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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2022
or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the transition period
from
to
Commission File Number 001-34806
Quad/Graphics, Inc.
(Exact name of registrant as specified in its charter)
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Wisconsin |
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39-1152983 |
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(State or other jurisdiction of incorporation or
organization) |
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(I.R.S. Employer Identification No.) |
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N61 W23044 Harry’s Way, Sussex, Wisconsin 53089-3995
(Address of principal executive offices) (Zip Code)
(414) 566-6000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
Class A Common Stock,
par value $0.025 per share |
QUAD |
The New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes ☒
No ☐
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T during the preceding 12 months (or
for such shorter period that the registrant was required to submit
and post such files). Yes ☒
No ☐
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, a
smaller reporting company or an emerging growth company. See the
definitions of “large accelerated filer,” “accelerated filer,”
“smaller reporting company” and “emerging growth company” in Rule
12b-2 of the Exchange Act.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Large accelerated filer |
☐ |
|
Accelerated filer |
☒ |
|
Non-accelerated filer |
☐ |
|
Smaller reporting company |
☒ |
|
|
|
Emerging growth company |
☐ |
If an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange
Act.
☐
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Act).
Yes ☐
No
☒
Indicate the number of shares outstanding of each of the issuer’s
classes of common stock as of the latest practicable
date.
|
|
|
|
|
|
|
|
|
|
Class |
|
Outstanding as of April 29, 2022 |
|
Class A Common Stock |
|
42,023,525 |
|
Class B Common Stock |
|
13,556,858 |
|
Class C Common Stock |
|
— |
QUAD/GRAPHICS, INC.
FORM 10-Q INDEX
For the Quarter Ended March 31, 2022
PART I — FINANCIAL INFORMATION
ITEM 1. Condensed
Consolidated Financial Statements (Unaudited)
QUAD/GRAPHICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data)
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
|
2022 |
|
2021 |
|
Net sales |
|
|
|
|
|
|
|
|
Products |
|
|
|
|
$ |
580.9 |
|
|
$ |
526.0 |
|
|
Services |
|
|
|
|
163.3 |
|
|
179.8 |
|
|
Total net sales |
|
|
|
|
744.2 |
|
|
705.8 |
|
|
Cost of sales |
|
|
|
|
|
|
|
|
Products |
|
|
|
|
503.1 |
|
|
428.3 |
|
|
Services |
|
|
|
|
116.5 |
|
|
131.5 |
|
|
Total cost of sales |
|
|
|
|
619.6 |
|
|
559.8 |
|
|
Operating expenses |
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
|
|
|
79.1 |
|
|
80.5 |
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
|
36.5 |
|
|
41.9 |
|
|
Restructuring, impairment and transaction-related
charges |
|
|
|
|
3.6 |
|
|
2.6 |
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
|
|
738.8 |
|
|
684.8 |
|
|
Operating income |
|
|
|
|
5.4 |
|
|
21.0 |
|
|
Interest expense |
|
|
|
|
9.3 |
|
|
14.5 |
|
|
Net pension income |
|
|
|
|
(3.2) |
|
|
(4.1) |
|
|
|
|
|
|
|
|
|
|
Earnings (loss) before income taxes and equity in earnings of
unconsolidated entity |
|
|
|
|
(0.7) |
|
|
10.6 |
|
|
Income tax expense |
|
|
|
|
0.3 |
|
|
0.5 |
|
|
Earnings (loss) before equity in earnings of unconsolidated
entity |
|
|
|
|
(1.0) |
|
|
10.1 |
|
|
Equity in earnings of unconsolidated entity |
|
|
|
|
— |
|
|
(0.1) |
|
|
Net earnings (loss) |
|
|
|
|
$ |
(1.0) |
|
|
$ |
10.2 |
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share |
|
|
|
|
|
|
|
|
Basic |
|
|
|
|
$ |
(0.02) |
|
|
$ |
0.20 |
|
|
Diluted |
|
|
|
|
$ |
(0.02) |
|
|
$ |
0.19 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding |
|
|
|
|
|
|
|
|
Basic |
|
|
|
|
51.5 |
|
|
51.4 |
|
|
Diluted |
|
|
|
|
51.5 |
|
|
52.8 |
|
See accompanying Notes to Condensed Consolidated Financial
Statements (Unaudited).
QUAD/GRAPHICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME
(in millions)
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
|
2022 |
|
2021 |
|
Net earnings (loss) |
|
|
|
|
$ |
(1.0) |
|
|
$ |
10.2 |
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) |
|
|
|
|
|
|
|
|
Translation adjustments |
|
|
|
|
0.8 |
|
|
(6.0) |
|
|
Interest rate swap adjustments |
|
|
|
|
1.4 |
|
|
1.8 |
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss), before tax |
|
|
|
|
2.2 |
|
|
(4.2) |
|
|
|
|
|
|
|
|
|
|
|
Income tax impact related to items of other comprehensive income
(loss) |
|
|
|
|
(0.3) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss), net of tax |
|
|
|
|
1.9 |
|
|
(4.2) |
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
$ |
0.9 |
|
|
$ |
6.0 |
|
See accompanying Notes to Condensed Consolidated Financial
Statements (Unaudited).
QUAD/GRAPHICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
(UNAUDITED)
March 31,
2022 |
|
December 31,
2021 |
|
ASSETS |
|
|
|
|
Cash and cash equivalents |
$ |
138.3 |
|
|
$ |
179.9 |
|
|
Receivables, less allowance for credit
losses of $28.4 million at March 31,
2022, and $28.2 million at December 31,
2021
|
341.7 |
|
|
362.0 |
|
|
Inventories |
249.1 |
|
|
226.2 |
|
|
Prepaid expenses and other current assets |
45.1 |
|
|
41.0 |
|
|
|
|
|
|
Total current assets |
774.2 |
|
|
809.1 |
|
|
|
|
|
|
Property, plant and equipment—net |
716.3 |
|
|
727.0 |
|
|
Operating lease right-of-use assets—net |
119.2 |
|
|
125.7 |
|
|
Goodwill |
86.4 |
|
|
86.4 |
|
|
Other intangible assets—net |
68.2 |
|
|
75.3 |
|
|
|
|
|
|
Other long-term assets |
73.9 |
|
|
66.5 |
|
|
|
|
|
|
Total assets |
$ |
1,838.2 |
|
|
$ |
1,890.0 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
Accounts payable |
$ |
396.3 |
|
|
$ |
367.3 |
|
|
Other current liabilities |
248.2 |
|
|
314.3 |
|
|
Short-term debt and current portion of long-term debt |
251.5 |
|
|
245.6 |
|
|
Current portion of finance lease obligations |
1.4 |
|
|
1.8 |
|
|
Current portion of operating lease obligations |
28.6 |
|
|
28.1 |
|
|
|
|
|
|
Total current liabilities |
926.0 |
|
|
957.1 |
|
|
|
|
|
|
Long-term debt |
547.9 |
|
|
554.9 |
|
|
Finance lease obligations |
1.4 |
|
|
1.4 |
|
|
Operating lease obligations |
93.3 |
|
|
99.8 |
|
|
Deferred income taxes |
12.8 |
|
|
11.9 |
|
|
Other long-term liabilities |
119.5 |
|
|
128.1 |
|
|
|
|
|
|
Total liabilities |
1,700.9 |
|
|
1,753.2 |
|
|
|
|
|
|
Commitments and contingencies (Note 8) |
|
|
|
|
|
|
|
|
Shareholders’ equity |
|
|
|
|
Preferred stock |
— |
|
|
— |
|
|
Common stock, Class A |
1.0 |
|
|
1.0 |
|
|
Common stock, Class B |
0.4 |
|
|
0.4 |
|
|
Common stock, Class C |
— |
|
|
— |
|
|
Additional paid-in capital |
838.6 |
|
|
839.3 |
|
|
Treasury stock, at cost |
(14.6) |
|
|
(14.9) |
|
|
Accumulated deficit |
(528.8) |
|
|
(527.8) |
|
|
Accumulated other comprehensive loss |
(159.3) |
|
|
(161.2) |
|
|
Total shareholders’ equity |
137.3 |
|
|
136.8 |
|
|
Total liabilities and shareholders’ equity |
$ |
1,838.2 |
|
|
$ |
1,890.0 |
|
See accompanying Notes to Condensed Consolidated Financial
Statements (Unaudited).
QUAD/GRAPHICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
2022 |
|
2021 |
|
OPERATING ACTIVITIES |
|
|
|
|
Net earnings (loss) |
$ |
(1.0) |
|
|
$ |
10.2 |
|
|
Adjustments to reconcile net earnings (loss) to net cash provided
by (used in) operating activities: |
|
|
|
|
Depreciation and amortization |
36.5 |
|
|
41.9 |
|
|
|
|
|
|
Impairment charges |
0.1 |
|
|
0.8 |
|
|
|
|
|
|
Amortization of debt issuance costs and original issue
discount |
0.7 |
|
|
0.6 |
|
|
|
|
|
|
Stock-based compensation |
1.9 |
|
|
3.0 |
|
|
|
|
|
|
|
|
|
|
Gain on the sale or disposal of property, plant and
equipment |
(0.4) |
|
|
(7.0) |
|
|
Deferred income taxes |
0.3 |
|
|
0.1 |
|
|
Equity in earnings of unconsolidated entity |
— |
|
|
(0.1) |
|
|
|
|
|
|
Changes in operating assets and liabilities—net of acquisitions and
divestitures |
(55.0) |
|
|
23.4 |
|
|
Net cash provided by (used in) operating activities |
(16.9) |
|
|
72.9 |
|
|
|
|
|
|
|
INVESTING ACTIVITIES |
|
|
|
|
Purchases of property, plant and equipment |
(19.1) |
|
|
(16.9) |
|
|
Cost investment in unconsolidated entities |
(1.9) |
|
|
(0.3) |
|
|
Proceeds from the sale of property, plant and equipment |
0.5 |
|
|
11.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other investing activities |
1.8 |
|
|
(0.2) |
|
|
Net cash used in investing activities |
(18.7) |
|
|
(6.0) |
|
|
|
|
|
|
|
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
Payments of long-term debt |
(3.7) |
|
|
(33.9) |
|
|
Payments of finance lease obligations |
(0.8) |
|
|
(0.8) |
|
|
Borrowings on revolving credit facilities |
25.5 |
|
|
4.4 |
|
|
Payments on revolving credit facilities |
(23.1) |
|
|
(5.7) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity awards redeemed to pay employees’ tax
obligations |
(2.5) |
|
|
(1.1) |
|
|
Payment of cash dividends |
(1.4) |
|
|
(1.4) |
|
|
Other financing activities |
(0.1) |
|
|
(2.9) |
|
|
Net cash used in financing activities |
(6.1) |
|
|
(41.4) |
|
|
|
|
|
|
|
Effect of exchange rates on cash and cash equivalents |
0.1 |
|
|
(0.1) |
|
|
Net increase (decrease) in cash and cash equivalents |
(41.6) |
|
|
25.4 |
|
|
Cash and cash equivalents at beginning of period |
179.9 |
|
|
55.2 |
|
|
Cash and cash equivalents at end of period |
$ |
138.3 |
|
|
$ |
80.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Condensed Consolidated Financial
Statements (Unaudited).
QUAD/GRAPHICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’
EQUITY
AND NONCONTROLLING INTERESTS
(in millions)
(UNAUDITED)
Condensed Consolidated Statement of Shareholders’ Equity For the
Three Months Ended March 31, 2022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
Additional
Paid-in
Capital |
|
Treasury Stock |
|
Accumulated
Deficit |
|
Accumulated
Other
Comprehensive
Loss |
|
Quad’s
Shareholders’
Equity |
|
Noncontrolling
Interests |
|
|
|
|
Shares |
|
Amount |
|
|
Shares |
|
Amount |
|
|
|
|
|
|
Balance at December 31, 2021 |
|
55.7 |
|
|
$ |
1.4 |
|
|
$ |
839.3 |
|
|
(1.4) |
|
|
$ |
(14.9) |
|
|
$ |
(527.8) |
|
|
$ |
(161.2) |
|
|
$ |
136.8 |
|
|
$ |
— |
|
|
|
|
Net earnings |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(1.0) |
|
|
— |
|
|
(1.0) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
0.8 |
|
|
0.8 |
|
|
— |
|
|
|
|
Interest rate swap adjustments, net of tax |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
1.1 |
|
|
1.1 |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation |
|
— |
|
|
— |
|
|
1.7 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
1.7 |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of share-based awards, net of other activity |
|
0.9 |
|
|
— |
|
|
(2.4) |
|
|
0.8 |
|
|
2.8 |
|
|
— |
|
|
— |
|
|
0.4 |
|
|
— |
|
|
|
|
Awards redeemed to pay employees’ tax obligations |
|
— |
|
|
— |
|
|
— |
|
|
(0.4) |
|
|
(2.5) |
|
|
— |
|
|
— |
|
|
(2.5) |
|
|
— |
|
|
|
|
Balance at March 31, 2022 |
|
56.6 |
|
|
$ |
1.4 |
|
|
$ |
838.6 |
|
|
(1.0) |
|
|
$ |
(14.6) |
|
|
$ |
(528.8) |
|
|
$ |
(159.3) |
|
|
$ |
137.3 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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|
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|
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|
|
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|
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|
|
|
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|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
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|
Condensed Consolidated Statement of Shareholders’ Equity For the
Three Months Ended March 31, 2021
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
Common Stock |
|
Additional
Paid-in
Capital |
|
Treasury Stock |
|
Accumulated
Deficit |
|
Accumulated
Other
Comprehensive
Loss |
|
Quad’s
Shareholders’
Equity |
|
Noncontrolling
Interests |
|
|
|
|
Shares |
|
Amount |
|
|
Shares |
|
Amount |
|
|
|
|
|
|
Balance at December 31, 2020 |
|
54.4 |
|
|
$ |
1.4 |
|
|
$ |
833.1 |
|
|
(0.8) |
|
|
$ |
(13.1) |
|
|
$ |
(566.0) |
|
|
$ |
(171.3) |
|
|
$ |
84.1 |
|
|
$ |
0.7 |
|
|
|
|
Net earnings |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
10.2 |
|
|
— |
|
|
10.2 |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(6.0) |
|
|
(6.0) |
|
|
— |
|
|
|
|
Interest rate swap adjustments, net of tax |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
1.8 |
|
|
1.8 |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation |
|
— |
|
|
— |
|
|
3.0 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
3.0 |
|
|
— |
|
|
|
|
|
|
|
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|
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|
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|
|
|
|
|
|
|
Issuance of share-based awards, net of other activity |
|
1.3 |
|
|
— |
|
|
(0.6) |
|
|
— |
|
|
1.0 |
|
|
— |
|
|
— |
|
|
0.4 |
|
|
— |
|
|
|
|
Awards redeemed to pay employees’ tax obligations |
|
— |
|
|
— |
|
|
— |
|
|
(0.2) |
|
|
(1.1) |
|
|
— |
|
|
— |
|
|
(1.1) |
|
|
— |
|
|
|
|
Balance at March 31, 2021 |
|
55.7 |
|
|
$ |
1.4 |
|
|
$ |
835.5 |
|
|
(1.0) |
|
|
$ |
(13.2) |
|
|
$ |
(555.8) |
|
|
$ |
(175.5) |
|
|
$ |
92.4 |
|
|
$ |
0.7 |
|
|
|
|
|
|
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|
See accompanying Notes to Condensed Consolidated Financial
Statements (Unaudited).
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2022
(In millions, except share and per share data and unless otherwise
indicated)
Note 1. Basis of Presentation
The accompanying unaudited condensed consolidated financial
statements for Quad/Graphics, Inc. and its subsidiaries (the
“Company” or “Quad”) 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, 2021, and
notes thereto included in the Company’s latest Annual Report on
Form 10-K filed with the SEC on February 23,
2022.
The Company is subject to seasonality in its quarterly results as
net sales and operating income are typically 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 provided by operating activities
and Free Cash Flow due to the reduction of working capital
requirements that reach peak levels during the third quarter.
Seasonality is driven by increased retail inserts and catalogs
primarily due to back-to-school and holiday-related advertising and
promotions. Due to the impacts from supply chain disruptions in
2022, the Company expects to reach higher than typical levels of
working capital requirements during the first and second quarters.
The Company expects seasonality impacts 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
months ended March 31, 2022 and 2021. 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.
COVID-19 Pandemic Impacts and Response -
The COVID-19 pandemic has had, and will continue to have, a
negative impact on the Company’s business, financial condition,
cash flows, results of operations, supply chain and raw materials
availability, although the full extent is still uncertain.
Throughout the pandemic, the Company implemented cost reduction and
cash conservation initiatives in response to the pandemic’s impact
on its business. With ongoing advancements against the COVID-19
pandemic, the effects on the Company have lessened from previous
periods. The Company continues to evaluate the impact and may
implement additional cost reduction measures as necessary. The
pandemic has also disrupted the Company’s supply chain and
contributed to rising inflationary cost pressures within the
Company’s raw materials, distribution and labor. The ultimate
impact of COVID-19 on the Company’s business, financial condition,
cash flows, results of operations, supply chain and raw materials
availability, will depend on future developments, including the
continuing duration of the pandemic and the related length of its
impact on the global economy, all of which are still
uncertain.
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2022
(In millions, except share and per share data and unless otherwise
indicated)
Note 2.
Revenue Recognition
Revenue Disaggregation
The following table provides information about disaggregated
revenue by the Company’s operating segments and major products and
services offerings for the
three months ended
March 31, 2022 and 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States Print
and Related Services |
|
International |
|
Total |
|
Three months ended March 31, 2022 |
|
|
|
|
|
|
Catalog, publications, retail inserts, and directories |
$ |
341.7 |
|
|
$ |
60.5 |
|
|
$ |
402.2 |
|
|
Direct mail and other printed products |
149.2 |
|
|
26.9 |
|
|
176.1 |
|
|
Other |
2.4 |
|
|
0.2 |
|
|
2.6 |
|
|
Total products |
493.3 |
|
|
87.6 |
|
|
580.9 |
|
|
Logistics services |
71.0 |
|
|
5.3 |
|
|
76.3 |
|
|
Marketing services and medical services |
86.8 |
|
|
0.2 |
|
|
87.0 |
|
|
Total services |
157.8 |
|
|
5.5 |
|
|
163.3 |
|
|
Total net sales |
$ |
651.1 |
|
|
$ |
93.1 |
|
|
$ |
744.2 |
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2021 |
|
|
|
|
|
|
Catalog, publications, retail inserts, and directories |
$ |
329.7 |
|
|
$ |
49.0 |
|
|
$ |
378.7 |
|
|
Direct mail and other printed products |
129.0 |
|
|
16.8 |
|
|
145.8 |
|
|
Other |
1.2 |
|
|
0.3 |
|
|
1.5 |
|
|
Total products |
459.9 |
|
|
66.1 |
|
|
526.0 |
|
|
Logistics services |
92.7 |
|
|
5.1 |
|
|
97.8 |
|
|
Marketing services and medical services |
82.0 |
|
|
— |
|
|
82.0 |
|
|
Total services |
174.7 |
|
|
5.1 |
|
|
179.8 |
|
|
Total net sales |
$ |
634.6 |
|
|
$ |
71.2 |
|
|
$ |
705.8 |
|
Nature of Products and Services
The Company recognizes its products and services revenue based on
when the transfer of control passes to the client or when the
service is completed and accepted by the client.
The products offering is predominantly comprised of the Company’s
print operations which includes retail inserts, publications,
catalogs, special interest publications, journals, direct mail,
directories, in-store marketing and promotion, packaging,
newspapers, custom print products, other commercial and specialty
printed products and global paper procurement.
The Company considers its logistic operations as services, which
include the delivery of printed material. The services offering
also includes revenues related to the Company’s marketing services
operations, which include digital content management, photography,
color services, page production, marketing strategy, creative
solutions, media planning and placement and facilities management,
as well as medical services.
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2022
(In millions, except share and per share data and unless otherwise
indicated)
Costs to Obtain Contracts
In accordance with Accounting Standards Codification 606
—
Revenue from Contracts with Customers,
the Company capitalizes certain sales incentives of the sales
compensation packages for costs that are directly attributed to
being awarded a client contract or renewal and would not have been
incurred had the contract not been obtained. The Company also
defers certain contract acquisition costs paid to the client at
contract inception. Costs to obtain contracts with a duration of
less than one year are expensed as incurred. For all contract costs
with contracts over one year, the Company amortizes the costs to
obtain contracts on a straight-line basis over the estimated life
of the contract and reviews quarterly for impairment.
Activity impacting costs to obtain contracts for the three months
ended March 31, 2022, was as follows:
|
|
|
|
|
|
|
Costs to Obtain Contracts |
|
Balance at December 31, 2021 |
$ |
5.1 |
|
|
Costs to obtain contracts |
— |
|
|
Amortization of costs to obtain contracts |
(0.5) |
|
|
Balance at March 31, 2022 |
$ |
4.6 |
|
Note 3. Restructuring, Impairment and Transaction-Related
Charges
The Company recorded restructuring, impairment and
transaction-related charges for the
three months ended
March 31, 2022 and 2021, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
|
2022 |
|
2021 |
|
Employee termination charges |
|
|
|
|
$ |
1.1 |
|
|
$ |
4.7 |
|
|
Impairment charges |
|
|
|
|
0.1 |
|
|
0.8 |
|
|
Transaction-related charges |
|
|
|
|
0.2 |
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
Other restructuring charges (income) |
|
|
|
|
2.2 |
|
|
(3.1) |
|
|
Total |
|
|
|
|
$ |
3.6 |
|
|
$ |
2.6 |
|
The costs related to these activities have been recorded in the
condensed consolidated statements of operations as restructuring,
impairment and transaction-related charges. See Note 18,
“Segment Information,” for restructuring, impairment and
transaction-related charges by segment.
Restructuring Charges
The Company has a restructuring program related to eliminating
excess manufacturing capacity and properly aligning its cost
structure. The Company classifies the following charges as
restructuring:
•Employee
termination charges
are incurred when the Company reduces its workforce through
facility consolidations and separation programs.
•Other
restructuring charges (income)
are presented net of the gains on the sale of facilities, including
a gain on the sale of the Riverside, California facility during
the
three months ended
March 31, 2021. The components of other restructuring charges
(income) consisted of the following during the
three months ended
March 31, 2022 and 2021:
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2022
(In millions, except share and per share data and unless otherwise
indicated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
|
2022 |
|
2021 |
|
Vacant facility carrying costs and lease exit charges |
|
|
|
|
$ |
1.0 |
|
|
$ |
3.9 |
|
|
Equipment and infrastructure removal costs |
|
|
|
|
— |
|
|
0.8 |
|
|
Gains on the sale of facilities |
|
|
|
|
— |
|
|
(7.8) |
|
|
Other restructuring activities |
|
|
|
|
1.2 |
|
|
— |
|
|
Other restructuring charges (income) |
|
|
|
|
$ |
2.2 |
|
|
$ |
(3.1) |
|
The restructuring charges recorded were based on plans that have
been committed to by management and were, in part, based upon
management’s best estimates of future events. Changes to the
estimates may require future restructuring charges and adjustments
to the restructuring liabilities. The Company expects to incur
additional restructuring charges related to these and other
initiatives.
Impairment Charges
The Company recognized impairment charges of $0.1 million and
$0.8 million during the three months ended March 31, 2022
and 2021, respectively. The impairment charges were primarily for
machinery and equipment no longer being utilized in production as a
result of facility consolidations, as well as other capacity
reduction and strategic divestiture activities.
The fair values of the impaired assets were determined by the
Company to be Level 3 under the fair value hierarchy (see
Note 11, “Financial Instruments and Fair Value Measurements,”
for the definition of Level 3 inputs) and were estimated based
on broker quotes, internal expertise related to current marketplace
conditions and estimated future discounted cash flows. These assets
were adjusted to their estimated fair values at the time of
impairment. If estimated fair values subsequently decline, the
carrying values of the assets are adjusted
accordingly.
Transaction-Related Charges
The Company incurs transaction-related charges primarily consisting
of professional service fees related to business acquisition and
divestiture activities. Transaction-related charges of $0.2 million
were recorded during the three months ended March 31, 2022 and
2021.
Restructuring Reserves
Activity impacting the Company’s restructuring reserves for the
three months ended March 31, 2022, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
Termination
Charges |
|
Impairment
Charges |
|
Transaction-Related
Charges |
|
|
|
Other
Restructuring
Charges |
|
Total |
|
Balance at December 31, 2021 |
$ |
4.7 |
|
|
$ |
— |
|
|
$ |
0.4 |
|
|
|
|
$ |
50.2 |
|
|
$ |
55.3 |
|
|
Expense, net |
1.1 |
|
|
0.1 |
|
|
0.2 |
|
|
|
|
2.2 |
|
|
3.6 |
|
|
Cash payments, net |
(1.7) |
|
|
— |
|
|
(0.1) |
|
|
|
|
(3.4) |
|
|
(5.2) |
|
|
Non-cash adjustments/reclassifications and translation |
(0.2) |
|
|
(0.1) |
|
|
— |
|
|
|
|
0.5 |
|
|
0.2 |
|
|
Balance at March 31, 2022 |
$ |
3.9 |
|
|
$ |
— |
|
|
$ |
0.5 |
|
|
|
|
$ |
49.5 |
|
|
$ |
53.9 |
|
The Company’s restructuring reserves at March 31, 2022,
included a short-term and a long-term component. The short-term
portion included $46.7 million in other current liabilities
(see Note 12, “Other Current and Long-Term Liabilities”) and
$0.7 million in accounts payable in the condensed consolidated
balance sheets as the Company expects these reserves to be settled
within the next twelve months. The long-term portion of
$6.5 million is included in other long-term liabilities (see
Note 12, “Other Current and Long-Term Liabilities”) in the
condensed consolidated balance sheets.
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2022
(In millions, except share and per share data and unless otherwise
indicated)
Note 4. Goodwill and Other Intangible Assets
Goodwill
Goodwill represents the excess of the purchase price over the fair
value of identifiable net assets acquired in a business
combination. Goodwill is assigned to specific reporting units and
is tested annually for impairment as of October 31, or more
frequently if events or changes in circumstances indicate that it
is more likely than not that the fair value of a reporting unit is
below its carrying value.
No indicators of impairment were identified in any of the Company’s
reporting units during the three months ended March 31,
2022.
The accumulated goodwill impairment losses and the carrying value
of goodwill at March 31, 2022, and December 31, 2021,
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States Print and Related Services |
|
International |
|
Total |
|
|
|
|
|
|
|
Goodwill |
$ |
864.7 |
|
|
$ |
30.0 |
|
|
$ |
894.7 |
|
|
|
|
|
|
|
|
Accumulated goodwill impairment loss |
(778.3) |
|
|
(30.0) |
|
|
(808.3) |
|
|
|
|
|
|
|
|
Goodwill, net of accumulated goodwill impairment loss |
$ |
86.4 |
|
|
$ |
— |
|
|
$ |
86.4 |
|
|
|
|
|
|
|
Other Intangible Assets
The components of finite-lived intangible assets at March 31,
2022, and December 31, 2021, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2022 |
|
December 31, 2021 |
|
Weighted
Average
Amortization
Period
(Years) |
|
Gross
Carrying
Amount |
|
Accumulated
Amortization |
|
Net Book
Value |
|
Weighted
Average
Amortization
Period
(Years) |
|
Gross
Carrying
Amount |
|
Accumulated
Amortization |
|
Net Book
Value |
|
Trademarks, patents, licenses and agreements |
6 |
|
$ |
67.7 |
|
|
$ |
(52.1) |
|
|
$ |
15.6 |
|
|
6 |
|
$ |
68.1 |
|
|
$ |
(50.7) |
|
|
17.4 |
|
|
Capitalized software |
5 |
|
19.6 |
|
|
(14.9) |
|
|
4.7 |
|
|
5 |
|
19.2 |
|
|
(14.3) |
|
|
4.9 |
|
|
Acquired Technology |
5 |
|
3.6 |
|
|
(1.4) |
|
|
2.2 |
|
|
5 |
|
3.6 |
|
|
(1.2) |
|
|
2.4 |
|
|
Customer relationships |
6 |
|
560.7 |
|
|
(515.0) |
|
|
45.7 |
|
|
6 |
|
560.1 |
|
|
(509.5) |
|
|
50.6 |
|
|
Total |
|
|
$ |
651.6 |
|
|
$ |
(583.4) |
|
|
$ |
68.2 |
|
|
|
|
$ |
651.0 |
|
|
$ |
(575.7) |
|
|
$ |
75.3 |
|
The gross carrying amount and accumulated amortization within other
intangible assets—net in the condensed consolidated balance sheets
at March 31, 2022, and December 31, 2021, differs from
the value originally recorded at acquisition due to impairment
charges recorded in prior years and the effects of currency
fluctuations since the purchase date.
Other intangible assets are evaluated for potential impairment
whenever events or circumstances indicate that the carrying value
may not be recoverable. There were no impairment charges recorded
on finite-lived intangible assets for the three months ended
March 31, 2022 and 2021.
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2022
(In millions, except share and per share data and unless otherwise
indicated)
Amortization expense for other intangible assets was $7.6 million
and $9.1 million for the three months ended March 31, 2022 and
2021, respectively. The estimated future amortization expense
related to other intangible assets as of March 31, 2022, was
as follows:
|
|
|
|
|
|
|
Amortization Expense |
|
Remainder of 2022 |
$ |
23.1 |
|
|
2023 |
26.6 |
|
|
2024 |
15.4 |
|
|
2025 |
2.7 |
|
|
2026 |
0.4 |
|
|
2027 |
— |
|
|
Total |
$ |
68.2 |
|
Note 5. Receivables
Prior to granting credit, the Company evaluates each client in an
underwriting process, taking into consideration the prospective
client’s financial condition, past payment experience, credit
bureau information and other financial and qualitative factors that
may affect the client’s ability to pay. Specific credit reviews and
standard industry credit scoring models are used in performing this
evaluation. Clients’ financial condition is continuously monitored
as part of the normal course of business. Some of the Company’s
clients are highly leveraged or otherwise subject to their own
operating and regulatory risks.
Specific client provisions are made when a review of significant
outstanding amounts, utilizing information about client
creditworthiness, as well as current and future economic trends
based on reasonable forecasts, indicates that collection is
doubtful. The Company also records a general provision based on the
overall risk profile of the receivables and through the assessment
of reasonable economic forecasts. The risk profile is assessed on a
quarterly basis using various methods, including external resources
and credit scoring models. Accounts that are deemed uncollectible
are written off when all reasonable collection efforts have been
exhausted.
The Company has recorded credit loss expense of $0.7 million and
$0.6 million during the three months ended March 31, 2022 and
2021, respectively, which is included in selling, general and
administrative expenses in the condensed consolidated statements of
operations.
Activity impacting the allowance for credit losses for the three
months ended March 31, 2022, was as follows:
|
|
|
|
|
|
|
Allowance for Credit Losses |
|
Balance at December 31, 2021 |
$ |
28.2 |
|
|
Provisions |
0.7 |
|
|
Write-offs |
(0.4) |
|
|
|
|
Translation and other |
(0.1) |
|
|
Balance at March 31, 2022 |
$ |
28.4 |
|
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2022
(In millions, except share and per share data and unless otherwise
indicated)
Note 6. Inventories
The components of inventories at March 31, 2022, and
December 31, 2021, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2022 |
|
December 31,
2021 |
|
Raw materials and manufacturing supplies |
$ |
166.1 |
|
|
$ |
148.6 |
|
|
Work in process |
38.5 |
|
|
31.6 |
|
|
Finished goods |
44.5 |
|
|
46.0 |
|
|
Total |
$ |
249.1 |
|
|
$ |
226.2 |
|
Note 7. Property, Plant and Equipment
The components of property, plant and equipment at March 31,
2022, and December 31, 2021, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2022 |
|
December 31,
2021 |
|
Land |
$ |
74.1 |
|
|
$ |
73.6 |
|
|
Buildings |
658.0 |
|
|
658.4 |
|
|
Machinery and equipment |
2,881.2 |
|
|
2,883.7 |
|
|
Other(1)
|
177.5 |
|
|
181.9 |
|
|
Construction in progress |
32.1 |
|
|
25.1 |
|
|
Property, plant and equipment—gross |
$ |
3,822.9 |
|
|
$ |
3,822.7 |
|
|
Less: accumulated depreciation |
(3,106.6) |
|
|
(3,095.7) |
|
|
Property, plant and equipment—net |
$ |
716.3 |
|
|
$ |
727.0 |
|
______________________________
(1)Other
consists of computer equipment, vehicles, furniture and fixtures,
leasehold improvements and communication-related
equipment.
The Company recorded impairment charges of $0.1 million and $0.8
million during the three months ended March 31, 2022 and 2021,
respectively, to reduce the carrying amounts of certain property,
plant and equipment no longer utilized in production to fair value
(see Note 3, “Restructuring, Impairment and
Transaction-Related Charges,” for further discussion on impairment
charges).
The Company recognized depreciation expense of $28.9 million and
$32.8 million for the three months ended March 31, 2022 and
2021, respectively.
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2022
(In millions, except share and per share data and unless otherwise
indicated)
Note 8. Commitments and Contingencies
Litigation
The Company is named as a defendant in various lawsuits in which
claims are asserted against the Company in the normal course of
business. The liabilities, if any, which ultimately result from
such lawsuits are not expected by management to have a material
impact on the condensed consolidated financial statements of the
Company.
Environmental Reserves
The Company is subject to various laws, regulations and government
policies relating to health and safety, to the generation, storage,
transportation, and disposal of hazardous substances, and to
environmental protection in general. The Company provides for
expenses associated with environmental remediation obligations when
such amounts are probable and can be reasonably estimated. Such
reserves are adjusted as new information develops or as
circumstances change. The environmental reserves are not
discounted. The Company believes it is in compliance with such
laws, regulations and government policies in all material respects.
Furthermore, the Company does not anticipate that maintaining
compliance with such environmental statutes will have a material
impact upon the Company’s condensed consolidated financial
position.
Note 9. Debt
The components of long-term debt as of March 31, 2022, and
December 31, 2021, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2022 |
|
December 31,
2021 |
|
Master note and security agreement |
$ |
6.2 |
|
|
$ |
7.2 |
|
|
Term Loan A |
575.4 |
|
|
575.4 |
|
|
|
|
|
|
Revolving credit facility |
— |
|
|
— |
|
|
Senior unsecured notes |
209.1 |
|
|
211.5 |
|
|
International term loans |
5.2 |
|
|
5.3 |
|
|
International revolving credit facilities |
10.8 |
|
|
8.8 |
|
|
Other |
1.1 |
|
|
1.4 |
|
|
Debt issuance costs |
(8.4) |
|
|
(9.1) |
|
|
Total debt |
$ |
799.4 |
|
|
$ |
800.5 |
|
|
Less: short-term debt and current portion of long-term
debt |
(251.5) |
|
|
(245.6) |
|
|
Long-term debt |
$ |
547.9 |
|
|
$ |
554.9 |
|
Fair Value of Debt
Based upon the interest rates available to the Company for
borrowings with similar terms and maturities, the fair value of the
Company’s total debt was approximately $0.8 billion at
March 31, 2022 and at December 31, 2021. The fair value
determination of the Company’s total debt was categorized as
Level 2 in the fair value hierarchy (see Note 11,
“Financial Instruments and Fair Value Measurements,” for the
definition of Level 2 inputs).
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2022
(In millions, except share and per share data and unless otherwise
indicated)
Senior Unsecured Notes
During the three months ended March 31, 2022, the Company
repurchased $2.4 million of its outstanding unsecured 7.0% senior
notes due May 1, 2022 (the “Senior Unsecured Notes”) in the open
market. All repurchased Senior Unsecured Notes were canceled. The
Company used cash flows from operating activities to fund the
repurchases. These repurchases were completed primarily to reduce
interest expense.
On May 2, 2022, the Company used liquidity available under its
revolving credit facility and available cash on hand to fund the
repayment on maturity of all $209.1 million aggregate principal
amount of its Senior Unsecured Notes.
Debt Issuance Costs
Activity impacting the Company’s debt issuance costs for the three
months ended March 31, 2022, was as follows:
|
|
|
|
|
|
|
Capitalized Debt
Issuance Costs |
|
Balance at December 31, 2021 |
$ |
9.1 |
|
|
Amortization of debt issuance costs |
(0.7) |
|
|
Balance at March 31, 2022 |
$ |
8.4 |
|
Covenants and Compliance
The Company’s various lending arrangements include certain
financial covenants (all financial terms, numbers and ratios are as
defined in the Company’s debt agreements, as amended to date). The
Company was in compliance with all covenants in its debt agreements
as of March 31, 2022. Among these covenants, the Company was
required to maintain the following as of March 31,
2022:
•Total
Leverage Ratio.
On a rolling twelve-month basis, the Total Leverage Ratio, defined
as consolidated total indebtedness to consolidated EBITDA, shall
not exceed 3.75 to 1.00 (for the twelve months ended
March 31, 2022, the Company’s Total Leverage Ratio was 3.30 to
1.00).
•Liquidity,
defined as unrestricted cash and permitted investments of the
Company and its subsidiaries (subject to certain conditions) plus
the aggregate amount of the unused revolving credit facility
commitments, shall not be less than $181.6 million at any time
during the period commencing December 15, 2023 and ending when all
obligations owed under the Senior Secured Credit Facility to
lenders that are not extending lenders are paid in
full.
•If
there is any amount outstanding on the Revolving Credit Facility or
Term Loan A, or if any lender has any revolving credit
exposure or Term Loan A credit exposure, the Company is
required to maintain the following:
◦Senior
Secured Leverage Ratio.
On a rolling four-quarter basis, the Senior Secured Leverage Ratio,
defined as the ratio of consolidated senior secured net
indebtedness to consolidated EBITDA, shall not exceed (a) 3.50 to
1.00 for any fiscal quarter ending prior to December 31, 2023, and
(b) 3.25 to 1.00 for any fiscal quarter ending on or after December
31, 2023 (other than, in the case of this clause (b), any fiscal
quarter ending September 30 of any year, each of which shall be
subject to a maximum Senior Secured Leverage Ratio not to exceed
3.50 to 1.00) (for the twelve months ended March 31, 2022, the
Company’s Senior Secured Leverage Ratio was
1.89 to 1.00).
◦Interest
Coverage Ratio.
On a rolling twelve-month basis, the Interest Coverage Ratio,
defined as consolidated EBITDA to cash consolidated interest
expense, shall not be less than 3.00 to 1.00 (for the twelve months
ended March 31, 2022, the Company’s Interest Coverage Ratio
was 5.18 to 1.00).
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2022
(In millions, except share and per share data and unless otherwise
indicated)
The indenture underlying the Senior Unsecured Notes contains
various covenants, including, but not limited to, covenants that,
subject to certain exceptions, limit the Company’s and its
restricted subsidiaries’ ability to incur and/or guarantee
additional debt; pay dividends, repurchase stock or make certain
other restricted payments; enter into agreements limiting dividends
and certain other restricted payments; prepay, redeem or repurchase
subordinated debt; grant liens on assets; enter into sale and
leaseback transactions; merge, consolidate, transfer or dispose of
substantially all of the Company’s consolidated assets; sell,
transfer or otherwise dispose of property and assets; and engage in
transactions with affiliates.
In addition to those covenants, the Senior Secured Credit Facility
also includes certain limitations on acquisitions, indebtedness,
liens, dividends and repurchases of capital stock.
•If
the Company’s Total Leverage Ratio is greater than
2.75 to 1.00, the Company is prohibited from making
greater than $60.0 million of dividend payments, capital stock
repurchases and certain other payments, over the course of the
agreement. If the Company’s Total Leverage Ratio is above 2.50 to
1.00 but below 2.75 to 1.00, the Company is prohibited from making
greater than $100.0 million of dividend payments, capital stock
repurchases and certain other payments, over the course of the
agreement. If the Total Leverage Ratio is less than 2.50 to 1.00,
there are no such restrictions. As the Company’s Total Leverage
Ratio as of March 31, 2022, was 3.30 to 1.00, the limitations
described above are currently applicable.
•If
the Company’s Senior Secured Leverage Ratio is greater than 3.00 to
1.00 or the Company’s Total Net Leverage Ratio which, on a rolling
twelve-month basis, is defined as consolidated net indebtedness to
consolidated EBITDA, is greater than 3.50 to 1.00, the Company is
prohibited from voluntarily prepaying any of the Senior Unsecured
Notes and from voluntarily prepaying any other unsecured or
subordinated indebtedness, with certain exceptions (including any
mandatory prepayments on the Senior Unsecured Notes or any other
unsecured or subordinated debt). If the Senior Secured Leverage
Ratio is less than 3.00 to 1.00 and the Total Net Leverage Ratio is
less than 3.50 to 1.00, there are no such restrictions. The
limitations described above are currently not applicable, as the
Company’s Senior Secured Leverage Ratio was 1.89 to 1.00 and the
Total Net Leverage Ratio was 2.75 to 1.00, as of March 31,
2022.
Note 10. Income Taxes
The Company records income tax expense on an interim basis. The
estimated effective income tax rate is adjusted quarterly, and
items discrete to a specific quarter and adjustments to valuation
allowances that could result in a reduction to tax expense or
benefit are reflected in income tax expense for that interim
period.
The effective income tax rate for the interim period can differ
from the statutory tax rate, as it reflects discrete items, such as
changes in the liability for unrecognized tax benefits related to
the establishment and settlement of income tax exposures and
expenses related to share-based compensation.
The Company currently has various open tax audits in multiple
jurisdictions. From time to time, the Company will receive tax
assessments as part of the process. Based on the information
available as of March 31, 2022, the Company has recorded its
best estimate of the potential settlements of these audits. Actual
results could differ from the estimated amounts.
The Company’s liability for unrecognized tax benefits was
$11.7 million as of March 31, 2022 and December 31,
2021. The Company anticipates a $0.5 million decrease to its
liability for unrecognized tax benefits within the next twelve
months due to the resolution of income tax audits or statute
expirations.
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2022
(In millions, except share and per share data and unless otherwise
indicated)
Note 11. Financial Instruments and Fair Value
Measurements
Certain assets and liabilities are required to be recorded at fair
value on a recurring basis, while other assets and liabilities are
recorded at fair value on a nonrecurring basis, generally as a
result of acquisitions or impairment charges. Fair value is
determined based on the exchange price that would be received for
an asset or paid to transfer a liability (an exit price) in the
principal or most advantageous market for the asset or liability in
an orderly transaction between market participants. GAAP also
classifies the inputs used to measure fair value into the following
hierarchy:
Level 1: Quoted prices in active markets for
identical assets or liabilities.
Level 2: Quoted prices in active markets for
similar assets or liabilities, quoted prices for identical or
similar assets or liabilities in markets that are not active, or
inputs other than quoted prices that are observable for the asset
or liability.
Level 3: Unobservable inputs for the asset
or liability. There were no recurring Level 3 fair value
measurements of assets or liabilities as of March 31,
2022.
Interest Rate Swaps
The Company currently holds one active interest rate swap contract.
Another previously held interest rate swap, effective on
February 28, 2017, terminated on February 28, 2022. The
purpose of entering into the contracts was to reduce the
variability of cash flows from interest payments related to a
portion of Quad’s variable-rate debt. The interest rate swap was
previously designated as cash flow hedges as they effectively
converted the notional value of the Company’s variable rate debt
based on one-month London Interbank Offered Rate (“LIBOR”) to a
fixed rate, including a spread on underlying debt, and a monthly
reset in the variable interest rate. However, the Company amended
its Senior Secured Credit Facility during the second quarter
of 2020, which added a 0.75% LIBOR floor to the Company’s
variable rate debt, changing the critical terms of the hedged
instrument. Due to this change in critical terms, the Company has
elected to de-designate the swaps as cash flow hedges, resulting in
future changes in fair value being recognized in interest expense.
The balance of the accumulated other comprehensive loss
attributable to the interest rate swaps as of June 30, 2020, will
be amortized to interest expense on a straight-line basis over the
remaining life of the swap contract. The Company expects to
reclassify $2.7 million of this balance to interest expense
over the next twelve months.
The key terms of the active interest rate swap is as
follows:
|
|
|
|
|
|
|
|
|
March 19, 2019
Interest Rate Swap |
|
|
|
Effective date |
March 29, 2019 |
|
|
|
Termination date |
March 28, 2024 |
|
|
|
Term |
5 years |
|
|
|
Notional amount |
$130.0 |
|
|
|
|
|
|
|
Fixed swap rate |
2.43% |
|
|
|
|
|
|
|
|
|
|
The Company classifies the interest rate swaps as Level 2
because the inputs into the valuation model are observable or can
be derived or corroborated utilizing observable market data at
commonly quoted intervals. The fair value of the interest rate
swaps classified as Level 2 as of March 31, 2022, and
December 31, 2021, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Location |
|
March 31, 2022 |
|
December 31, 2021 |
|
Interest rate swap liabilities |
Other current liabilities |
|
$ |
— |
|
|
$ |
(0.7) |
|
|
Interest rate swap liabilities |
Other long-term liabilities |
|
$ |
(0.2) |
|
|
$ |
(4.4) |
|
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2022
(In millions, except share and per share data and unless otherwise
indicated)
Prior to the Company’s de-designation of the interest rate swap as
a cash flow hedge, the interest rate swap was considered highly
effective, with no amount of ineffectiveness recorded into
earnings. The change in the fair value of the interest rate swap is
recorded as an adjustment to interest expense in the condensed
consolidated statements of operations. The cash flows associated
with the interest rate swap have been recognized as an adjustment
to interest expense in the condensed consolidated statements of
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
|
2022 |
|
2021 |
|
Cash Flow Impacts |
|
|
|
|
|
|
|
|
Net interest paid |
|
|
|
|
$ |
1.5 |
|
|
$ |
1.8 |
|
|
|
|
|
|
|
|
|
|
|
Impacts with Swaps as Nonhedging Instruments |
|
|
|
|
|
|
|
|
Income recognized in interest expense excluded from hedge
effectiveness assessments |
|
|
|
|
(5.0) |
|
|
(2.7) |
|
|
Amounts reclassified out of accumulated other comprehensive loss to
interest expense |
|
|
|
|
1.4 |
|
|
1.8 |
|
|
Net interest expense |
|
|
|
|
1.5 |
|
|
1.8 |
|
|
Total impact of swaps to interest expense |
|
|
|
|
$ |
(2.1) |
|
|
$ |
0.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Exchange Contracts
The Company has operations in countries that have transactions
outside their functional currencies and periodically enters into
foreign exchange contracts. These contracts are used to hedge the
net exposures of changes in foreign currency exchange rates and are
designated as either cash flow hedges or fair value hedges. Gains
or losses on net foreign currency hedges are intended to offset
losses or gains on the underlying net exposures in an effort to
reduce the earnings volatility resulting from fluctuating foreign
currency exchange rates. There were no open foreign currency
exchange contracts as of March 31, 2022.
Natural Gas Forward Contracts
The Company periodically enters into natural gas forward purchase
contracts to hedge against increases in commodity costs. The
Company’s commodity contracts qualified for the exception related
to normal purchases and sales during the three months ended
March 31, 2022 and 2021, as the Company takes delivery in the
normal course of business.
Debt
The Company measures fair value on its debt instruments using
interest rates available to the Company for borrowings with similar
terms and maturities and is categorized as Level 2. See
Note 9, “Debt,” for the fair value of the Company’s debt as of
March 31, 2022.
Nonrecurring Fair Value Measurements
In addition to assets and liabilities that are recorded at fair
value on a recurring basis, the Company is required to record
certain assets and liabilities at fair value on a nonrecurring
basis, generally as a result of acquisitions or the remeasurement
of assets resulting in impairment charges, which are categorized as
Level 3. See Note 3, “Restructuring, Impairment and
Transaction-Related Charges” and Note 7, “Property, Plant and
Equipment” for further discussion on impairment charges recorded as
a result of the remeasurement of certain long-lived
assets.
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2022
(In millions, except share and per share data and unless otherwise
indicated)
Other Estimated Fair Value Measurements
The Company records the fair value of its forward contracts and
pension plan assets on a recurring basis. The fair value of cash
and cash equivalents, receivables, inventories, accounts payable
and other current liabilities approximate their carrying values as
of March 31, 2022, and December 31, 2021.
Note 12. Other Current and Long-Term Liabilities
The components of other current and long-term liabilities as of
March 31, 2022, and December 31, 2021, were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2022 |
|
December 31, 2021 |
|
Other Current Liabilities |
|
Other
Long-Term Liabilities |
|
Total |
|
Other Current Liabilities |
|
Other
Long-Term Liabilities |
|
Total |
|
Employee-related liabilities
(1)
|
$ |
82.4 |
|
|
$ |
46.6 |
|
|
$ |
129.0 |
|
|
$ |
128.8 |
|
|
$ |
52.8 |
|
|
$ |
181.6 |
|
|
Single employer pension plan obligations |
1.6 |
|
|
14.3 |
|
|
15.9 |
|
|
1.6 |
|
|
17.6 |
|
|
19.2 |
|
|
Multiemployer pension plans – withdrawal liability |
3.9 |
|
|
27.4 |
|
|
31.3 |
|
|
3.8 |
|
|
28.4 |
|
|
32.2 |
|
|
Deferred revenue |
51.5 |
|
|
1.8 |
|
|
53.3 |
|
|
66.4 |
|
|
2.1 |
|
|
68.5 |
|
|
Tax-related liabilities |
19.1 |
|
|
5.3 |
|
|
24.4 |
|
|
20.0 |
|
|
5.3 |
|
|
25.3 |
|
|
Restructuring liabilities |
46.7 |
|
|
6.5 |
|
|
53.2 |
|
|
47.5 |
|
|
6.1 |
|
|
53.6 |
|
|
Interest and rent liabilities |
6.6 |
|
|
— |
|
|
6.6 |
|
|
2.8 |
|
|
— |
|
|
2.8 |
|
|
Interest rate swap liabilities |
— |
|
|
0.2 |
|
|
0.2 |
|
|
0.7 |
|
|
4.4 |
|
|
5.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
36.4 |
|
|
17.4 |
|
|
53.8 |
|
|
42.7 |
|
|
11.4 |
|
|
54.1 |
|
|
Total |
$ |
248.2 |
|
|
$ |
119.5 |
|
|
$ |
367.7 |
|
|
$ |
314.3 |
|
|
$ |
128.1 |
|
|
$ |
442.4 |
|
______________________________
(1)Employee-related
liabilities consist primarily of payroll, bonus, vacation, health
and workers’ compensation.
Note 13. Employee Retirement Plans
Defined Contribution Plans
The Quad/Graphics, Inc. Employee Stock Ownership Plan (“ESOP”)
holds profit sharing contributions of Company stock, which are made
at the discretion of the Company’s Board of Directors. There were
no profit sharing contributions during the three months ended
March 31, 2022 and 2021.
Pension Plans
The Company assumed various funded and unfunded frozen pension
plans for a portion of its full-time employees in the United States
as part of the acquisition of World Color Press Inc. (“World Color
Press”) in 2010. Benefits are generally based upon years of service
and compensation. These plans are funded in conformity with the
applicable government regulations. The Company funds at least the
minimum amount required for all qualified plans using actuarial
cost methods and assumptions acceptable under government
regulations.
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2022
(In millions, except share and per share data and unless otherwise
indicated)
The components of net pension income for the three months ended
March 31, 2022 and 2021, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
|
2022 |
|
2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest cost |
|
|
|
|
$ |
(2.4) |
|
|
$ |
(2.1) |
|
|
Expected return on plan assets |
|
|
|
|
5.6 |
|
|
6.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net pension income |
|
|
|
|
$ |
3.2 |
|
|
$ |
4.1 |
|
The Company made $0.2 million in benefit payments to its
non-qualified defined benefit pension plans during the three months
ended March 31, 2022. There were no contributions to its
qualified defined benefit pension plans during the three months
ended March 31, 2022.
Multiemployer Pension Plans (“MEPPs”)
The Company has withdrawn from all significant MEPPs and replaced
these union sponsored “promise to pay in the future” defined
benefit plans with a Company sponsored “pay as you go” defined
contribution plan. The two MEPPs, the Graphic Communications
International Union – Employer Retirement Fund (“GCIU”) and the
Graphic Communications Conference of the International Brotherhood
of Teamsters National Pension Fund (“GCC”), are significantly
underfunded, and require the Company to pay a withdrawal liability
to fund its pro rata share of the underfunding as of the plan year
the full withdrawal was completed. As a result of the decision to
withdraw, the Company accrued a withdrawal liability based on
information provided by each plan’s trustee. The Company has
reserved $31.3 million for the total MEPPs withdrawal
liability as of March 31, 2022, of which $27.4 million
was recorded in other long-term liabilities and $3.9 million
was recorded in other current liabilities in the condensed
consolidated balance sheets. The Company is scheduled to make
payments to the GCIU and GCC until April 2032 and February 2024,
respectively. The Company made payments totaling $1.5 million
for the three months ended March 31, 2022 and
2021.
Note 14. Earnings (Loss) Per Share
Basic earnings (loss) per share is computed as net earnings (loss)
divided by the basic weighted average common shares outstanding.
The calculation of diluted earnings (loss) per share includes the
effect of any dilutive equity incentive instruments. The Company
uses the treasury stock method to calculate the effect of
outstanding dilutive equity incentive instruments, which requires
the Company to compute total proceeds as the sum of the amount the
employee must pay upon exercise of the award and the amount of
unearned stock-based compensation costs attributable to future
services.
Equity incentive instruments for which the total employee proceeds
from exercise exceed the average fair value of the same equity
incentive instrument over the period have an anti-dilutive effect
on earnings per share during periods with net earnings, and
accordingly, the Company excludes them from the calculation. Due to
the net loss incurred during the three months ended March 31,
2022, the assumed exercise of all equity incentive instruments was
anti-dilutive and therefore, not included in the diluted loss per
share calculation. Anti-dilutive equity instruments excluded from
the computation of diluted net earnings per share were 0.9 million
class A common shares for the three months ended March 31,
2021.
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2022
(In millions, except share and per share data and unless otherwise
indicated)
Reconciliations of the numerator and the denominator of the basic
and diluted per share computations for the Company’s common stock
for the three months ended March 31, 2022 and 2021, are
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
|
2022 |
|
2021 |
|
Numerator |
|
|
|
|
|
|
|
|
Net earnings (loss) |
|
|
|
|
$ |
(1.0) |
|
|
$ |
10.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator |
|
|
|
|
|
|
|
|
Basic weighted average number of common shares outstanding for all
classes of common shares |
|
|
|
|
51.5 |
|
|
51.4 |
|
|
Plus: effect of dilutive equity incentive instruments |
|
|
|
|
— |
|
|
1.4 |
|
|
Diluted weighted average number of common shares outstanding for
all classes of common shares |
|
|
|
|
51.5 |
|
|
52.8 |
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share |
|
|
|
|
|
|
|
|
Basic |
|
|
|
|
$ |
(0.02) |
|
|
$ |
0.20 |
|
|
Diluted |
|
|
|
|
$ |
(0.02) |
|
|
$ |
0.19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 15. Equity Incentive Programs
The shareholders of the Company approved the
Quad/Graphics, Inc. 2020 Omnibus Incentive Plan (the “2020
Plan”) at the Company’s annual meeting of shareholders held on May
18, 2020 for two complementary purposes: (1) to attract and
retain outstanding individuals to serve as directors, officers and
employees; and (2) to increase shareholder value. The
Company’s previous plan, the Quad/Graphics, Inc. 2010 Omnibus Plan
(the “2010 Plan”), was terminated on May 18, 2020, and no new
awards will be granted under the 2010 Plan. All awards that were
granted under the 2010 Plan that were outstanding as of
May 18, 2020 will remain outstanding and will continue to be
governed by the 2010 Plan.
The 2020 Plan provides for an aggregate 3,000,000 shares of
class A common stock reserved for issuance, plus shares still
available for issuance or re-credited under the 2010 Plan.
Awards under the 2020 Plan may consist of incentive awards, stock
options, stock appreciation rights, performance shares, performance
share units, shares of class A common stock, restricted stock
(“RS”), restricted stock units (“RSU”), deferred stock units
(“DSU”) or other stock-based awards as determined by the Company’s
Board of Directors. Each stock option granted has an exercise price
of no less than 100% of the fair market value of the class A
common stock on the date of grant. There were 1,331,509 shares
of class A common stock reserved for issuance under the 2020
Plan as of March 31, 2022. Authorized unissued shares or
treasury shares may be used for issuance under the Company’s equity
incentive programs. The Company plans to either use treasury shares
of its class A common stock or issue shares of class A
common stock to meet the stock requirements of its awards in the
future.
The Company recognizes compensation expense based on estimated
grant date fair values for all share-based awards issued to
employees and non-employee directors, including stock options,
performance shares, performance share units, RS awards, RSU awards
and DSU awards. The Company recognizes these compensation costs for
only those awards expected to vest, on a straight-line basis over
the requisite three year service period of the awards, except
deferred stock units, which are fully vested and expensed on the
grant date. The Company estimated the number of awards expected to
vest based, in part, on historical forfeiture rates and also based
on management’s expectations of employee turnover within the
specific employee groups receiving each type of award. Forfeitures
are estimated at the time of grant and revised, if necessary, in
subsequent periods, if actual forfeitures differ from those
estimates.
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2022
(In millions, except share and per share data and unless otherwise
indicated)
Equity Incentive Compensation Expense
Equity incentive compensation expense was recorded primarily in
selling, general and administrative expenses in the condensed
consolidated statements of operations and includes expense
recognized for liability awards that are remeasured on a quarterly
basis. The total compensation expense recognized related to all
equity incentive programs for the three months ended March 31,
2022 and 2021, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
|
2022 |
|
2021 |
|
RS and RSU equity awards expense |
|
|
|
|
$ |
1.7 |
|
|
$ |
2.2 |
|
|
RSU liability awards expense |
|
|
|
|
0.2 |
|
|
— |
|
|
DSU awards expense |
|
|
|
|
— |
|
|
0.8 |
|
|
Total equity incentive compensation expense |
|
|
|
|
$ |
1.9 |
|
|
$ |
3.0 |
|
Total future compensation expense related to all equity incentive
programs granted as of March 31, 2022, was estimated to be
$9.4 million, which consists entirely of expense for RS and
RSU awards. Estimated future compensation expense is
$3.5 million for the remainder of 2022, $3.4 million for
2023, $2.2 million for 2024 and $0.3 million for
2025.
Stock Options
There were no stock options granted, and no compensation expense
was recognized related to stock options for the three months ended
March 31, 2022 and 2021. There is no future compensation
expense for stock options as of March 31, 2022. The following
table is a summary of the stock option activity for the three
months ended March 31, 2022:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Under
Option |
|
Weighted Average
Exercise
Price |
|
Weighted Average
Remaining
Contractual Term
(years) |
|
Aggregate
Intrinsic Value
(millions) |
|
Outstanding at December 31, 2021 |
56,034 |
|
|
$ |
14.14 |
|
|
0.0 |
|
$ |
— |
|
|
Granted |
— |
|
|
— |
|
|
|
|
|
|
Exercised |
— |
|
|
— |
|
|
|
|
|
|
Canceled/forfeited/expired |
(56,034) |
|
|
14.14 |
|
|
|
|
|
|
Outstanding and exercisable at March 31, 2022 |
— |
|
|
$ |
— |
|
|
0.0 |
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The intrinsic value of options outstanding and exercisable at
December 31, 2021 was based on the fair value of the stock
price. There were no stock options exercised during the three
months ended March 31, 2022 and 2021.
Restricted Stock and Restricted Stock Units
Restricted stock and restricted stock unit awards consist of shares
or the rights to shares of the Company’s class A common stock
which are awarded to employees of the Company. The awards are
restricted such that they are subject to substantial risk of
forfeiture and to restrictions on their sale or other transfer by
the employee. RSU awards are typically granted to eligible
employees outside of the United States. As defined in the
individual grant agreements, acceleration of vesting may occur
under a change in control, death, disability or normal retirement
of the grantee. Grantees receiving RS awards are able to exercise
full voting rights and receive full credit for dividends during the
vesting period. All such dividends will be paid to the RS grantee
within 45 days of full vesting. Grantees receiving RSU awards
are not entitled to vote, but do earn dividends. Upon vesting, RSU
awards will be settled either through cash payment equal to the
fair market value of the RSU awards on the vesting date or through
issuance of the Company’s class A common stock. In general, RS
and RSU awards will vest on the third anniversary of the grant
date, provided the holder of the share is continuously employed by
the Company until the vesting date.
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2022
(In millions, except share and per share data and unless otherwise
indicated)
The following table is a summary of RS and RSU award activity for
the three months ended March 31, 2022:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock |
|
Restricted Stock Units |
|
Shares |
|
Weighted-
Average
Grant Date
Fair Value
Per Share |
|
Weighted-
Average
Remaining
Contractual
Term (years) |
|
Units |
|
Weighted-
Average
Grant Date
Fair Value
Per Share |
|
Weighted-
Average
Remaining
Contractual
Term (years) |
|
Nonvested at December 31, 2021 |
3,053,019 |
|
|
$ |
6.99 |
|
|
1.2 |
|
222,093 |
|
|
$ |
10.41 |
|
|
0.5 |
|
Granted |
1,654,473 |
|
|
4.00 |
|
|
|
|
54,014 |
|
|
4.00 |
|
|
|
|
Vested |
(1,039,567) |
|
|
12.31 |
|
|
|
|
(169,489) |
|
|
12.33 |
|
|
|
|
Forfeited |
(37,656) |
|
|
4.37 |
|
|
|
|
(6) |
|
|
12.33 |
|
|
|
|
Nonvested at March 31, 2022 |
3,630,269 |
|
|
$ |
4.13 |
|
|
2.1 |
|
106,612 |
|
|
$ |
4.11 |
|
|
2.2 |
In the first quarter of 2019, the Company issued RSU awards in
connection with the acquisition of Periscope, Inc. that were
accounted for as liability awards and vested on March 1, 2022.
The awards were recorded at fair value on the initial issuance date
and were remeasured to fair value at each reporting period, with
the change in fair value being recorded in selling, general and
administrative expense in the condensed consolidated statements of
operations.
Deferred Stock Units
Deferred stock units are awards of rights to shares of the
Company’s class A common stock and are awarded to non-employee
directors of the Company. The following table is a summary of DSU
award activity for the three months ended March 31,
2022:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Stock Units |
|
Units |
|
Weighted-Average Grant Date Fair Value Per Share |
|
Outstanding at December 31, 2021 |
687,391 |
|
|
$ |
8.26 |
|
|
Granted |
— |
|
|
— |
|
|
Dividend equivalents granted |
— |
|
|
— |
|
|
Settled |
(79,908) |
|
|
4.62 |
|
|
Outstanding at March 31, 2022 |
607,483 |
|
|
$ |
8.74 |
|
Each DSU award entitles the grantee to receive one share of
class A common stock upon the earlier of the separation date
of the grantee or the second anniversary of the grant date, but
could be subject to acceleration for a change in control, death or
disability as defined in the individual DSU grant agreement.
Grantees of DSU awards may not exercise voting rights, but are
credited with dividend equivalents, and those dividend equivalents
will be converted into additional DSU awards based on the closing
price of the class A common stock. As DSU awards are fully
vested on the grant date, all compensation expense is recognized at
the date of grant.
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2022
(In millions, except share and per share data and unless otherwise
indicated)
Note 16. Shareholders’ Equity
The Company has three classes of common stock as follows (share
data in millions):
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Issued Common Stock |
|
Authorized Shares |
|
Outstanding |
|
Treasury |
|
Total Issued Shares |
|
Class A stock ($0.025 par value)
|
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|
|
|
|
|
|
|
March 31, 2022 |
105.0 |
|
|
42.1 |
|
|
0.5 |
|
|
42.6 |
|
|
December 31, 2021 |
105.0 |
|
|
40.8 |
|
|
0.9 |
|
|
41.7 |
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|
|
|
|
|
Class B stock ($0.025 par value)
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|
|
March 31, 2022 |
80.0 |
|
|
13.5 |
|
|
— |
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|
13.5 |
|
|
December 31, 2021 |
80.0 |
|
|
13.5 |
|
|
— |
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13.5 |
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|
Class C stock ($0.025 par value)
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March 31, 2022 |
20.0 |
|
|
— |
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0.5 |
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0.5 |
|
|
December 31, 2021 |
20.0 |
|
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— |
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|
0.5 |
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|
0.5 |
|
In accordance with the Articles of Incorporation, each class A
common share has one vote per share and each class B and
class C common share has ten votes per share on all matters
voted upon by the Company’s shareholders. Liquidation rights are
the same for all three classes of common stock.
The Company also has 0.5 million shares of $0.01 par value
preferred stock authorized, of which none were issued at
March 31, 2022, and December 31, 2021. The Company has no
present plans to issue any preferred stock.
On July 30, 2018, the Company’s Board of Directors authorized
a share repurchase program of up to $100.0 million of the
Company’s outstanding class A common stock. There were no
shares repurchased during the three months ended March 31,
2022, or during the three months ended March 31, 2021. As of
March 31, 2022, there were $100.0 million of authorized
repurchases remaining under the program.
In accordance with the Articles of Incorporation, dividends are
paid equally for all three classes of common shares. Due to
uncertainty in client demand as a result of the COVID-19 pandemic,
the Company’s Board of Directors proactively suspended the
Company’s quarterly dividends beginning in the second quarter of
2020.
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2022
(In millions, except share and per share data and unless otherwise
indicated)
Note 17. Accumulated Other Comprehensive Loss
The changes in accumulated other comprehensive loss by component,
net of tax, for the three months ended March 31, 2022, were as
follows:
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Translation Adjustments |
|
Interest Rate Swap Adjustments |
|
Pension Benefit Plan Adjustments |
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Total |
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Balance at December 31, 2021 |
$ |
(143.1) |
|
|
$ |
(6.7) |
|
|
$ |
(11.4) |
|
|
$ |
(161.2) |
|
|
Other comprehensive income before reclassifications |
0.8 |
|
|
— |
|
|
— |
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|
0.8 |
|
|
Amounts reclassified from accumulated other comprehensive loss to
net earnings (loss) |
— |
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|
1.1 |
|
|
— |
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|
1.1 |
|
|
Net other comprehensive income |
0.8 |
|
|
1.1 |
|
|
— |
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|
1.9 |
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Balance at March 31, 2022 |
$ |
(142.3) |
|
|
$ |
(5.6) |
|
|
$ |
(11.4) |
|
|
$ |
(159.3) |
|
The changes in accumulated other comprehensive loss by component,
net of tax, for the three months ended March 31, 2021, were as
follows:
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|
|
Translation Adjustments |
|
Interest Rate Swap Adjustments |
|
Pension Benefit Plan Adjustments |
|
Total |
|
Balance at December 31, 2020 |
$ |
(130.8) |
|
|
$ |
(12.3) |
|
|
$ |
(28.2) |
|
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$ |
(171.3) |
|
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Other comprehensive loss before reclassifications |
(6.0) |
|
|
— |
|
|
— |
|
|
(6.0) |
|
|
Amounts reclassified from accumulated other comprehensive loss to
net income |
— |
|
|
1.8 |
|
|
— |
|
|
1.8 |
|
|
Net other comprehensive income (loss) |
(6.0) |
|
|
1.8 |
|
|
— |
|
|
(4.2) |
|
|
Balance at March 31, 2021 |
$ |
(136.8) |
|
|
$ |
(10.5) |
|
|
$ |
(28.2) |
|
|
$ |
(175.5) |
|
The details of the reclassifications from accumulated other
comprehensive loss to net earnings (loss) for the three months
ended March 31, 2022 and 2021, were as follows:
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Details of Accumulated Other
Comprehensive Loss Components |
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Three Months Ended March 31, |
|
Condensed Consolidated Statements of Operations
Presentation |
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2022 |
|
2021 |
|
|
Amortization of amounts accumulated for interest rate swaps
de-designated as cash flow hedges |
|
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$ |
1.4 |
|
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$ |
1.8 |
|
|
Interest expense |
|
Impact of income taxes |
|
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|
|
|
|
(0.3) |
|
|
— |
|
|
Income tax expense |
|
Amortization of amounts accumulated for interest rate swaps
de-designated as cash flow hedges, net of tax |
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$ |
1.1 |
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$ |
1.8 |
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Note 18. Segment Information
As a global marketing experience company, Quad leverages its more
than 50-year heritage of platform excellence, innovation, strong
culture and social purpose to create a better way for its clients,
employees and communities. The Company’s operating and reportable
segments are aligned with how the chief operating decision maker of
the Company currently manages the business. The Company’s operating
and reportable segments, including their product and service
offerings, and a “Corporate” category are as follows:
•United
States Print and Related Services
•International
•Corporate
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2022
(In millions, except share and per share data and unless otherwise
indicated)
United States Print and Related Services
The United States Print and Related Services segment is
predominantly comprised of the Company’s United States printing
operations and is managed as one integrated platform. This includes
retail inserts, publications, catalogs, special interest
publications, journals, direct mail, directories, in-store
marketing and promotion, packaging, newspapers, custom print
products, other commercial and specialty printed products and
global paper procurement, together with marketing and other
complementary services, including consumer insights, audience
targeting, personalization, media planning and placement, process
optimization, campaign planning and creation, pre-media production,
videography, photography, digital execution, print execution and
logistics. This segment also includes the manufacture of
ink.
International
The International segment consists of the Company’s printing
operations in Europe and Latin America, including operations in
England, France, Germany, Poland, Argentina, Colombia, Mexico and
Peru, as well as investments in printing operations
in India.
This segment provides printed products and marketing and other
complementary services consistent with the United States Print and
Related Services segment. As of March 31, 2022, the Company
has no unrestricted subsidiaries as defined in the Company’s Senior
Unsecured Notes indenture.
Corporate
Corporate consists of unallocated general and administrative
activities and associated expenses including, in part, executive,
legal and finance, as well as certain expenses and income from
frozen employee retirement plans, such as pension benefit
plans.
The following is a summary of segment information for the three
months ended March 31, 2022 and 2021:
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Net Sales |
|
Operating Income (Loss) |
|
Restructuring, Impairment and Transaction-
Related Charges |
|
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|
Products |
|
Services |
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|
Three months ended March 31, 2022 |
|
|
|
|
|
|
|
|
|
|
United States Print and Related Services |
$ |
493.3 |
|
|
$ |
157.8 |
|
|
$ |
11.8 |
|
|
$ |
1.7 |
|
|
|
|
International |
87.6 |
|
|
5.5 |
|
|
3.7 |
|
|
1.6 |
|
|
|
|
Total operating segments |
580.9 |
|
|
163.3 |
|
|
15.5 |
|
|
3.3 |
|
|
|
|
Corporate |
— |
|
|
— |
|
|
(10.1) |
|
|
0.3 |
|
|
|
|
Total |
$ |
580.9 |
|
|
$ |
163.3 |
|
|
$ |
5.4 |
|
|
$ |
3.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2021 |
|
|
|
|
|
|
|
|
|
|
United States Print and Related Services |
$ |
459.9 |
|
|
$ |
174.7 |
|
|
$ |
32.5 |
|
|
$ |
1.1 |
|
|
|
|
International |
66.1 |
|
|
5.1 |
|
|
1.5 |
|
|
0.8 |
|
|
|
|
Total operating segments |
526.0 |
|
|
179.8 |
|
|
34.0 |
|
|
1.9 |
|
|
|
|
Corporate |
— |
|
|
— |
|
|
(13.0) |
|
|
0.7 |
|
|
|
|
Total |
$ |
526.0 |
|
|
$ |
179.8 |
|
|
$ |
21.0 |
|
|
$ |
2.6 |
|
|
|
Restructuring, impairment and transaction-related charges for the
three months ended March 31, 2022 and 2021, are further
described in Note 3, “Restructuring, Impairment and
Transaction-Related Charges,” and are included in the operating
income (loss) results by segment above.
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2022
(In millions, except share and per share data and unless otherwise
indicated)
A reconciliation of operating income to earnings (loss) before
income taxes and equity in earnings of unconsolidated entity as
reported in the condensed consolidated statements of operations for
the three months ended March 31, 2022 and 2021, was as
follows:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
|
2022 |
|
2021 |
|
Operating income |
|
|
|
|
$ |
5.4 |
|
|
$ |
21.0 |
|
|
Less: interest expense |
|
|
|
|
9.3 |
|
|
14.5 |
|
|
Less: net pension income |
|
|
|
|
(3.2) |
|
|
(4.1) |
|
|
|
|
|
|
|
|
|
|
Earnings (loss) before income taxes and equity in earnings of
unconsolidated entity |
|
|
|
|
$ |
(0.7) |
|
|
$ |
10.6 |
|
Note 19. New Accounting Pronouncements
In March 2020, the Financial Accounting Standards Board (“FASB”)
issued Accounting Standards Update 2020-04 “Reference Rate Reform
(Topic 848): Facilitation of the Effects of Reference Rate Reform
on Financial Reporting” (“ASU 2020-04”), which provides optional
guidance for a limited period of time to ease the potential burden
in accounting for reference rate reform. ASU 2020-04 permits
entities to apply certain expedients and exceptions for contracts,
hedging relationships, and other transactions impacted by the
anticipated transition away from the use of LIBOR or other
interbank offered rates to alternative reference rates. This
optional guidance is effective as of March 12, 2020, through
December 31, 2022. The Company is evaluating the impact of the
adoption of ASU 2020-04 on the condensed consolidated
financial statements.
ITEM 2. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion of the financial condition and results of
operations of Quad should be read together with (1) the
condensed consolidated financial statements for the three months
ended March 31, 2022 and 2021, including the notes thereto,
included in Item 1, “Condensed Consolidated Financial
Statements (Unaudited),” of this Quarterly Report on
Form 10-Q; and (2) the audited consolidated annual
financial statements as of and for the year ended December 31,
2021, and notes thereto included in the Company’s Annual Report on
Form 10-K, filed with the SEC on February 23,
2022.
Management’s discussion and analysis of financial condition and
results of operations is provided as a supplement to the Company’s
condensed consolidated financial statements and accompanying notes
to help provide an understanding of the Company’s financial
condition, the changes in the Company’s financial condition and the
Company’s results of operations. This discussion and analysis is
organized as follows:
•Cautionary
Statement Regarding Forward-Looking Statements.
•Overview.
This section includes a general description of the Company’s
business and segments, an overview of key performance metrics the
Company’s management measures and utilizes to evaluate business
performance, and an overview of trends affecting the Company,
including management’s actions related to the trends.
•Results
of Operations.
This section contains an analysis of the Company’s results of
operations by comparing the results for (1) the three months
ended March 31, 2022, to the three months ended March 31,
2021. The comparability of the Company’s results of operations
between periods was impacted by the divestiture of the Company’s
third-party logistics business on June 30, 2021. The results of
operations of the divestiture are included in the Company’s
condensed consolidated results until the date of disposition.
Forward-looking statements providing a general description of
recent and projected industry and Company developments that are
important to understanding the Company’s results of operations are
included in this section. This section also provides a discussion
of EBITDA and EBITDA margin, financial measures that the Company
uses to assess the performance of its business that are not
prepared in accordance with GAAP.
•Liquidity
and Capital Resources.
This section provides an analysis of the Company’s capitalization,
cash flows, a statement about off-balance sheet arrangements and a
discussion of outstanding debt and commitments. Forward-looking
statements important to understanding the Company’s financial
condition are included in this section. This section also provides
a discussion of Free Cash Flow and Debt Leverage Ratio, non-GAAP
financial measures that the Company uses to assess liquidity and
capital allocation and deployment.
Cautionary Statement Regarding Forward-Looking
Statements
To the extent any statements in this Quarterly Report on
Form 10-Q contain information that is not historical, these
statements are forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended.
These forward-looking statements relate to, among other things, the
objectives, goals, strategies, beliefs, intentions, plans,
estimates, prospects, projections and outlook of the Company, and
can generally be identified by the use of words such as “may,”
“will,” “expect,” “intend,” “estimate,” “anticipate,” “plan,”
“foresee,” “believe” or “continue” or the negatives of these terms,
variations on them and other similar expressions. In addition, any
statements that refer to expectations, projections or other
characterizations of future events or circumstances are
forward-looking statements.
These forward-looking statements are not guarantees of future
performance and are subject to risks, uncertainties and other
factors, some of which are beyond the control of the Company. These
risks, uncertainties and other factors could cause actual results
to differ materially from those expressed or implied by those
forward-looking statements. Among risks, uncertainties and other
factors that may impact Quad are those described in Part I,
Item 1A, “Risk Factors,” of the Company’s 2021
Annual Report on Form 10-K, filed with the SEC on
February 23, 2022, as such may be amended or supplemented in
Part II, Item 1A, “Risk Factors,” of the Company’s
subsequently filed Quarterly Reports on Form 10-Q (including
this report), and the following:
•The
impact of fluctuations in costs (including labor and labor-related
costs, energy costs, freight rates and raw materials, including
paper and the materials to manufacture ink) and the impact of
fluctuations in the availability of raw materials, including paper
and the materials to manufacture ink;
•The
impact of inflationary cost pressures and supply chain
shortages;
•The
impact of decreasing demand for printed materials and significant
overcapacity in a highly competitive environment creates downward
pricing pressures and potential under-utilization of
assets;
•The
negative impacts the COVID-19 pandemic has had and will continue to
have on the Company’s business, financial condition, cash flows,
results of operations and supply chain, including rising
inflationary cost pressures on raw materials, distribution and
labor, and future uncertain impacts;
•The
failure to attract and retain qualified talent across the
enterprise;
•The
impact of increased business complexity as a result of the
Company’s transformation to a marketing experience
company;
•The
impact of digital media and similar technological changes,
including digital substitution by consumers;
•The
inability of the Company to reduce costs and improve operating
efficiency rapidly enough to meet market conditions;
•The
impact of changes in postal rates, service levels or regulations,
including delivery delays due to ongoing COVID-19 impacts on daily
operational staffing at the United States Postal
Service;
•The
impact of a data-breach of sensitive information, ransomware attack
or other cyber incident on the Company;
•The
impact negative publicity could have on our business;
•The
impact of changing future economic conditions;
•The
failure of clients to perform under contracts or to renew contracts
with clients on favorable terms or at all;
•The
fragility and decline in overall distribution
channels;
•The
failure to successfully identify, manage, complete and integrate
acquisitions, investment opportunities or other significant
transactions, as well as the successful identification and
execution of strategic divestitures;
•The
impact of an other than temporary decline in operating results and
enterprise value that could lead to non-cash impairment charges due
to the impairment of property, plant and equipment and other
intangible
assets;
•The
impact of risks associated with the operations outside of the
United States (“U.S.”), including costs incurred or reputational
damage suffered due to improper conduct of its employees,
contractors or agents, and geopolitical events like war and
terrorism;
•Significant
investments may be needed to maintain the Company’s platforms,
processes, systems, client and product technology and marketing and
to remain technologically and economically
competitive;
•The
impact of the various restrictive covenants in the Company’s debt
facilities on the Company’s ability to operate its business, as
well as the uncertain negative impacts COVID-19 may have on the
Company’s ability to continue to be in compliance with these
restrictive covenants;
•The
impact of regulatory matters and legislative developments or
changes in laws, including changes in cyber-security, privacy and
environmental laws; and
•The
impact on the holders of Quad’s class A common stock of a limited
active market for such shares and the inability to independently
elect directors or control decisions due to the voting power of the
class B common stock.
Quad cautions that the foregoing list of risks, uncertainties and
other factors is not exhaustive, and you should carefully consider
the other factors detailed from time to time in Quad’s filings with
the SEC and other uncertainties and potential events when reviewing
the Company’s forward-looking statements.
Because forward-looking statements are subject to assumptions and
uncertainties, actual results may differ materially from those
expressed or implied by such forward-looking statements. You are
cautioned not to place undue reliance on such statements, which
speak only as of the date of this Quarterly Report on
Form 10-Q. Except to the extent required by the federal
securities laws, Quad undertakes no obligation to publicly update
or revise any forward-looking statements, whether as a result of
new information, future events or otherwise.
Overview
Business Overview
Quad is a global marketing experience company that helps brands
reimagine their marketing to be more streamlined, impactful,
flexible and frictionless. Quad’s strategic priorities are powered
by three key competitive advantages that include integrated
marketing platform excellence, innovation, and culture and social
purpose. The Company’s integrated marketing platform is powered by
a set of core specialties including business strategy, insights and
analytics, technology solutions, managed services, agency and
studio solutions, media, print, in-store and packaging. Serving
over 4,600 clients, Quad has more than 15,000 people working in 14
countries around the world.
Quad’s overarching business strategy and singular vision as a
global marketing experience company is achieved through the
execution of the following five consistent strategic
priorities:
Walk in the Shoes of Clients
The Company encourages all employees, regardless of job title, to
walk in the shoes of clients by putting a priority on listening to
clients’ needs and challenges, doing what they can to make it easy
to work with Quad, and making the client experience enjoyable and
inclusive at every touchpoint. With a focus on solving problems and
removing friction wherever a client experiences it in the marketing
process, Quad seeks to become an invaluable strategic marketing
partner for its clients, helping them successfully navigate today’s
constantly evolving media landscape through innovative data-driven
solutions, produced and deployed efficiently across multiple media
channels. A key component of Quad’s client-facing strategy is to
strengthen relationships at higher levels within a client’s
organization so the Company can better understand, anticipate and
satisfy the organization’s requirements, including their diversity,
equity and inclusion goals, and broader environmental, social and
governance objectives. The Company also believes its proactive
thought leadership in the key issues facing its clients, including
data-driven marketing, mar-tech and postal reform, will foster
loyalty to the Quad brand.
Grow the Business Profitably
This strategic priority centers on Quad’s ability to defend against
significant media disruption, deploy balanced use of capital,
including disciplined and compelling investments, and grow the
business as a marketing experience company. Key components of this
priority are:
•Acquire
new and expand existing account relationships
by introducing clients to the Company’s complete through-the-line
marketing offering – from strategy and creative through production,
execution and analytics – that helps them market more efficiently
and effectively. To this end, Quad is focused on ensuring it has
the right talent in the right positions to facilitate strategic
marketing conversations and tailored solutions based on a better
understanding of their needs.
•Expand
in key vertical industries
with growth opportunities, such as consumer technology,
consumer-packaged goods, financial services, insurance, healthcare
and direct-to-consumer, while continuing to capitalize on the
Company’s established expertise in retail and publishing. Through
existing and new offerings, Quad delivers solutions dedicated to
solving client marketing and process challenges.
•Make
disciplined and compelling investments
that take many different forms. The Company intends to continue to
pursue growth investments that help expand and strengthen its
integrated marketing platform. In addition, the Company intends to
continue making long-term investments in its talent, such as hiring
business professionals with client-side marketing experience and
consulting expertise to enhance its position as a marketing
experience company, as well as investments to attract new employees
and increase existing employee engagement, retention and
productivity.
Bolster Platform Strength
The Company operates what it believes to be a superior and
unparalleled integrated marketing platform, which it has
consciously built to remove friction in the marketing process and
speed the overall marketing journey through reduced complexity,
increased efficiencies and enhanced marketing spend effectiveness
across channels. Through this unique platform, the Company offers a
complete through-the-line marketing offering featuring agency,
consulting and implementation solutions encompassing marketing
strategy, including consumer insights and data analytics; creative
solutions for producing quality content at scale; and media
deployment and optimization for all channels, including print,
broadcast, digital, in-store, out-of-home and packaging supported
by 24/7 global production, including industry-leading print
manufacturing and mail-distribution capabilities. Quad uses a
disciplined return on capital framework to make regular, strategic
investments in this platform, resulting in what it believes is the
most integrated, automated, efficient, innovative and modern
marketing platform of its kind. The Company’s long-standing,
disciplined culture of holistic Continuous Improvement and
commitment to Lean Enterprise methodologies, along with ongoing,
strategic investments in talent, technology, products and services
to accelerate its position as a marketing experience
company.
To strengthen its offering, the Company continually seeks to
enhance its product portfolio, especially in the direct marketing,
in-store and packaging spaces, with innovations that support
clients’ ability to stand out in a consumer’s mailbox or front
doorstep, or on the store shelf. These innovations include
proprietary solutions unavailable anywhere else in the marketing,
communications or printing industries.
Additionally, Quad has chosen to strategically divest of those
businesses that cannot be easily leveraged as part of its greater
integrated marketing platform, such as the QuadExpress third-party
logistics business Quad sold in 2021. Through these types of
optimization efforts, Quad maintains a superior, unparalleled
platform that delivers value to clients and, ultimately, their
customers.
Empower Employees
Quad’s strategic priority to empower employees throughout their
career journey builds on the key aspects of the Company’s distinct
corporate culture, which the Company views as a competitive
advantage. These aspects include the Company’s enduring values,
which are centered on trust, innovation, growth, believing in
people and doing the right thing. The Company understands that its
employees perform better at work when they can simply be themselves
– confident in their abilities, comfortable sharing their ideas,
opinions and beliefs, and able to bring their truest and best
selves to the workplace – all of which leads to a more inclusive
environment and better engagement, decision-making and business
outcomes. The Company embraces forward-thinking workplace
practices, such as flexible work models for the long-term future of
work; implements innovative talent acquisition strategies to meet
its labor and business needs; and provides training and reward
programs to engage, develop and retain its employees. Employees are
encouraged to take advantage of the Company’s continuous growth
environment, which not only teaches critical on-the-job and
leadership skills, but also helps them respond to rapid change,
cultivate effective networks, and create high-quality relationships
necessary for personal, professional and company growth. The
Company believes its approach to continuous growth for each
employee is advantageously distinct from other employers. With the
Company’s encouragement to do things differently, to be something
greater and to create a better way, employees are more fully
engaged in their day-to-day activities, producing better results
for clients and advancing the Company’s strategic priorities.
Additionally, the Company engages employees and fosters corporate
pride by supporting community activities, initiatives and
organizations that improve the quality of life near Quad’s
operations.
Enhance Financial Strength and Create Shareholder
Value
Quad follows a disciplined approach to maintaining and enhancing
financial strength to create shareholder value, which is essential
given ongoing media disruption, including printing industry
challenges. This strategy is centered on the Company’s ability to
drive profitable growth, and maximize net earnings, Free Cash Flow
and operating margins; maintain consistent financial policies to
ensure a strong balance sheet, liquidity level and access to
capital; and retain the financial flexibility needed to
strategically allocate and deploy capital as circumstances change.
The priorities for capital allocation and deployment are balanced
according to prevailing circumstances and what the Company thinks
is best for shareholder value creation at any particular point in
time. Those priorities currently include: deleveraging the
Company’s balance sheet through debt and pension liability
reductions; making compelling investments that drive profitable
organic growth and productivity in the Company’s print
manufacturing and distribution operations, as well as expansion
into higher-growth marketing services; and paying dividends and
stock buybacks over the long term.
To provide ongoing improvement in manufacturing productivity and,
ultimately, maximize operating margins, the Company applies
holistic Continuous Improvement and Lean Enterprise methodologies
to simplify and streamline processes. These same methodologies are
applied to its selling, general and administrative functions to
create a truly Lean Enterprise. The Company continually works to
lower its cost structure by consolidating its manufacturing
operations into its most efficient facilities, as well as realizing
purchasing, mailing and logistics efficiencies by centralizing and
consolidating print manufacturing volumes, and eliminating
redundancies in its administrative and corporate operations. Quad
believes that its focused efforts to be the high-quality, low-cost
producer generates increased Free Cash Flow and allows the Company
to maintain a strong balance sheet through debt and pension
liability reduction. The Company’s disciplined financial approach
also allows it to maintain sufficient liquidity and to reduce
refinancing risk, with the nearest significant debt maturity of
$91.5 million occurring in January 2024. The Company had total
liquidity of $535.0 million as of March 31, 2022, which
consisted of up to $396.7 million of unused capacity under its
revolving credit arrangement, net of $35.8 million of issued
letters of credit, and cash and cash equivalents of $138.3 million.
On May 2, 2022, the Company used liquidity available under its
revolving credit facility and available cash on hand to fund the
repayment on maturity of all $209.1 million aggregate principal
amount of its Senior Unsecured Notes. In addition, the Company
completed the amendment of its $1 billion bank debt agreement
during the fourth quarter of 2021, extending the maturity to
November 2026. Quad is proud of its strong and trusted banking
relationships, which provide the Company with increased financial
flexibility to continue to pay down debt and to make strategic
investments to accelerate its position as a marketing experience
company.
Segments
The Company’s operating and reportable segments are aligned with
how the chief operating decision maker of the Company currently
manages the business. The Company’s operating and reportable
segments, including their product and service offerings, and a
“Corporate” category are summarized below.
•The
United States Print and Related Services segment
is predominantly comprised of the Company’s United States printing
operations and is managed as one integrated platform. This includes
retail inserts, publications, catalogs, special interest
publications, journals, direct mail, directories, in-store
marketing and promotion, packaging, newspapers, custom print
products, other commercial and specialty printed products and
global paper procurement, together with marketing and other
complementary services, including consumer insights, audience
targeting, personalization, media planning and placement, process
optimization, campaign planning and creation, pre-media production,
videography, photography, digital execution, print execution and
logistics. This segment also includes the manufacture of ink. The
United States Print and Related Services segment accounted for
approximately 87% of the Company’s consolidated net sales during
the three months ended March 31, 2022.
•The
International segment
consists of the Company’s printing operations in Europe and Latin
America, including operations in England, France, Germany, Poland,
Argentina, Colombia, Mexico and Peru, as well as investments in
printing operations in India. This segment provides printed
products and marketing and other complementary services consistent
with the United States Print and Related Services segment. The
International segment accounted for approximately 13% of the
Company’s consolidated net sales during the three months ended
March 31, 2022.
•Corporate
consists of unallocated general and administrative activities and
associated expenses including, in part, executive, legal and
finance, as well as certain expenses and income from frozen
employee retirement plans, such as pension benefit
plans.
Key Performance Metrics Overview
The Company’s management believes the ability to generate net sales
growth, profit increases and positive cash flow, while maintaining
the appropriate level of debt, are key indicators of the successful
execution of the Company’s business strategy and will increase
shareholder value. The Company uses period-over-period net sales
growth, EBITDA, EBITDA margin, net cash provided by (used in)
operating activities, Free Cash Flow and Debt Leverage Ratio as
metrics to measure operating performance, financial condition and
liquidity. EBITDA, EBITDA margin, Free Cash Flow and Debt Leverage
Ratio are non-GAAP financial measures (see the definitions of
EBITDA, EBITDA margin and the reconciliation of net earnings (loss)
to EBITDA in the “Results of Operations” section below, and see the
definitions of Free Cash Flow and Debt Leverage Ratio, the
reconciliation of net cash provided by (used in) operating
activities to Free Cash Flow, and the calculation of Debt Leverage
Ratio in the “Liquidity and Capital Resources” section
below).
Net sales growth.
The Company uses period-over-period net sales growth as a key
performance metric. The Company’s management assesses net sales
growth based on the ability to generate increased net sales through
increased sales to existing clients, sales to new clients, sales of
new or expanded solutions to existing and new clients and
opportunities to expand sales through strategic investments,
including acquisitions.
EBITDA and EBITDA margin.
The Company uses EBITDA and EBITDA margin as metrics to assess
operating performance. The Company’s management assesses EBITDA and
EBITDA margin based on the ability to increase revenues while
controlling variable expense growth.
Net cash provided by (used in) operating activities.
The Company uses net cash provided by (used in) operating
activities as a metric to assess liquidity. The Company’s
management assesses net cash provided by (used in) operating
activities based on the ability to meet recurring cash obligations
while increasing available cash to fund debt service requirements,
capital expenditures, acquisitions and other investments in future
growth, cash restructuring requirements related to cost reduction
activities, shareholder dividends and share repurchases. Net cash
provided by (used in) operating activities can be significantly
impacted by the timing of non-recurring or infrequent receipts or
expenditures.
Free Cash Flow.
The Company uses Free Cash Flow as a metric to assess liquidity and
capital deployment. The Company’s management assesses Free Cash
Flow as a measure to quantify cash available for strengthening the
balance sheet (debt and pension liability reduction), for strategic
capital allocation and deployment through investments in the
business (acquisitions and strategic investments) and for returning
capital to the shareholders (dividends and share repurchases). The
Company’s priorities for capital allocation and deployment will
change as circumstances dictate for the business, and Free Cash
Flow can be significantly impacted by the Company’s restructuring
activities and other unusual items.
Debt Leverage Ratio.
The Company uses the Debt Leverage Ratio as a metric to assess
liquidity and the flexibility of its balance sheet. Consistent with
other liquidity metrics, the Company monitors the Debt Leverage
Ratio as a measure to determine the appropriate level of debt the
Company believes is optimal to operate its business, and
accordingly, to quantify debt capacity available for strengthening
the balance sheet (debt and pension liability reduction), for
strategic capital allocation and deployment through investments in
the business (capital expenditures, acquisitions and strategic
investments), and for returning capital to the shareholders
(dividends and share repurchases). The priorities for capital
allocation and deployment will change as circumstances dictate for
the business, and the Debt Leverage Ratio can be significantly
impacted by the amount and timing of large expenditures requiring
debt financing, as well as changes in profitability.
The Company remains disciplined with its debt leverage. The
Company’s consolidated debt and finance lease obligations decreased
by $2 million during the three months ended March 31,
2022. Since the Company completed the World Color Press acquisition
in July 2010, the Company has reduced debt and finance lease
obligations by $937 million and has reduced the obligations
for pension, postretirement and MEPPs by $515 million, for a
total obligation reduction since July of 2010 of
$1.4 billion.
The Company is subject to seasonality in its quarterly results as
net sales and operating income are typically 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 provided by operating activities
and Free Cash Flow due to the reduction of working capital
requirements that reach peak levels during the third quarter.
Seasonality is driven by increased retail inserts and catalogs
primarily due to back-to-school and holiday-related advertising and
promotions. Due to the impacts from supply chain disruptions in
2022, the Company expects to reach higher than typical levels of
working capital requirements during the first and second quarters.
The Company expects seasonality impacts to continue in future
years.
Overview of Trends Affecting Quad
As consumer media consumption habits change, marketing services
providers face increased demand to offer end-to-end marketing
services, from strategy and creative through execution, across all
channels, traditional and digital. As new marketing and advertising
channels emerge, marketing services providers must expand their
services beyond traditional channels, such as for television,
newspapers, print publications and radio, to digital channels, such
as mobile, internet search, internet display and video, to create
effective multichannel campaigns for their clients. This trend
greatly influences Quad’s ongoing efforts to redefine the future of
integrated marketing and create greater value for its clients who
are looking for less complexity, greater transparency and
accountability from their business partners.
The Company leverages its data-driven print expertise as part of an
integrated marketing platform that helps its clients not only plan
and produce marketing programs, but also deploy, manage and measure
them across all media channels. Competition in the printing
industry remains highly fragmented and intense, and the Company
believes that there are indicators of heightened competitive
pressures. The industry has excess manufacturing capacity created
by continued declines in industry volumes, compounded by the
COVID-19 pandemic, which, in turn, have created accelerated
downward pricing pressures. The Company faces competition due to
the increased accessibility and quality of digital alternatives to
traditional delivery of printed documents through the online
distribution and hosting of media content, and the digital
distribution of documents and data. The Company faces competition
from print management and marketing consulting firms that look to
streamline processes and reduce the overall print spend of the
Company’s clients.
The Company believes that a disciplined approach for capital
management and a strong balance sheet are critical to be able to
invest in profitable growth opportunities and technological
advances, thereby providing the highest return for shareholders.
Management balances the use of cash between deleveraging the
Company’s balance sheet (through reduction in debt and pension
obligations), compelling investment opportunities (through capital
expenditures, acquisitions and strategic investments) and returns
to shareholders (through dividends and share
repurchases).
The Company continues to make progress on integrating and
streamlining all aspects of its business, thereby lowering its cost
structure by consolidating its manufacturing platform into its most
efficient facilities, as well as realizing purchasing, mailing and
logistics efficiencies by centralizing and consolidating print
manufacturing volumes and eliminating redundancies in its
administrative and corporate operations. The Company has continued
to evolve its manufacturing platform, equipping facilities to be
product line agnostic, which enables the Company to maximize
equipment utilization. Quad believes that the large plant size of
certain of its key printing facilities allows the Company to drive
savings in certain product lines (such as publications and
catalogs) due to economies of scale and from investments in
automation and technology. The Company continues to focus on
proactively aligning its cost structure to the realities of the
top-line pressures it faces in the printing industry through Lean
Manufacturing and sustainable continuous improvement
programs.
The Company believes it will continue to drive productivity
improvements and sustainable cost reduction initiatives into the
future through an engaged workforce and ongoing adoption of the
latest manufacturing automation and technology. Through this
strategy, the Company believes it can maintain the strongest, most
efficient print manufacturing platform to remain a high-quality,
low-cost producer.
Integrated distribution with the United States Postal Service
(“USPS”) is an important component of the Company’s business. Any
material change in the current service levels provided by the
postal service could impact the demand that clients have for print
services. The USPS continues to experience financial problems. The
passing of the Postal Service Reform Act of 2022, signed in April
2022, gives the USPS considerable financial relief as well as
significant cost relief over the next ten years. While the
legislative postal reform helps considerably, without decreased
operational cost structures, increased efficiencies or increased
volumes and revenues, these losses will potentially continue into
the future. As a result of these financial difficulties, the USPS
has continued to adjust its postal rates and service levels.
Additional price increases may result in clients reducing mail
volumes and exploring the use of alternative methods for delivering
a larger portion of their products, such as continued diversion to
the internet and other alternative media channels in order to
ensure that they stay within their expected postage
budgets.
Federal statute requires the Postal Regulatory Commission (“PRC”)
to conduct reviews of the overall rate-making structure for the
USPS to ensure funding stability. As a result of those reviews, the
PRC authorized a five year rate-making structure that provides the
USPS with additional pricing flexibility over the Consumer Price
Index cap, which may result in a substantially altered rate
structure for mailers. The revised rate authority that is effective
as a result of the rules issued by the PRC includes a higher
overall rate cap on the USPS’ ability to increase rates from year
to year. This has led to price spikes for mailers and may also
reduce the incentive for the USPS to continue to take out costs and
instead continue to rely on postage to cover the costs of an
outdated postal service that does not reflect the industry’s
ability or willingness to pay. The uncertainty as to how much of
the authority the USPS will use also creates potential volume
declines as rate predictability with respect to cost is no longer
known for mailers. The result may be reduced demand for printed
products as clients may move more aggressively into other delivery
methods, such as the many digital and mobile options now available
to consumers.
The Company has invested significantly in its mail preparation and
distribution capabilities to mitigate the impact of increases in
postage costs, and to help clients successfully navigate the
ever-changing postal environment. Through its data analytics,
unique software to merge mail streams on a large scale, advanced
finishing capabilities and technology, and in-house transportation
and logistics operations, the Company manages the mail preparation
and distribution of most of its clients’ products to maximize
efficiency, to enable on-time and consistent delivery and to
partially reduce these costs; however, the net impact of increasing
postal costs may create a decrease in client demand for print and
mail products.
The Company’s results of operations have been adversely impacted as
a result of the COVID-19 pandemic and the emergence of new
variants. Through the Company’s Crisis Management Team, including
executive and operations leadership, the Company has been executing
business continuity plans focused on protecting the health and
well-being of our employees, while also continuing to service
clients, and protect the long-term financial health of the Company
as the COVID-19 pandemic continues. With ongoing advancements
against the COVID-19 pandemic, the effects on the Company have
lessened from previous periods. The Company is continuing to
evaluate the impact and may implement additional cost reduction
measures as necessary. The ultimate impact of COVID-19 on the
Company’s business, financial condition, cash flows, results of
operations and supply chain will depend on future developments,
including the continuing duration of the pandemic and the related
length of its impact on the global economy, all of which are still
uncertain.
Additionally, the increasing cost and availability of raw
materials, such as paper, ink, supplies, distribution and labor,
have been and are expected to continue to adversely impact the
Company’s results of operation. The Company is dependent on its
production personnel to print the Company’s products in a
cost-effective and efficient manner that allows the Company to
obtain new clients and to drive sales from existing clients. The
nationwide shortage of available production personnel may put a
strain on the Company’s ability to accept new work from client
requests, including the Company’s seasonally higher third and
fourth quarters. The ongoing labor shortage is also placing upward
price pressure on freight, as the number of available drivers have
been reduced, and may have an adverse effect on our operations. Due
to the reduced number of freight drivers available, the Company may
not be able to meet rising customer demand and could fail to meet
our clients’ expectations.
The Company has also experienced and anticipates it will continue
to experience certain distribution challenges, including, but not
limited to, the above-noted delivery delays at the USPS and recent
volume restrictions at the United Parcel Service, Federal Express
and certain local couriers. As the labor shortages, supply chain
and distribution challenges continue to evolve, the Company is
unable to predict the duration of the shortages and challenges and
the extent of the impact on the Company’s business, financial
condition, cash flows and results of operations. As a result of the
rising inflationary cost pressures within our raw materials,
distribution and labor, the Company has and will continue to pass
along price increases to our clients. The Company expects
inflationary cost pressures and supply chain shortages to
potentially continue through fiscal year 2022. The Company is
unable to predict the future impact of the labor and supply chain
shortages as well as cost inflation, and the resulting impact on
the Company’s business, financial condition, cash flows and results
of operations.
Results of Operations for the Three Months Ended March 31,
2022, Compared to the Three Months Ended March 31,
2021
Summary Results
The Company’s operating income, operating margin, net earnings
(loss) (computed using a 25% normalized tax rate for all items
subject to tax) and diluted earnings (loss) per share for the three
months ended March 31, 2022, changed from the three months
ended March 31, 2021, as follows (dollars in millions, except
margin and per share data):
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Operating
Income |
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Operating Margin |
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Net Earnings (Loss) |
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Diluted Earnings (Loss) Per Share |
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For the three months ended March 31, 2021 |
$ |
21.0 |
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3.0 |
% |
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$ |
10.2 |
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$ |
0.19 |
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Restructuring, impairment and transaction-related
charges
(1)
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(1.0) |
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(0.1) |
% |
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(0.8) |
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(0.01) |
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Other operating income elements
(2)
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(14.6) |
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(2.2) |
% |
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(10.8) |
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(0.21) |
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Operating Income |
5.4 |
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0.7 |
% |
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(1.4) |
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(0.03) |
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Interest expense
(3)
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N/A |
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N/A |
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3.9 |
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0.07 |
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Net pension income
(4)
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N/A |
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N/A |
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(0.7) |
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(0.01) |
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Income taxes
(5)
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N/A |
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N/A |
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(2.7) |
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(0.05) |
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Investments in unconsolidated entity, net of tax
(6)
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N/A |
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N/A |
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(0.1) |
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— |
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For the three months ended March 31, 2022 |
$ |
5.4 |
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0.7 |
% |
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$ |
(1.0) |
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$ |
(0.02) |
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______________________________
(1)Restructuring,
impairment and transaction-related charges increased
$1.0 million ($0.8 million, net of tax), to
$3.6 million during the three months ended March 31,
2022, and included the following:
a.A
$3.6 million decrease in employee termination charges from
$4.7 million during the three months ended March 31,
2021, to $1.1 million during the three months ended
March 31, 2022;
b.A
$0.7 million decrease in impairment charges from
$0.8 million during the three months ended March 31,
2021, to $0.1 million during the three months ended
March 31, 2022;
c.Transaction-related
charges of $0.2 million for both of the three months ended
March 31, 2022 and 2021; and
d.A
$5.3 million increase in various other restructuring charges
from $3.1 million of income during the three months ended
March 31, 2021, to $2.2 million of expense during the
three months ended March 31, 2022.
The Company expects to incur additional restructuring costs in
future reporting periods in connection with eliminating excess
manufacturing capacity and properly aligning its cost structure in
conjunction with the Company’s acquisitions and strategic
investments, and other cost reduction programs.
(2)Other
operating income elements decreased $14.6 million
($10.8 million, net of tax impact) during the three months
ended March 31, 2022, primarily due to net cost increases from
supply chain disruptions, cost inflation in materials and freight
and labor shortages. These cost increases were partially offset by
the following: (1) an $8.5 million increase in paper byproduct
recoveries; (2) a $5.4 million decrease in depreciation and
amortization expense; and (3) savings from other cost reduction
initiatives.
(3)Interest
expense decreased $5.2 million ($3.9 million, net of tax)
during the three months ended March 31, 2022, to
$9.3 million. This change was due to a $3.0 million
decrease in interest expense related to the interest rate swaps and
lower average debt levels in the three months ended March 31,
2022, as compared to the three months ended March 31,
2021.
(4)Net
pension income decreased $0.9 million ($0.7 million, net
of tax) during the three months ended March 31, 2022, to
$3.2 million. This was due to a $0.6 million decrease
from the expected long-term return on pension plan assets and a
$0.3 million increase from interest cost on pension plan
liabilities.
(5)The
$2.7 million decrease in income tax benefit as calculated in
the following table is primarily due to a $2.8 million decrease in
valuation allowance reserves.
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Three Months Ended March 31, |
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2022 |
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2021 |
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$ Change |
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Earnings (loss) before income taxes and equity in earnings of
unconsolidated entity |
$ |
(0.7) |
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$ |
10.6 |
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$ |
(11.3) |
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Normalized tax rate |
25.0 |
% |
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25.0 |
% |
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Income tax expense (benefit) at normalized tax rate |
(0.2) |
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2.7 |
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(2.9) |
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Income tax expense from the condensed consolidated statements of
operations |
0.3 |
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0.5 |
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(0.2) |
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Impact of income taxes |
$ |
(0.5) |
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$ |
2.2 |
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$ |
(2.7) |
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(6)The
decrease in investments in unconsolidated entity, net of tax, of
$0.1 million during the three months ended March 31,
2022, was due to a $0.1 million decrease in earnings at the
Company’s investment in Plural Industria Grafica Ltda., the
Company’s Brazilian joint venture. In January 2022, the Company
sold its investment in Plural.
Operating Results
The following table sets forth certain information from the
Company’s condensed consolidated statements of operations on an
absolute dollar basis and as a relative percentage of total net
sales for each noted period, together with the relative percentage
change in such information between the periods set forth
below:
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Three Months Ended March 31, |
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2022 |
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2021 |
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(dollars in millions) |
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Amount |
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% of
Sales |
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