Net
changes in non-cash balances related to operations:
|
|
|
|
|
|
|
|
|
|
|
|
Trade
receivables
|
|
|
|
(66.7
|
)
|
(66.8
|
)
|
(10.1
|
)
|
(67.6
|
)
|
Inventories
|
|
|
|
(42.8
|
)
|
(52.0
|
)
|
(24.4
|
)
|
(53.1
|
)
|
Trade
payables and accrued liabilities
|
|
|
|
(12.7
|
)
|
93.0
|
|
39.2
|
|
195.0
|
|
Other
current assets and liabilities
|
|
|
|
23.3
|
|
10.7
|
|
10.5
|
|
(57.8
|
)
|
Other
non-current assets and liabilities
|
|
|
|
(0.1
|
)
|
(29.9
|
)
|
(40.0
|
)
|
(80.7
|
)
|
|
|
|
|
(99.0
|
)
|
(45.0
|
)
|
(24.8
|
)
|
(64.2
|
)
|
Cash
flows provided by (used in) operating activities
|
|
|
|
(41.8
|
)
|
51.2
|
|
133.5
|
|
205.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of long-term debt, net of issuance costs
|
|
|
|
|
|
(0.6
|
)
|
43.0
|
|
540.4
|
|
Repayments
of long-term debt
|
|
|
|
(10.1
|
)
|
(2.5
|
)
|
(12.3
|
)
|
(257.3
|
)
|
Redemption
of convertible notes
|
|
10
|
|
|
|
|
|
(119.5
|
)
|
|
|
Net
borrowings (repayments) under revolving bank facility
|
|
|
|
110.8
|
|
62.9
|
|
166.4
|
|
(25.2
|
)
|
Net
proceeds from issuance of equity shares
|
|
|
|
1.4
|
|
1.6
|
|
4.3
|
|
5.5
|
|
Redemption
of preferred shares
|
|
|
|
|
|
|
|
|
|
(175.9
|
)
|
Dividends
on equity shares
|
|
|
|
|
|
(13.3
|
)
|
|
|
(39.8
|
)
|
Dividends
on preferred shares
|
|
12
|
|
(5.9
|
)
|
(9.7
|
)
|
(17.6
|
)
|
(33.6
|
)
|
Cash
flows provided by financing activities
|
|
|
|
96.2
|
|
38.4
|
|
64.3
|
|
14.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
Business
acquisitions, net of cash and cash equivalents
|
|
|
|
|
|
|
|
(3.5
|
)
|
(0.1
|
)
|
Proceeds
from business disposals, net of cash and
cash equivalents
|
|
|
|
|
|
0.4
|
|
|
|
28.4
|
|
Additions
to property, plant and equipment
|
|
|
|
(62.5
|
)
|
(82.6
|
)
|
(197.2
|
)
|
(219.0
|
)
|
Net
proceeds from disposal of assets
|
|
|
|
28.5
|
|
0.2
|
|
69.0
|
|
9.2
|
|
Restricted
cash
|
|
|
|
(0.5
|
)
|
(5.0
|
)
|
(6.8
|
)
|
(15.0
|
)
|
Cash
flows used in investing activities
|
|
|
|
(34.5
|
)
|
(87.0
|
)
|
(138.5
|
)
|
(196.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect on
foreign currency
|
|
|
|
(18.9
|
)
|
(3.6
|
)
|
(41.7
|
)
|
(16.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
changes in cash and cash equivalents
|
|
|
|
1.0
|
|
(1.0
|
)
|
17.6
|
|
6.7
|
|
Cash and
cash equivalents, beginning of period
|
|
|
|
34.4
|
|
26.0
|
|
17.8
|
|
18.3
|
|
Cash and
cash equivalents, end of period
|
|
|
|
$
|
35.4
|
|
$
|
25.0
|
|
$
|
35.4
|
|
$
|
25.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
|
|
$
|
63.8
|
|
$
|
48.8
|
|
$
|
129.6
|
|
$
|
104.6
|
|
Dividends
paid on preferred shares classified as liability
|
|
12
|
|
3.0
|
|
|
|
5.7
|
|
|
|
Income
tax paid (net of refund)
|
|
|
|
(12.2
|
)
|
6.3
|
|
1.2
|
|
54.3
|
|
See
accompanying Notes to Consolidated Financial Statements.
4
CONSOLIDATED
BALANCE SHEETS
(In millions of US dollars)
(Unaudited)
|
|
|
|
September 30,
|
|
December 31,
|
|
|
|
Note
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
(Revised,
|
|
|
|
|
|
|
|
Note 12)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash and
cash equivalents
|
|
|
|
$
|
35.4
|
|
$
|
17.8
|
|
Trade
receivables
|
|
|
|
470.6
|
|
445.6
|
|
Receivables
from related parties
|
|
|
|
20.8
|
|
20.3
|
|
Inventories
|
|
|
|
390.5
|
|
356.7
|
|
Income
taxes receivable
|
|
|
|
7.6
|
|
35.2
|
|
Future
income taxes
|
|
|
|
46.6
|
|
40.6
|
|
Prepaid
expenses
|
|
|
|
25.1
|
|
23.2
|
|
Total
current assets
|
|
|
|
996.6
|
|
939.4
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment
|
|
7
|
|
2,096.6
|
|
2,287.4
|
|
Goodwill
|
|
8
|
|
2,175.2
|
|
2,324.3
|
|
Restricted
cash
|
|
|
|
54.9
|
|
48.1
|
|
Other
assets
|
|
|
|
231.6
|
|
224.2
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
|
|
$
|
5,554.9
|
|
$
|
5,823.4
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Trade
payables and accrued liabilities
|
|
|
|
$
|
991.7
|
|
$
|
942.4
|
|
Payables
to related parties
|
|
|
|
3.6
|
|
1.5
|
|
Income
and other taxes payable
|
|
|
|
25.9
|
|
39.7
|
|
Future
income taxes
|
|
|
|
1.1
|
|
1.1
|
|
Current
portion of long-term debt
|
|
9
|
|
47.4
|
|
30.7
|
|
Total
current liabilities
|
|
|
|
1,069.7
|
|
1,015.4
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
9
|
|
2,237.2
|
|
1,984.0
|
|
Other
liabilities
|
|
|
|
358.1
|
|
283.5
|
|
Future
income taxes
|
|
|
|
299.8
|
|
389.1
|
|
Convertible
notes
|
|
10
|
|
|
|
117.7
|
|
Preferred
shares
|
|
12
|
|
175.9
|
|
150.2
|
|
Minority
interest
|
|
|
|
|
|
1.3
|
|
|
|
|
|
|
|
|
|
Shareholders
equity:
|
|
|
|
|
|
|
|
Capital
stock
|
|
12
|
|
1,456.7
|
|
1,452.4
|
|
Contributed
surplus
|
|
10
|
|
101.5
|
|
114.1
|
|
Retained
earnings
|
|
|
|
21.0
|
|
398.3
|
|
Accumulated
other comprehensive income (loss)
|
|
14
|
|
(165.0
|
)
|
(82.6
|
)
|
|
|
|
|
1,414.2
|
|
1,882.2
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
|
|
$
|
5,554.9
|
|
$
|
5,823.4
|
|
See
accompanying Notes to Consolidated Financial Statements.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Periods ended September 30, 2007 and
2006
(Tabular amounts are expressed in millions of
US dollars, except per share and option amounts)
(Unaudited)
1.
Basis of Presentation
The
consolidated financial statements included in this report are unaudited and
reflect normal and recurring adjustments which are, in the opinion of the
Company, considered necessary for a fair presentation. These consolidated
financial statements have been prepared in conformity with Canadian generally
accepted accounting principles (Canadian GAAP). The same accounting policies
as described in the Companys latest Annual Report have been used, except
changes described in Note 2. However, these consolidated financial statements
do not include all disclosures required under Canadian GAAP and, accordingly,
should be read in conjunction with the consolidated financial statements and
the notes thereto included in the Companys latest Annual Report.
Seasonality
The
operations of the Companys business are seasonal, with the majority of
historical operating income recognized in the second half of the fiscal year,
primarily as a result of the higher number of magazine pages, new product
launches and back-to-school, retail and holiday catalog promotions. Within any
year, the seasonality could adversely affect the Companys cash flow and
results of operations on a quarterly basis.
Comparative figures
Certain comparative figures have been reclassified
to conform to the presentation of the current period.
2.
Change in Accounting Policies Financial
Instruments
Effective January 1, 2007,
the Company adopted the Canadian Institute of Chartered Accountants (CICA)
Handbook Section 1530, Comprehensive Income, Section 3855, Financial
Instruments Recognition and Measurement and Section 3865, Hedges.
Changes in accounting policies in conformity with these new accounting
standards are as follows:
(a)
Comprehensive income
Section 1530 introduces
the concept of comprehensive income, which is calculated by including other
comprehensive income with net income. Other comprehensive income represents
changes in shareholders equity arising from transactions and other events with
non-owner sources such as unrealized gains and losses on financial assets
classified as available-for-sale, changes in translation adjustment of
self-sustaining foreign operations and changes in the fair value of the
effective portion of cash flow hedging instruments. With the adoption of this
section, the consolidated financial statements now include consolidated
statements of comprehensive income. The comparative statements were restated
solely to include the translation adjustment of self-sustaining foreign
operations as provided by transition rules.
(b)
Financial instruments
Section 3855 establishes
standards for recognizing and measuring financial assets, financial liabilities
and derivatives. Under this standard, financial instruments are now classified
as held-for-trading, available-for-sale, held-to-maturity, loans and
receivables, or other financial liabilities and measurement in subsequent
periods depends on their classification. Transaction costs are expensed as
incurred for financial instruments classified as held-for-trading. For other
financial instruments, transaction costs are capitalized on initial recognition
and presented as a reduction of the underlying financial instruments. Financial
assets and financial liabilities held-for-trading are measured at fair value
with changes recognized in income. Available-for-sale financial assets are
measured at fair value or at cost, in the case of financial assets that do not
have a quoted market price in an active market, and changes in fair value are
recorded in comprehensive income.
Financial assets
held-to-maturity, loans and receivables, and other financial liabilities are
measured at amortized cost using the effective interest method of amortization.
The Company has classified its restricted and unrestricted cash and cash
equivalents and temporary investments as held for trading. Trade receivables,
receivables from related parties, loans and other long-term receivables included
in other assets were classified as loans and receivable. Portfolio investments
were classified as available for sale. All of the Companys financial
liabilities were classified as other financial liabilities.
6
2.
Change in Accounting Policies Financial Instruments (contd)
(b)
Financial instruments (contd)
Derivative instruments are
recorded as financial assets or liabilities at fair value, including those
derivatives that are embedded in financial or non-financial contracts that are
not closely related to the host contracts. Changes in the fair values of
derivatives are recognized in financial expenses with the exception of
derivatives designated in a cash flow hedge for which hedge accounting is used.
In accordance with the new standards, the Company selected January 1, 2003
as its transition date for adopting this standard related to embedded
derivatives.
(c)
Hedges
Section 3865 specifies the
criteria that must be satisfied in order for hedge accounting to be applied and
the accounting for each of the permitted hedging strategies.
Accordingly, for derivatives
designated as fair value hedges, such as certain cross currency interest rate
swaps used by the Company, changes in the fair value of the hedging derivative
recorded in income are substantially offset by changes in the fair value of the
hedged item to the extent that the hedging relationship is effective. When a
fair value hedge is discontinued, the carrying value of the hedged item is no
longer adjusted and the cumulative fair value adjustments to the carrying value
of the hedged item are amortized to income over the remaining term of the
original hedging relationship.
For derivative instruments
designated as cash flow hedges, such as certain commodity swaps and forward
exchange contracts used by the Company, the effective portion of a hedge is
reported in other comprehensive income until it is recognized in income during
the same period in which the hedged item affects income, while the ineffective
portion is immediately recognized in the consolidated statement of income. When
a cash flow hedge is discontinued, the amounts previously recognized in
accumulated other comprehensive income are reclassified to income when the
variability in the cash flows of the hedged item affects income.
Upon adoption of these new
sections, the transition rules require that the Company adjust either the
opening retained earnings or accumulated other comprehensive income as if the
new rules had always been applied in the past, without restating
comparative figures of prior years. Accordingly, the following adjustments were
recorded in the consolidated financial statements as at January 1, 2007:
Decrease of other assets by $24.3 million
Decrease in trade payable and accrued liabilities by $0.6 million
Increase of other liabilities by $18.9 million
Decrease of long-term debt by $27.6 million
Decrease of future income tax liabilities by $7.1 million
Decrease of retained earnings by $2.2 million
Decrease of accumulated other comprehensive income by $5.7 million
Finally,
the adoption of the new standards had no material impact on net income in 2007.
7
3.
Impairment of Assets, Restructuring and
Other Charges
The
following table details the charge for impairment of assets, restructuring and
other charges and pension settlements:
|
|
|
|
Three months ended
|
|
Nine months ended
|
|
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
Note
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment
of assets
|
|
|
|
$
|
128.0
|
|
$
|
|
|
$
|
155.8
|
|
$
|
7.9
|
|
Restructuring
and other charges
|
|
|
|
4.7
|
|
11.6
|
|
37.6
|
|
55.3
|
|
Pension
settlements
|
|
13
|
|
|
|
|
|
4.8
|
|
1.9
|
|
|
|
|
|
$
|
132.7
|
|
$
|
11.6
|
|
$
|
198.2
|
|
$
|
65.1
|
|
(a)
Impairment of assets
I
n the third quarter
of 2007, the Company concluded that some long-lived assets were impaired and
recorded an impairment charge on long-lived assets, in facilities in North
America and Europe, of $128.0 million mainly on machinery and equipment. This charge was a result of impairment tests being triggered in
North America, following the installation of new state-of-the-art technology
and the relocation of existing presses into fewer, but larger and more
efficient facilities. In Europe, the impairment test was triggered by the sale
and merger of the European operations. For the nine-month
period ended September 30, 2007, the Company recorded impairment charges related
to long-lived assets in North America and in Europe totaling $155.8 million mainly
on machinery and equipment.
(b)
Restructuring and
other charges
The following table details the Companys
restructuring and other charges and the change in the reserve for restructuring
and other charges:
|
|
Nine months ended September 30, 2007
|
|
|
|
|
|
Prior Year
|
|
|
|
|
|
2007 Initiatives
|
|
Initiatives
|
|
Total
|
|
Expenses
|
|
|
|
|
|
|
|
Workforce
reduction
|
|
$
|
13.6
|
|
$
|
6.2
|
|
$
|
19.8
|
|
Leases
and carrying costs for closed facilities
|
|
8.0
|
|
13.3
|
|
21.3
|
|
|
|
21.6
|
|
19.5
|
|
41.1
|
|
Underspending
|
|
|
|
|
|
|
|
Workforce
reduction
|
|
|
|
(3.3
|
)
|
(3.3
|
)
|
Leases
and carrying costs for closed facilities
|
|
|
|
(0.2
|
)
|
(0.2
|
)
|
|
|
|
|
(3.5
|
)
|
(3.5
|
)
|
Payments
|
|
|
|
|
|
|
|
Workforce
reduction
|
|
(10.5
|
)
|
(29.1
|
)
|
(39.6
|
)
|
Leases
and carrying costs for closed facilities
|
|
(8.0
|
)
|
(16.4
|
)
|
(24.4
|
)
|
|
|
(18.5
|
)
|
(45.5
|
)
|
(64.0
|
)
|
Net change
|
|
3.1
|
|
(29.5
|
)
|
(26.4
|
)
|
Foreign
currency changes
|
|
|
|
1.4
|
|
1.4
|
|
Balance,
beginning of period
|
|
|
|
46.9
|
|
46.9
|
|
Balance, end of period
|
|
$
|
3.1
|
|
$
|
18.8
|
|
$
|
21.9
|
|
2007
restructuring initiatives
During the third quarter of 2007, there were
no new restructuring initiatives. The restructuring charge incurred in the
third quarter was related to previous 2007 quarter initiatives. In the second
quarter of 2007, there was a restructuring initiative in North America related
to the closure of the Vancouver, BC facility (Canada). In addition, in the
first quarter of 2007, there were restructuring initiatives in North America
related to the closure of the Lincoln, NE facility (Magazine group) and the
Phoenix, AZ facility (Retail group). There were also various headcount
reductions across North America and Europe. These initiatives are expected to
be completed by the end of 2007 with a total cost of $28.4 million of which
$14.1 million is for workforce reduction and $14.3 million for lease and closed
facilities.
8
4.
Financial Expenses
|
|
|
|
Three months ended
|
|
Nine months ended
|
|
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
Note
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Interest
on long-term debt and convertible notes
|
|
|
|
$
|
40.7
|
|
$
|
39.4
|
|
$
|
127.0
|
|
$
|
110.9
|
|
Prepayment
premium on the early redemption of debts
|
|
9
|
|
53.1
|
|
|
|
53.1
|
|
|
|
Bank and
other charges
|
|
|
|
3.0
|
|
1.8
|
|
8.1
|
|
3.0
|
|
Amortization
of deferred financing costs
|
|
|
|
0.9
|
|
0.7
|
|
3.0
|
|
2.1
|
|
Net (gain)
loss on foreign exchange and derivative
financial instruments (a) (b)
|
|
|
|
9.7
|
|
(3.7
|
)
|
(4.4
|
)
|
(11.0
|
)
|
Exchange
loss from reductions of net investments
in self-sustaining foreign operations
|
|
|
|
|
|
|
|
|
|
2.5
|
|
|
|
|
|
107.4
|
|
38.2
|
|
186.8
|
|
107.5
|
|
Interest
capitalized to the cost of fixed assets
|
|
|
|
(0.9
|
)
|
(4.5
|
)
|
(4.5
|
)
|
(12.7
|
)
|
|
|
|
|
$
|
106.5
|
|
$
|
33.7
|
|
$
|
182.3
|
|
$
|
94.8
|
|
(a)
During the
three-month period ended September 30, 2007, the Company recorded a net
loss of $70.4 million on embedded derivatives not closely related to their host
contracts and derivative financial instruments for which hedge accounting was
not used (a net gain of $10.0 million in 2006). During the first nine months of
the year 2007, the Company recorded a net loss of $104.6 million on embedded derivatives not closely related to
their host contracts and derivative financial instruments for which
hedge accounting was not used ($19.0 million in 2006).
(b)
During
the three-month period ended September 30, 2007, the Company recorded a
net loss of $3.3 million for the ineffective portion of fair value hedges and a
net loss of $1.5 million during the nine-month period ended September 30,
2007.
5.
Earnings (Loss) per Share
The
following table sets forth the computation of basic and diluted earnings (loss)
per share from continuing operations:
|
|
Three months ended
|
|
Nine months ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Net
income (loss) from continuing operations
|
|
$
|
(315.1
|
)
|
$
|
19.2
|
|
$
|
(374.3
|
)
|
$
|
19.0
|
|
|
|
|
|
|
|
|
|
|
|
Net income
allocated to holders of preferred shares
|
|
4.7
|
|
7.7
|
|
16.7
|
|
26.4
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) from continuing operations allocated to holders of equity
shares
|
|
$
|
(319.8
|
)
|
$
|
11.5
|
|
$
|
(391.0
|
)
|
$
|
(7.4
|
)
|
|
|
|
|
|
|
|
|
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
number of diluted equity shares outstanding
|
|
132.0
|
|
131.5
|
|
131.9
|
|
131.3
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per share:
|
|
|
|
|
|
|
|
|
|
Basic and
diluted
|
|
$
|
(2.42
|
)
|
$
|
0.09
|
|
$
|
(2.96
|
)
|
$
|
(0.06
|
)
|
For the purpose
of calculating diluted earnings (loss) per share, the effects of the
convertible notes (redeemed in June 2007) and the effects of all stock
options were excluded, since their inclusion was anti-dilutive, for both 2007
and 2006.
9
6.
Business Disposals
In July and
March 2007, the Company sold its investments in two facilities of its
French operations for nominal cash consideration, in both cases resulting in a
net loss on disposal of $1.7 million and $11.0 million, respectively.
7.
Property, Plant and Equipment
In September 2007, the Company concluded
an agreement for the sale and leaseback of machinery and equipment in a facility
in North America. The transaction is considered to be a sale of assets with
proceeds of $14.5 million and the disposal generated a loss of $0.5 million
which has been recorded in selling, general and administrative expenses. The
subsequent transaction consists of operating leases over lease terms of 7
years.
In March 2007,
the Company concluded an agreement for the sale and leaseback of land and
buildings of facilities in North America. The transaction is considered to be a
sale of assets with proceeds of $34.2 million. The subsequent transaction
consists of operating leases over lease terms of 15 years. The disposal of
these assets generated a gain of $13.6 million which was deferred and will be
amortized over the lease terms.
8.
Goodwill
|
|
North
|
|
|
|
Latin
|
|
|
|
|
|
America
|
|
Europe
|
|
America
|
|
Total
|
|
Balance,
beginning of year
|
|
$
|
2,156.3
|
|
$
|
159.4
|
|
$
|
8.6
|
|
$
|
2,324.3
|
|
Goodwill
acquired during the period
|
|
3.9
|
|
|
|
0.5
|
|
4.4
|
|
Goodwill
impairment charge
|
|
|
|
(166.0
|
)
|
|
|
(166.0
|
)
|
Foreign
currency changes
|
|
5.4
|
|
6.6
|
|
0.5
|
|
12.5
|
|
Balance, end of period
|
|
$
|
2,165.6
|
|
$
|
|
|
$
|
9.6
|
|
$
|
2,175.2
|
|
The Company completed its annual goodwill impairment testing in the
third quarter of 2007. Taking into account
financial information such as the sale and merger of the European
operations (Note 18), management determined that the carrying value of goodwill
for its European reporting unit was not recoverable and that the resulting
impairment of such goodwill amounted to its entire carrying value of $166.0
million at September 30, 2007. The Company also concluded that the
goodwill for its North America and Latin America segments was fully recoverable
and will continue to monitor these segments for indicators of potential
impairment.
10
9.
Long-term Debt
The following table summarizes changes in
long-term debt:
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
|
|
Note
|
|
Maturity
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Revolving
bank facility and other short-term lines (a)
|
|
|
|
2009
|
|
$
|
277.1
|
|
$
|
97.1
|
|
Senior
Notes 4.875% and 6.125%
|
|
|
|
2008,
2013
|
|
598.1
|
|
597.9
|
|
Senior
Notes 8.42% and 8.52% (b)
|
|
|
|
2010, 2012
|
|
260.0
|
|
231.5
|
|
Senior
Notes 9.75%
|
|
|
|
2015
|
|
400.0
|
|
400.0
|
|
Equipment
financing credit facility (c)
|
|
|
|
2015
|
|
156.9
|
|
101.3
|
|
Senior
Notes 8.54% and 8.69% (b)
|
|
|
|
2015,
2020
|
|
109.6
|
|
85.0
|
|
Senior
Notes 8.75%
|
|
|
|
2016
|
|
450.0
|
|
450.0
|
|
Senior Debentures
6.50%
|
|
|
|
2027
|
|
3.2
|
|
3.2
|
|
Other
debts and capital leases
|
|
|
|
2007-2016
|
|
47.7
|
|
48.7
|
|
|
|
|
|
|
|
2,302.6
|
|
2,014.7
|
|
Change in
fair value of debts for hedged interest rate risk
|
|
2
|
|
|
|
1.4
|
|
|
|
Adjustment
related to embedded derivatives
|
|
2
|
|
|
|
6.9
|
|
|
|
Financing
fees, net of amortization
|
|
2
|
|
|
|
(26.3
|
)
|
|
|
|
|
|
|
|
|
2,284.6
|
|
2,014.7
|
|
Less
current maturities
|
|
|
|
|
|
47.4
|
|
30.7
|
|
|
|
|
|
|
|
$
|
2,237.2
|
|
$
|
1,984.0
|
|
(a)
In September 2007,
the Company finalized new terms for its syndicated Revolving bank facility. As part of
the new agreement, the Company has agreed to reduce its facility from $1
billion to $750.0 million in October 2007, of which a portion will be
secured by a lien on assets in an amount of $135.6 million. The amendment also
includes a commitment to reduce the facility to $500.0 million by July 1,
2008 and includes certain restrictions on the use of proceeds, terms of
repayment and certain restrictive covenants, including the obligation to
maintain certain financial ratios.
The Revolving bank facility
bears interest at variable rates base on Bankers Acceptances, LIBOR or prime
rates. At September 30, 2007, $173.1 million was drawn on the facility.
(b)
In September 2007,
the Company announced that it will call for redemption all of its outstanding
Senior Notes (8.42%, 8.52%, 8.54% and 8.69%) on October 29, 2007 for a
redemption price of 100% of the outstanding principal amount of the Notes, plus
the accrued and unpaid interest on the Notes to the redemption date plus the
applicable prepayment premium amount of $53.1 million due on the redemption
date. The Notes were classified as long-term debt, since the Company intends to
draw on its syndicated Revolving bank credit facility for the financing of this
transaction.
(c)
In October 2007,
the credit facility will be secured by a lien on assets in an amount of $34.4
million.
Principal
repayments on long-term debt are as follows:
Remainder
of 2007
|
|
$
|
23.6
|
|
2008
|
|
225.7
|
|
2009
|
|
674.5
|
|
2010
|
|
21.0
|
|
2011
|
|
21.9
|
|
2012 and
thereafter
|
|
1,335.9
|
|
11
10.
Convertible Notes
|
|
September 30, 2007
|
|
December 31, 2006
|
|
Convertible
senior subordinated notes 6.00%
|
|
$
|
|
|
$
|
117.7
|
|
|
|
|
|
|
|
|
|
In June 2007,
the Company redeemed all of its outstanding 6.00% Convertible senior
subordinated notes
(the Convertible Notes) due on October 1, 2007 for a redemption price of
100.6% of the outstanding principal amount of $119.5 million, plus accrued and
unpaid interest at the redemption date. The additional amount paid on redemption
of the Convertible Notes was a premium of $0.7 million recorded as financing
expenses. A
loss of $0.6 million relating to the debt
component was recorded as financing expenses and a gain of $15.9 million
relating to the equity component was transferred from contributed surplus to
retained earnings, both due to the difference between the net book value and
the fair value of the components.
11.
Stock-Based Compensation
The following table summarizes information
about stock options:
|
|
September 30, 2007
|
|
December 31, 2006
|
|
Number of
stock options at the end of the period (in thousands):
|
|
|
|
|
|
Outstanding
|
|
7,737.8
|
|
7,772.3
|
|
Exercisable
|
|
4,008.1
|
|
3,041.2
|
|
The
total stock-based compensation expense recorded in the first nine months of 2007
was $2.9 million ($3.1 million for the same period in 2006).
12.
Capital Stock
|
|
September 30, 2007
|
|
December 31, 2006
|
|
(Thousands of shares)
|
|
Number
|
|
Amount
|
|
Number
|
|
Amount
|
|
|
|
|
|
|
|
|
|
(Revised)
|
|
|
|
|
|
|
|
|
|
|
|
Multiple
Voting Shares
|
|
46,987
|
|
$
|
93.5
|
|
46,987
|
|
$
|
93.5
|
|
Subordinate
Voting Shares
|
|
85,079
|
|
1,150.7
|
|
84,722
|
|
1,146.4
|
|
Redeemable
First Preferred Shares - Series 3 - Classified as Shareholders equity
|
|
12,000
|
|
212.5
|
|
12,000
|
|
212.5
|
|
Total
capital stock
|
|
|
|
$
|
1,456.7
|
|
|
|
$
|
1,452.4
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable
First Preferred Shares - Series 5 - Classified as liability
|
|
7,000
|
|
$
|
175.9
|
|
7,000
|
|
$
|
150.2
|
|
During the first nine months of
2007, 22,500 Subordinate Voting Shares were issued under the Companys stock
option plan (none in 2006), and 334,657 Subordinate Voting Shares were issued
under the Companys Canadian and US Employee Stock Purchase Plans (506,365 in
the first nine months of 2006) for a total cash consideration of $4.3 million ($5.5 million
in the first nine months of 2006).
During the second quarter of
2007, the Company reclassified the Series 5 Cumulative Redeemable First
Preferred Shares in the amount of $150.2 million as at December 31, 2006
from Capital stock ($113.9 million) and Accumulated other comprehensive income
($36.3 million) to preferred shares classified as liability in the balance
sheet, to conform with accounting standards related to such financial
instruments (CICA Handbook section 3861). Dividends on these shares are
now presented in the consolidated statement of income as dividends on preferred
shares classified as liability.
12
13.
Pension and Other Postretirement
Benefits
The following table presents the Companys
pension and other postretirement benefit costs:
|
|
Three months ended
|
|
Nine months ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Pension
benefits
|
|
$
|
15.4
|
|
$
|
22.1
|
|
$
|
51.6
|
|
$
|
60.4
|
|
Postretirement
benefits
|
|
0.3
|
|
0.8
|
|
1.7
|
|
2.4
|
|
Total
benefit cost
|
|
$
|
15.7
|
|
$
|
22.9
|
|
$
|
53.3
|
|
$
|
62.8
|
|
The
2007 pension benefit costs included a total settlement loss of $4.8 million ($1.9
million in 2006), as described in Note 3.
In 2006, the Company modified its defined
benefit plans for certain employees in Canada and in the United States, and created
a defined contribution Group Registered Retirement Savings Plan (Group RRSP)
for employees in Canada. As of October 1, 2006, affected employees in
Canada had the choice to adhere to the Group RRSP, or to continue to
participate in the modified plan, while future employees automatically adhere
to the new Group RRSP. For employees in the United States, one of the defined
benefit plans was frozen on October 1, 2006, and an improved defined
contribution plan has been offered to employees. A net curtailment gain of $1.7
million was recorded in relation with these changes for the first nine months
of 2006.
14.
Accumulated Other Comprehensive Income
The following
table presents changes in the carrying amount of accumulated other
comprehensive income:
|
|
|
|
Translation
|
|
Cash flow
|
|
|
|
|
|
Note
|
|
adjustment
|
|
hedges
|
|
Total
|
|
|
|
|
|
(Revised,
|
|
|
|
|
|
|
|
|
|
Note 12)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31,
2005
|
|
|
|
$
|
(102.6
|
)
|
$
|
|
|
$
|
(102.6
|
)
|
Other
comprehensive income (loss), net of income taxes
|
|
|
|
(9.1
|
)
|
|
|
(9.1
|
)
|
Balance, September 30,
2006
|
|
|
|
(111.7
|
)
|
|
|
(111.7
|
)
|
Other
comprehensive income, net of income taxes
|
|
|
|
29.1
|
|
|
|
29.1
|
|
Balance, December 31,
2006
|
|
|
|
(82.6
|
)
|
|
|
(82.6
|
)
|
Change in
accounting policy - Financial Instruments, net of income taxes
|
|
2
|
|
|
|
(5.7
|
)
|
(5.7
|
)
|
Other
comprehensive income (loss), net of income taxes
|
|
|
|
(7.4
|
)
|
6.2
|
|
(1.2
|
)
|
Balance, March 31,
2007
|
|
|
|
(90.0
|
)
|
0.5
|
|
(89.5
|
)
|
Other
comprehensive income (loss), net of income taxes
|
|
|
|
(40.6
|
)
|
3.7
|
|
(36.9
|
)
|
Balance, June 30,
2007
|
|
|
|
(130.6
|
)
|
4.2
|
|
(126.4
|
)
|
Other
comprehensive income (loss), net of income taxes
|
|
|
|
(42.4
|
)
|
3.8
|
|
(38.6
|
)
|
Balance, September 30, 2007
|
|
|
|
$
|
(173.0
|
)
|
$
|
8.0
|
|
$
|
(165.0
|
)
|
Over
the next twelve months, the Company expects an estimated $1.6 million (net of
income tax of $0.4 million) in net gains in other comprehensive income as at September 30,
2007 to be reclassified to net income. The maximum length of time over which
the Company is hedging its exposure to the variability in future cash flows for
anticipated transactions is 36 months. During the nine-month period ended September 30,
2007, there were no forecasted transactions that failed to occur.
13
15.
Income Tax Components of Other
Comprehensive Income
The following table presents the income taxes
on components of Other Comprehensive Income:
|
|
Three months ended
|
|
Nine months ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Unrealized
(loss) gain on foreign currency translation adjustment
|
|
$
|
4.8
|
|
$
|
0.1
|
|
$
|
(2.2
|
)
|
$
|
(1.6
|
)
|
Unrealized
net gain on derivative financial instruments related to cash flow hedges
|
|
(0.5
|
)
|
|
|
(4.0
|
)
|
|
|
Reclassification
of realized net loss on derivative financial instruments to the statement of
income
|
|
(0.6
|
)
|
|
|
(2.7
|
)
|
|
|
|
|
$
|
3.7
|
|
$
|
0.1
|
|
$
|
(8.9
|
)
|
$
|
(1.6
|
)
|
16.
Related Party Transactions
During
the second quarter of 2007, a real estate property was sold to a shareholder of
the parent company at fair value of $1.3 million, established based on an
independent estimate, resulting in a gain on disposal of $1.0 million included in
selling, general and administrative expenses.
14
17.
Segmented Information
The
Company operates in the printing industry. Its business groups are located in
three main segments: North America, Europe and Latin America. These segments
are managed separately, since they all require specific market strategies. The
Company assesses the performance of each segment based on operating income
before impairment of assets, restructuring and other charges and goodwill
impairment charge (Adjusted EBIT).
|
|
North
|
|
|
|
Latin
|
|
|
|
Inter-
|
|
|
|
|
|
America
|
|
Europe
|
|
America
|
|
Other
|
|
Segment
|
|
Total
|
|
Three
months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
1,098.4
|
|
$
|
242.5
|
|
$
|
75.0
|
|
$
|
0.4
|
|
$
|
(1.7
|
)
|
$
|
1,414.6
|
|
Impairment of assets
|
|
52.1
|
|
75.9
|
|
|
|
|
|
|
|
128.0
|
|
Restructuring and other charges
|
|
3.1
|
|
1.6
|
|
|
|
|
|
|
|
4.7
|
|
Goodwill impairment charge
|
|
|
|
166.0
|
|
|
|
|
|
|
|
166.0
|
|
Adjusted EBIT
|
|
58.6
|
|
(13.1
|
)
|
3.2
|
|
(5.5
|
)
|
|
|
43.2
|
|
Operating income (loss)
|
|
3.4
|
|
(256.6
|
)
|
3.2
|
|
(5.5
|
)
|
|
|
(255.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
1,241.1
|
|
$
|
244.1
|
|
$
|
61.2
|
|
$
|
0.2
|
|
$
|
(0.4
|
)
|
$
|
1,546.2
|
|
Impairment
of assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring
and other charges
|
|
3.3
|
|
7.7
|
|
0.6
|
|
|
|
|
|
11.6
|
|
Goodwill
impairment charge
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
EBIT
|
|
75.7
|
|
(6.0
|
)
|
3.4
|
|
(5.8
|
)
|
|
|
67.3
|
|
Operating
income (loss)
|
|
72.4
|
|
(13.7
|
)
|
2.8
|
|
(5.8
|
)
|
|
|
55.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
3,224.9
|
|
$
|
744.6
|
|
$
|
202.3
|
|
$
|
0.5
|
|
$
|
(4.2
|
)
|
$
|
4,168.1
|
|
Impairment of assets
|
|
71.7
|
|
84.1
|
|
|
|
|
|
|
|
155.8
|
|
Restructuring and other charges
|
|
30.0
|
|
12.3
|
|
0.1
|
|
|
|
|
|
42.4
|
|
Goodwill impairment charge
|
|
|
|
166.0
|
|
|
|
|
|
|
|
166.0
|
|
Adjusted EBIT
|
|
151.0
|
|
(52.9
|
)
|
7.5
|
|
(17.3
|
)
|
|
|
88.3
|
|
Operating income (loss)
|
|
49.3
|
|
(315.3
|
)
|
7.4
|
|
(17.3
|
)
|
|
|
(275.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
3,537.6
|
|
$
|
758.1
|
|
$
|
170.5
|
|
$
|
0.6
|
|
$
|
(0.9
|
)
|
$
|
4,465.9
|
|
Impairment
of assets
|
|
5.5
|
|
1.9
|
|
0.5
|
|
|
|
|
|
7.9
|
|
Restructuring
and other charges
|
|
23.9
|
|
32.6
|
|
0.7
|
|
|
|
|
|
57.2
|
|
Goodwill
impairment charge
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
EBIT
|
|
177.8
|
|
(8.6
|
)
|
6.8
|
|
(8.7
|
)
|
|
|
167.3
|
|
Operating
income (loss)
|
|
148.4
|
|
(43.1
|
)
|
5.6
|
|
(8.7
|
)
|
|
|
102.2
|
|
15
18.
Subsequent Events
Merger
of the European operations
On November 7, 2007, the Company announced a
sale and merger of its European operations with Roto Smeets De Boer NV
(RSDB). The new merged entity will be named Roto Smeets Quebecor (RSQ) and
will remain listed on Euronext Amsterdam. Under the terms of the merger
agreement RSDB will remit to QWI cash and shares valued at 240 million,
subject to certain post closing adjustments. The consideration for the Company
will be comprised of 1.4 million shares in RSDB whereby the Company will
acquire a 29.9% stake in the combined business and 150 million in cash. The
net cash proceeds of approximately 150 million will be used by the Company to
repay debt and to provide a 8-year note of 35 million to RSQ repayable from
2011 to 2015. The merger will create the largest independent European gravure
and offset printing company and is conditional on the approval of the
shareholders of RSDB and receipt of clearance from the European Commission,
with closing expected to take place by the end of 2007. This transaction could
result in an estimated loss on disposal of
$
70 million
before cumulative translation adjustment impact. Following this transaction,
the basis of accounting for the investment in RSQ will be the equity method.
Operations summary of European operations
|
|
For the nine-month period ended
|
|
|
|
September 30, 2007
|
|
|
|
|
|
Revenues
|
|
$
|
736.6
|
|
|
|
|
|
|
Net loss before income taxes
|
|
(343.5
|
)
|
|
|
|
|
Net loss
|
|
$
|
(330.8
|
)
|
Summary of assets and liabilities sold
|
|
September 30, 2007
|
|
|
|
|
|
Assets sold:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
11.2
|
|
Non-cash operating working capital
|
|
143.7
|
|
Property, plant and equipment
|
|
458.9
|
|
Other assets
|
|
10.4
|
|
|
|
|
|
Liabilities sold:
|
|
|
|
|
|
|
|
Other liabilities
|
|
26.8
|
|
Future income taxes
|
|
10.7
|
|
|
|
|
|
Net assets
|
|
$
|
586.7
|
|
Net assets sold (70.1%)
|
|
$
|
411.3
|
|
|
|
|
|
Proceeds:
|
|
|
|
Cash
|
|
$
|
213.3
|
|
Shares
|
|
78.2
|
|
Note receivable
|
|
49.8
|
|
|
|
$
|
341.3
|
|
|
|
|
|
|
|
16
18.
Subsequent Events (contd)
Trade receivables
Due to recent DBRS credit
rating downgrades, the Company obtained a waiver of certain covenants until October 15,
2007, at which point the Company commenced the amortization process set out in
the agreement governing the Canadian securitization program. By virtue of the
amortization process, the Company continues to service past receivables sold
under the program, but no additional receivables or related ownership interest
is sold to the Trust. On October 24, 2007, the Company amended its U.S.
program to include receivables generated by its Canadian operations (now a
North American program) and thus ended the Canadian program. In order to
conclude the revised arrangement, CA$23.6 million ($24.3 million) of
receivables which remained outstanding were repurchased under the Canadian
program. On October 24, 2007,
due to the
inclusion of the Canadian receivables, the
amount outstanding under the North American program has increased by $72.0
million. The amount outstanding under the
Canadian program was CA$47.0 million ($47.2 million) as at September 30,
2007.
In October 2007, the
Company signed an agreement to commence the amortization process of its
European securitization program. As of that date, the Company continues to
service past receivables sold under the program, but no additional receivables
or related ownership interest is sold to the Trust. The Company does not
anticipate that any amounts sold under the European program will remain
outstanding by the end of 2007 and management intends to replace the facility
with an alternate financing source.
Property sold to a company
under common control
On October 11, 2007, the Company sold a property to a company under common
control, Quebecor Media Inc., for
consideration of CA$62.5
million ($64.0 million). Simultaneously, the Company entered into a long-term
lease over a term of 17 years with
Quebecor Media Inc., to rent a portion of the property sold. Consideration for
the two transactions was settled by a cash receipt of CA$43.9 million ($44.9
million) on the date of the transactions and the Company assumed a net balance of
sale, including interest, of CA$7.0 million ($7.2 million) receivable in 2013.
Percentage for fixed dividend
rate on Series 3 Preferred Shares
On October 15, 2007, the Company announced that the fixed dividend rate
for its Series 3 Cumulative Redeemable First Preferred Shares will be
equal to 150% of the yield on five-year non-callable Government of Canada bonds
to be determined on November 9, 2007. Holders of the Series 3
Preferred Shares will also have the right to convert all or any number of their
shares effective as of December 1, 2007, on a one-for-one basis, into Series 2
Cumulative Redeemable First Preferred Shares.
Operating leases
On October 11, 2007, the Company
purchased machinery and equipment under operating lease for a cash
consideration of $32.5 million. The amount recorded in machinery and equipment
will be net of a provision of $2.6 million, since the fair value of the
equipment is lower than the residual value guarantee.
17
FORM
52-109F2
CERTIFICATION
OF INTERIM FILINGS
I, Wes William Lucas,
President
and Chief Executive Officer of Quebecor World Inc., certify that:
1.
I have
reviewed the interim filings (as this term is defined in Multilateral
Instrument 52-109
Certification of
Disclosure in Issuers Annual and Interim Filings
) of Quebecor World
Inc. (the issuer) for the interim period ending September 30, 2007;
2.
Based on my knowledge, the interim filings do
not contain any untrue statement of a material fact or omit to state a material
fact required to be stated or that is necessary to make a statement not
misleading in light of the circumstances under which it was made, with respect
to the period covered by the interim filings;
3.
Based on my knowledge, the interim financial
statements together with the other financial information included in the
interim filings fairly present in all material respects the financial
condition, results of operations and cash flows of the issuer, as of the date
and for the periods presented in the interim filings;
4.
The issuers other certifying officers and I
are responsible for establishing and maintaining disclosure controls and
procedures and internal control over financial reporting for the issuer, and we
have:
(a)
designed such disclosure controls and
procedures, or caused them to be designed under our supervision, to provide
reasonable assurance that material information relating to the issuer,
including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which the interim filings are
being prepared; and
(b)
designed such internal control over financial reporting, or caused it
to be designed under our supervision, to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with the issuers GAAP; and
5.
I have caused the issuer to disclose in the
interim MD&A any change in the issuers internal control over financial
reporting that occurred during the issuers most recent interim period that has
materially affected, or is reasonably likely to materially affect, the issuers
internal control over financial reporting.
Date: November 7, 2007
|
|
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/s/ Wes William Lucas
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|
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Wes William Lucas
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President and Chief Executive Officer
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Quebecor World Inc.
|
18
FORM
52-109F2
CERTIFICATION
OF INTERIM FILINGS
I, Jacques Mallette,
Executive Vice
President and Chief Financial Officer of Quebecor World Inc., certify that:
1.
I have
reviewed the interim filings (as this term is defined in Multilateral
Instrument 52-109
Certification of
Disclosure in Issuers Annual and Interim Filings
) of Quebecor World
Inc. (the issuer) for the interim period ending September 30, 2007;
2.
Based on my knowledge, the interim filings do
not contain any untrue statement of a material fact or omit to state a material
fact required to be stated or that is necessary to make a statement not
misleading in light of the circumstances under which it was made, with respect
to the period covered by the interim filings;
3.
Based on my knowledge, the interim financial
statements together with the other financial information included in the
interim filings fairly present in all material respects the financial
condition, results of operations and cash flows of the issuer, as of the date
and for the periods presented in the interim filings;
4.
The issuers other certifying officers and I
are responsible for establishing and maintaining disclosure controls and
procedures and internal control over financial reporting for the issuer, and we
have:
(a)
designed such disclosure controls and
procedures, or caused them to be designed under our supervision, to provide
reasonable assurance that material information relating to the issuer,
including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which the interim filings are
being prepared; and
(b)
designed such internal control over financial reporting, or caused it
to be designed under our supervision, to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with the issuers GAAP; and
5.
I have caused the issuer to disclose in the
interim MD&A any change in the issuers internal control over financial
reporting that occurred during the issuers most recent interim period that has
materially affected, or is reasonably likely to materially affect, the issuers
internal control over financial reporting.
Date: November 7, 2007
|
|
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/s/ Jacques Mallette
|
|
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Jacques Mallette
|
Executive Vice President and Chief Financial
Officer
|
Quebecor World Inc.
|
19
SIGNATURES
Pursuant to the requirements of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
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QUEBECOR WORLD INC.
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|
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By:
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/s/ Marie-É. Chlumecky
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|
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|
|
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Name:
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Marie-É.
Chlumecky
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Title:
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Assistant Corporate Secretary
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|
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Date:
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November 7,
2007
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20
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