Basis of Presentation

The accompanying unaudited condensed consolidated financial statements for Quad/Graphics, Inc. and its subsidiaries (the "Company" or "Quad/Graphics") have been prepared by the Company pursuant to the rules and regulations for interim financial information of the United States Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been omitted pursuant to such SEC rules and regulations. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated annual financial statements as of and for the year ended December 31, 2017, and notes thereto included in the Company's latest Annual Report on Form 10-K filed with the SEC on February 21, 2018.

The Company is subject to seasonality in its quarterly results as net sales and operating income are higher in the third and fourth quarters of the calendar year as compared to the first and second quarters. The fourth quarter is typically the highest seasonal quarter for cash flows from operating activities due to the reduction of working capital requirements that reach peak levels during the third quarter. Seasonality is driven by increased magazine advertising page counts, retail inserts, catalogs and books primarily due to back-to-school and holiday-related advertising and promotions. The Company expects this seasonality impact to continue in future years.

The financial information contained herein reflects all adjustments, in the opinion of management, necessary for a fair presentation of the Company's results of operations for the three and nine months ended September 30, 2018 and 2017. All of these adjustments are of a normal recurring nature, except as otherwise noted. All intercompany transactions have been eliminated in consolidation. These unaudited condensed consolidated financial statements include estimates and assumptions of management that affect the amounts reported in the condensed consolidated financial statements. Actual results could differ from these estimates.

Revenue Recognition

On January 1, 2018, the Company adopted Accounting Standards Update 2014-09, "Revenue from Contracts with Customers" ("Topic 606"), which provides revised guidance on recognizing revenue from contracts with customers. The Company adopted Topic 606 using the modified retrospective approach and applied the guidance to those contracts which were not completed as of January 1, 2018. This means that Topic 606 has been applied to the 2018 financial statements and disclosures going forward, but that prior period financial statements and disclosures reflect the revenue recognition standard of Topic 605, Revenue from Contracts with Customers. See Note 2, "Revenue Recognition," for additional accounting policy and transition disclosures.

Pension Plans

On January 1, 2018, the Company adopted Accounting Standards Update 2017-07 "Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost" ("ASU 2017-07"), which provides revised guidance on how to present the components of net pension income in the statement of operations. The Company has adopted ASU 2017-07 retrospectively and has utilized the practical expedient that permits the use of the amounts disclosed in previous filings for net pension income as the estimation basis for the presentation of the prior comparative periods. There are no service costs associated with the Company's pension plans due to their frozen status.

The effects of the adjustments to the condensed consolidated statements of operations as a result of the adoption of ASU 2017-07 for the three and nine months ended September 30, 2017, are as follows:



	Three Months Ended September 30, 2017								Nine Months Ended September 30, 2017
	As Previously Reported		Adjusted for ASU 2017-07			As Adjusted			As Previously Reported		Adjusted for ASU 2017-07			As Adjusted
Net sales	$	1,005.4	$	—		$	1,005.4		$	2,967.2	$	—		$	2,967.2
Cost of sales	784.8		—			784.8			2,330.9		—			2,330.9
Operating expenses
Selling, general and administrative expenses	104.9		2.6			107.5			302.6		7.8			310.4
Depreciation and amortization	58.3		—			58.3			175.5		—			175.5
Restructuring, impairment and transaction-related charges	8.0		—			8.0			22.5		—			22.5
Total operating expenses	956.0		2.6			958.6			2,831.5		7.8			2,839.3
Operating income	49.4		(2.6		)	46.8			135.7		(7.8		)	127.9
Interest expense	17.8		—			17.8			53.6		—			53.6
Net pension income	—		(2.6		)	(2.6		)	—		(7.8		)	(7.8		)
Loss on debt extinguishment	—		—			—			2.6		—			2.6
Earnings before income taxes and equity in (earnings) loss of unconsolidated entity	$	31.6	$	—		$	31.6		$	79.5	$	—		$	79.5

See Note 13, "Employee Retirement Plans," for the components of net pension income for the three and nine months ended September 30, 2018 and 2017.

Furthermore, the effects of the adjustments to the consolidated statements of operations as a result of the adoption of ASU 2017-07 for the years ended December 31, 2017 and 2016, are as follows:



	Year Ended December 31, 2017								Year Ended December 31, 2016
	As Previously Reported		Adjusted for ASU 2017-07			As Adjusted			As Previously Reported			Adjusted for ASU 2017-07			As Adjusted
Net sales	$	4,131.4	$	—		$	4,131.4		$	4,329.5		$	—		$	4,329.5
Cost of sales	3,259.4		—			3,259.4			3,394.8			—			3,394.8
Operating expenses
Selling, general and administrative expenses	413.4		10.4			423.8			454.6			12.1			466.7
Depreciation and amortization	232.5		—			232.5			277.1			—			277.1
Restructuring, impairment and transaction-related charges	61.2		(0.8		)	60.4			80.6			(7.0		)	73.6
Total operating expenses	3,966.5		9.6			3,976.1			4,207.1			5.1			4,212.2
Operating income	164.9		(9.6		)	155.3			122.4			(5.1		)	117.3
Interest expense	71.1		—			71.1			77.2			—			77.2
Net pension income	—		(9.6		)	(9.6		)	—			(5.1		)	(5.1		)
Loss (gain) on debt extinguishment	2.6		—			2.6			(14.1		)	—			(14.1		)
Earnings before income taxes and equity in (earnings) loss of unconsolidated entity	$	91.2	$	—		$	91.2		$	59.3		$	—		$	59.3