Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Following discussion of the financial condition and results of operations of Quad should be read together with Quad’s audited consolidated financial statements for each of the two years in the period ended December 31, 2022, including the notes thereto, included in Part II, Item 8, “Financial Statements and Supplementary Data,” of this Annual Report on Form 10-K. This discussion contains forward-looking statements that reflect the Company’s plans, estimates and beliefs. The Company’s actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed in “Forward-Looking Statements” and Part I, Item 1A, “Risk Factors,” included earlier within this Annual Report on Form 10-K.
Management’s discussion and analysis of financial condition and results of operations is provided as a supplement to the Company’s 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:
•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 the year ended December 31, 2022, to the year ended December 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 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 accounting principles generally accepted in the United States of America (“GAAP”).
•Liquidity and Capital Resources. This section provides an analysis of the Company’s capitalization, cash flows and a discussion and table 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.
•Critical Accounting Policies and Estimates. This section contains a discussion of the accounting policies that the Company’s management believes are important to the Company’s financial condition and results of operations, as well as allowances and reserves that require significant judgment and estimates on the part of the Company’s management. In addition, all of the Company’s significant accounting policies, including critical accounting policies, are summarized in Note 1, “Basis of Presentation and Summary of Significant Accounting Policies,” to the consolidated financial statements in Part II, Item 8, “Financial Statements and Supplementary Data,” of this Annual Report on Form 10-K.
Overview
Business Overview
Quad is a global marketing experience company that gives brands a more streamlined, impactful, flexible and frictionless way to go to market and reach consumers. The Company leverages its three key competitive advantages — integrated marketing platform excellence, ongoing innovation, and culture and social purpose — to create a better way for its clients, employees and communities. With a marketing platform intentionally built for integrated marketing execution, Quad helps brands reduce the complexity of working with multiple agency partners and vendors; increase marketing process efficiency; and maximize marketing effectiveness. The Company’s holistic, multichannel, through-the-line marketing solutions include strategy and consulting, data and analytics, technology solutions, media services, creative and content solutions, and managed services. With unmatched scale for client-based, on-site services and highly qualified talent with expansive subject matter expertise, the Company has the resources and knowledge to help a wide variety of clients across multiple verticals, including those in industries such as retail, publishing, consumer packaged goods, financial services, healthcare, insurance and direct-to-consumer.
For a full description of the Company’s business overview, refer to Part I, Item 1, “Business,” of this Annual Report on Form 10-K.
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 its 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 print execution and logistics for retail inserts, catalogs, long-run publications, special interest publications, journals, direct mail, directories, in-store marketing and promotion, packaging, newspapers, custom print products, as well as other commercial and specialty printed products, along with global paper procurement, and marketing and other complementary services, such as data and analytics, technology solutions, media services, creative and content solutions, managed services and execution in non-print channels (e.g., digital and broadcast). This segment also includes the manufacture of ink. The United States Print and Related Services segment accounted for approximately 87% and 89% of the Company’s consolidated net sales during the years ended December 31, 2022 and 2021, respectively.
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% and 11% of the Company’s consolidated net sales during the years ended December 31, 2022 and 2021, respectively.
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 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 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 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 operating activities. The Company uses net cash provided by operating activities as a metric to assess liquidity. The Company’s management assesses net cash provided by operating activities based on the ability to meet recurring cash obligations while increasing available cash to fund debt service requirements, capital expenditures, cash restructuring requirements related to cost reduction activities, World Color Press single employer pension plan contributions, World Color Press MEPPs withdrawal liabilities, acquisitions and other investments in future growth, shareholder dividends and share repurchases. Net cash provided by 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 Company’s 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 $234 million during the year ended December 31, 2022, primarily due to the use of cash and cash equivalents and cash provided by operating activities.
Overview of Trends Affecting Quad
As consumer media consumption habits change, advertising and marketing services providers face increased demand to offer end-to-end marketing services, from strategy and creative through execution. As new marketing channels emerge, these 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 help brands reduce the complexities of working with multiple agency partners and vendors, increase marketing process efficiency and maximize marketing effectiveness.
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 commercial printing industry remains highly fragmented and intense, and the Company believes that there are indicators of heightened competitive pressures. The commercial printing industry has moved toward a demand for shorter print runs, faster product turnaround and increased production efficiencies of products with lower page counts and increased complexity. This — combined with increases in postage expenses and marketers’ increasing use of online marketing and communication channels (exacerbated by the COVID-19 pandemic, as well as the current macroeconomic conditions) — has led to excess manufacturing capacity.
For a full description of the Company’s industry and competition overview, refer to Part I, Item 1, “Business,” of this Annual Report on Form 10-K.
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 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 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, gave the USPS considerable financial relief as well as significant 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 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. The USPS is expected to use these additional rate authorities to implement twice a year increases in the future. 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 on any specific rate increase 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. 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, particularly from the heavily impacted year of 2020. The COVID-19 pandemic weakened demand for the Company’s products and services, disrupted the Company’s supply chain and resulted in rising inflationary cost and labor pressures, distribution challenges and recessionary concerns from evolving macroeconomic conditions. The Company continues to evaluate the current economic environment and may implement additional cost reduction measures as necessary.
Additionally, rising interest rates, 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 during the Company’s seasonally higher third and fourth quarters.
The Company has also experienced and anticipates it will continue to experience certain distribution challenges, including, but not limited to, delivery delays at the USPS and recent volume restrictions at the United Parcel Service, Federal Express and certain local couriers. As the 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 its raw materials, distribution and labor, the Company has and will continue to pass along price increases to its clients. The Company expects inflationary cost pressures and certain supply chain shortages to potentially continue through fiscal year 2023. The Company is unable to predict the future impact of 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 Year Ended December 31, 2022, Compared to the Year Ended December 31, 2021
Summary Results
The Company’s operating income, operating margin, net earnings (computed using a 25% normalized tax rate for all items subject to tax) and diluted earnings per share for the year ended December 31, 2022, changed from the year ended December 31, 2021, as follows (dollars in millions, except per share data): | | | | | | | | | | | | | | | | | | | | | | | |
| Operating Income | | Operating Margin | | Net Earnings | | Diluted Earnings Per Share |
For the year ended December 31, 2021 | $ | 92.8 | | | 3.1 | % | | $ | 37.8 | | | $ | 0.71 | |
Gains from sale and leaseback (1) | (24.5) | | | (0.8) | % | | (18.4) | | | (0.35) | |
Restructuring, impairment and transaction-related charges (2) | (25.9) | | | (0.8) | % | | (19.4) | | | (0.35) | |
Other operating income elements (3) | 11.1 | | | 0.2 | % | | 8.3 | | | 0.17 | |
Operating Income | 53.5 | | | 1.7 | % | | 8.3 | | | 0.18 | |
Interest expense (4) | N/A | | N/A | | 8.4 | | | 0.15 | |
Net pension income (5) | N/A | | N/A | | (1.4) | | | (0.03) | |
Loss on debt extinguishment (6) | N/A | | N/A | | 0.5 | | | 0.01 | |
Income taxes (7) | N/A | | N/A | | (6.2) | | | (0.12) | |
| | | | | | | |
Investments in unconsolidated entity, net of tax (8) | N/A | | N/A | | (0.3) | | | (0.01) | |
For the year ended December 31, 2022 | $ | 53.5 | | | 1.7 | % | | $ | 9.3 | | | $ | 0.18 | |
______________________________
(1)The Company executed sale and leaseback transactions of its Chalfont, Pennsylvania and West Allis, Wisconsin facilities resulting in $24.5 million ($18.4 million, net of tax) in gains during the year ended December 31, 2021.
(2)Restructuring, impairment and transaction-related charges increased $25.9 million ($19.4 million, net of tax), to $44.8 million during the year ended December 31, 2022, and included the following:
a.A $2.6 million decrease in employee termination charges from $9.9 million during the year ended December 31, 2021, to $7.3 million during the year ended December 31, 2022;
b.A $32.7 million decrease in impairment charges from $34.9 million during the year ended December 31, 2021, to $2.2 million during the year ended December 31, 2022;
c.A $1.4 million increase in transaction-related charges from $0.6 million during the year ended December 31, 2021, to $2.0 million during the year ended December 31, 2022;
d.A $0.7 million increase in integration-related charges from zero during the year ended December 31, 2021, to $0.7 million during the year ended December 31, 2022; and
e.A $59.1 million increase in various other restructuring charges from $26.5 million of income during the year ended December 31, 2021, to $32.6 million of expense during the year ended December 31, 2022.
The Company expects to incur additional restructuring and integration 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.
(3)Other operating income elements increased $11.1 million ($8.3 million, net of tax) primarily due to the following: (1) higher print pricing and volume; (2) a $16.0 million decrease in depreciation and amortization expense; and (3) savings from other cost reduction initiatives. These cost decreases were partially offset by cost increases from supply chain disruptions, cost inflation in materials and freight and labor shortages and a $13.4 million gain from a property insurance claim in 2021 that did not repeat in 2022.
(4)Interest expense decreased $11.2 million ($8.4 million, net of tax) during the year ended December 31, 2022, to $48.4 million. This change was due to a $9.3 million decrease in interest expense related to the interest rate swaps and lower average debt levels, partially offset by a higher weighted average interest rate on borrowings during the year ended December 31, 2022, as compared to the year ended December 31, 2021.
(5)Net pension income decreased $1.9 million ($1.4 million, net of tax) during the year ended December 31, 2022, to $12.6 million. This was due to a $1.9 million decrease from the expected long-term return on pension plan assets and a $0.9 million increase from interest cost on pension plan liabilities, partially offset by a $0.9 million decrease in a non-cash settlement charge in 2021 that did not repeat in 2022.
(6)The $0.7 million ($0.5 million, net of tax) decrease in loss on debt extinguishment relates to a $0.5 million loss on debt extinguishment recorded during the fourth quarter of 2021, primarily related to the repurchase of the Company’s unsecured 7.0% senior notes which were due on May 1, 2022 and a $0.2 million loss on debt extinguishment from the fifth amendment to the Company’s April 28, 2014 Senior Secured Credit Facility, completed on November 2, 2021. There was no loss on debt extinguishment during the year ended December 31, 2022.
(7)The $6.2 million increase in income tax expense as calculated in the following table is primarily due to a $22.3 million increase from valuation allowance reserves, partially offset by the following: (1) a $6.2 million decrease from impairment charges related to foreign investments in 2021; (2) a $5.1 million decrease from loss on the sale of its Argentina print business in 2022; (3) a $2.6 million decrease from income in foreign branches; and (4) a $1.6 million decrease from equity award activity and executive compensation limitation. | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | |
| 2022 | | 2021 | | $ Change |
| (dollars in millions) |
Earnings before income taxes and equity in earnings of unconsolidated entity | $ | 17.7 | | | $ | 47.0 | | | $ | (29.3) | |
Normalized tax rate | 25.0 | % | | 25.0 | % | | |
Income tax expense at normalized tax rate | 4.4 | | | 11.7 | | | (7.3) | |
| | | | | |
Less: Income tax expense from the consolidated statements of operations | 8.4 | | | 9.5 | | | (1.1) | |
| | | | | |
Impact of income taxes | $ | 4.0 | | | $ | (2.2) | | | $ | 6.2 | |
(8)The decrease from investments in unconsolidated entity, net of tax, of $0.3 million during the year ended December 31, 2022, was due to the equity in earnings of $0.3 million for the year ended December 31, 2021 at the Company’s investment in Plural Industria Gráfica Ltda. (“Plural”), 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 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: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | | | |
| | | | | | | |
| | | |
| 2022 | | % of Net Sales | | 2021 | | % of Net Sales | | $ Change | | % Change |
| (dollars in millions) |
Net sales: | | | | | | | | | | | |
Products | $ | 2,528.3 | | | 78.6 | % | | $ | 2,247.1 | | | 75.9 | % | | $ | 281.2 | | | 12.5 | % |
Services | 688.7 | | | 21.4 | % | | 713.3 | | | 24.1 | % | | (24.6) | | | (3.4) | % |
Total net sales | 3,217.0 | | | 100.0 | % | | 2,960.4 | | | 100.0 | % | | 256.6 | | | 8.7 | % |
Cost of sales: | | | | | | | | | | | |
Products | 2,156.2 | | | 67.0 | % | | 1,861.0 | | | 62.9 | % | | 295.2 | | | 15.9 | % |
Services | 462.6 | | | 14.4 | % | | 528.9 | | | 17.9 | % | | (66.3) | | | (12.5) | % |
Total cost of sales | 2,618.8 | | | 81.4 | % | | 2,389.9 | | | 80.8 | % | | 228.9 | | | 9.6 | % |
Selling, general & administrative expenses | 358.6 | | | 11.1 | % | | 326.0 | | | 11.0 | % | | 32.6 | | | 10.0 | % |
Gains from sale and leaseback | — | | | — | % | | (24.5) | | | (0.8) | % | | 24.5 | | | nm |
Depreciation and amortization | 141.3 | | | 4.4 | % | | 157.3 | | | 5.3 | % | | (16.0) | | | (10.2) | % |
Restructuring, impairment and transaction-related charges | 44.8 | | | 1.4 | % | | 18.9 | | | 0.6 | % | | 25.9 | | | 137.0 | % |
Total operating expenses | 3,163.5 | | | 98.3 | % | | 2,867.6 | | | 96.9 | % | | 295.9 | | | 10.3 | % |
Operating income | $ | 53.5 | | | 1.7 | % | | $ | 92.8 | | | 3.1 | % | | $ | (39.3) | | | (42.3) | % |
Net Sales
Product sales increased $281.2 million, or 12.5%, for the year ended December 31, 2022, compared to the year ended December 31, 2021, primarily due to a $191.2 million increase from paper sales and a $110.1 million increase in sales in the Company’s print product lines, primarily due to increased print pricing and volume, partially offset by $20.1 million in unfavorable foreign exchange impacts.
Service sales, which primarily consist of logistics, distribution, marketing services, imaging and medical services, decreased $24.6 million, or 3.4%, for the year ended December 31, 2022, compared to the year ended December 31, 2021, primarily due to a $58.0 million decrease in sales due to the divestiture of the Company’s third-party logistics business, partially offset by a $22.4 million increase in logistics sales and an $11.0 million increase in marketing services and medical services.
Cost of Sales
Cost of product sales increased $295.2 million, or 15.9%, for the year ended December 31, 2022, compared to the year ended December 31, 2021, primarily due to the following: (1) an increase in paper costs; (2) the impacts from rising costs of material, labor and other costs of production; and (3) higher print volumes. These increases were partially offset by savings from other cost reduction initiatives.
Cost of service sales decreased $66.3 million, or 12.5%, for the year ended December 31, 2022, compared to the year ended December 31, 2021, primarily due to the impact from the divestiture of the Company’s third-party logistics business and savings from other cost reduction initiatives.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $32.6 million, or 10.0%, for the year ended December 31, 2022, compared to the year ended December 31, 2021, primarily due to the following: (1) a $14.0 million increase in employee-related costs; (2) a $13.4 million gain from a property insurance claim in 2021 that did not repeat in 2022; and (3) a $2.1 million increase in credit loss expense. Selling, general and administrative expenses as a percentage of net sales increased from 11.0% for the year ended December 31, 2021, to 11.1% for the year ended December 31, 2022.
Gains from sale and leaseback
The Company executed sale and leaseback transactions of its Chalfont, Pennsylvania and West Allis, Wisconsin facilities resulting in $24.5 million ($18.4 million, net of tax) in gains during the year ended December 31, 2021.
Depreciation and Amortization
Depreciation and amortization decreased $16.0 million, or 10.2%, for the year ended December 31, 2022, compared to the year ended December 31, 2021, due to a $15.4 million decrease in depreciation expense, primarily from property, plant and equipment becoming fully depreciated over the past year, a decrease in purchases of property, plant and equipment and a $0.6 million decrease in amortization expense.
Restructuring, Impairment and Transaction-Related Charges
Restructuring, impairment and transaction-related charges increased $25.9 million, or 137.0%, for the year ended December 31, 2022, compared to the year ended December 31, 2021, primarily due to the following: | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | |
| 2022 | | 2021 | | $ Change |
| (dollars in millions) |
Employee termination charges | $ | 7.3 | | | $ | 9.9 | | | $ | (2.6) | |
Impairment charges (a) | 2.2 | | | 34.9 | | | (32.7) | |
Transaction-related charges | 2.0 | | | 0.6 | | | 1.4 | |
Integration costs | 0.7 | | | — | | | 0.7 | |
Other restructuring charges (income) | | | | | |
Vacant facility carrying costs and lease exit charges | 5.4 | | | 19.8 | | | (14.4) | |
Equipment and infrastructure removal costs | 0.7 | | | 1.6 | | | (0.9) | |
Gains on the sale of facilities (b) | — | | | (24.8) | | | 24.8 | |
Other restructuring activities (c) | 26.5 | | | (23.1) | | | 49.6 | |
Other restructuring charges (income) | 32.6 | | | (26.5) | | | 59.1 | |
Total restructuring, impairment and transaction-related charges | $ | 44.8 | | | $ | 18.9 | | | $ | 25.9 | |
______________________________
(a)Includes $2.2 million and $2.8 million of impairment charges 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 during the years ended December 31, 2022 and 2021, respectively. Impairment charges related to the Company’s decision to sell the investment in Plural of $32.1 million were recorded during the year ended December 31, 2021.
(b)Includes a $13.8 million gain on the sale of the Oklahoma City, Oklahoma facility, a $7.6 million gain on the sale of the Riverside, California facility, a $1.0 million gain on the sale of the Fernley, Nevada facility and a $2.4 million gain on the sale of other facilities during the year ended December 31, 2021.
(c)Includes a $23.1 million loss on the sale of its Argentina print business during the year ended December 31, 2022; and a $20.9 million gain on the sale of a business and a $2.7 million gain from the reclassification of foreign currency translation adjustments during the year ended December 31, 2021. Also includes $1.8 million and $0.6 million in charges from foreign currency losses as a result of the economy in Argentina being classified as highly inflationary during the years ended December 31, 2022 and 2021, respectively. The Company has considered the economy in Argentina to be highly inflationary since June 30, 2018.
EBITDA and EBITDA Margin—Consolidated
EBITDA is defined as net earnings, excluding (1) interest expense, (2) income tax expense and (3) depreciation and amortization. EBITDA margin represents EBITDA as a percentage of net sales. EBITDA and EBITDA margin are presented to provide additional information regarding Quad’s performance. Both are important measures by which Quad gauges the profitability and assesses the performance of its business. EBITDA and EBITDA margin are non-GAAP financial measures and should not be considered alternatives to net earnings as a measure of operating performance, or to cash flows provided by operating activities as a measure of liquidity. Quad’s calculation of EBITDA and EBITDA margin may be different from the calculations used by other companies, and therefore, comparability may be limited.
EBITDA and EBITDA margin for the year ended December 31, 2022, compared to the year ended December 31, 2021, were as follows: | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| | | |
| |
| 2022 | | % of Net Sales | | 2021 | | % of Net Sales |
| (dollars in millions) |
EBITDA and EBITDA margin (non-GAAP) | $ | 207.4 | | | 6.4 | % | | $ | 264.2 | | | 8.9 | % |
EBITDA decreased $56.8 million for the year ended December 31, 2022, compared to the year ended December 31, 2021, primarily due to the following: (1) $25.9 million of increased restructuring, impairment and transaction-related charges; (2) $24.5 million in gains from sale and leaseback transactions in 2021 that did not repeat in 2022; (3) a $13.4 million gain from a property insurance claim in 2021 that did not repeat in 2022; and (4) cost increases from supply chain disruptions, cost inflation in materials and freight and labor shortages. These cost increases were partially offset by an increase in print product pricing and volume and savings from other cost reduction initiatives.
A reconciliation of EBITDA to net earnings for the years ended December 31, 2022 and 2021, was as follows: | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 |
| (dollars in millions) |
Net earnings (1) | $ | 9.3 | | | $ | 37.8 | |
Interest expense | 48.4 | | | 59.6 | |
Income tax expense | 8.4 | | | 9.5 | |
Depreciation and amortization | 141.3 | | | 157.3 | |
EBITDA (non-GAAP) | $ | 207.4 | | | $ | 264.2 | |
______________________________
(1)Net earnings included the following:
a.Restructuring, impairment and transaction-related charges of $44.8 million and $18.9 million for the years ended December 31, 2022 and 2021, respectively;
b.Gains from sale and leaseback of $24.5 million for the year ended December 31, 2021;
c.Loss on debt extinguishment of $0.7 million for the year ended December 31, 2021; and
d.Equity in earnings of unconsolidated entity of $0.3 million for the year ended December 31, 2021.
United States Print and Related Services
The following table summarizes net sales, operating income, operating margin and certain items impacting comparability within the United States Print and Related Services segment: | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | | | |
| | | | | | | |
| | | |
| 2022 | | 2021 | | $ Change | | % Change |
| (dollars in millions) |
Net sales: | | | | | | | |
Products | $ | 2,126.6 | | | $ | 1,935.8 | | | $ | 190.8 | | | 9.9 | % |
Services | 668.1 | | | 692.8 | | | (24.7) | | | (3.6) | % |
Operating income (including restructuring, impairment and transaction-related charges) | 108.3 | | | 163.1 | | | (54.8) | | | (33.6) | % |
Operating margin | 3.9 | % | | 6.2 | % | | N/A | | N/A |
Restructuring, impairment and transaction-related charges | $ | 12.1 | | | $ | (14.5) | | | $ | 26.6 | | | nm |
Net Sales
Product sales for the United States Print and Related Services segment increased $190.8 million, or 9.9%, for the year ended December 31, 2022, compared to the year ended December 31, 2021, primarily due to a $128.7 million increase from paper sales and a $62.1 million increase in sales in the Company’s print product lines, primarily due to increased print pricing and volume.
Service sales for the United States Print and Related Services segment decreased $24.7 million, or 3.6%, for the year ended December 31, 2022, compared to the year ended December 31, 2021, primarily due to a $58.0 million decrease in sales due to the divestiture of the Company’s third-party logistics business, partially offset by a $22.6 million increase in logistics sales and a $10.7 million increase in marketing services and medical services.
Operating Income
Operating income for the United States Print and Related Services segment decreased $54.8 million, or 33.6%, for the year ended December 31, 2022, compared to the year ended December 31, 2021, primarily due to the following: (1) a $26.6 million increase in restructuring, impairment and transaction-related charges; (2) $24.5 million in gains from sale and leaseback transactions in 2021 that did not repeat in 2022; (3) a $13.4 million gain from a property insurance claim in 2021 that did not repeat in 2022; and (4) 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 increase in print product pricing and volume; (2) a $14.0 million decrease in depreciation and amortization expense; and (3) savings from other cost reduction initiatives.
The operating margin for the United States Print and Related Services segment decreased to 3.9% for the year ended December 31, 2022, from 6.2% for the year ended December 31, 2021, primarily due to the reasons provided above.
Restructuring, Impairment and Transaction-Related Charges
Restructuring, impairment and transaction-related charges for the United States Print and Related Services segment increased $26.6 million for the year ended December 31, 2022, compared to the year ended December 31, 2021, primarily due to the following: | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | |
| 2022 | | 2021 | | $ Change |
| (dollars in millions) |
Employee termination charges | $ | 4.1 | | | $ | 8.2 | | | $ | (4.1) | |
Impairment charges (a) | 1.1 | | | 2.8 | | | (1.7) | |
Transaction-related charges | — | | | — | | | — | |
Integration costs | — | | | — | | | — | |
Other restructuring charges (income) | | | | | |
Vacant facility carrying costs and lease exit charges | 5.4 | | | 19.8 | | | (14.4) | |
Equipment and infrastructure removal costs | 0.7 | | | 1.6 | | | (0.9) | |
Gains on the sale of facilities (b) | — | | | (24.8) | | | 24.8 | |
Other restructuring activities (c) | 0.8 | | | (22.1) | | | 22.9 | |
Other restructuring charges (income) | 6.9 | | | (25.5) | | | 32.4 | |
Total restructuring, impairment and transaction-related charges | $ | 12.1 | | | $ | (14.5) | | | $ | 26.6 | |
______________________________
(a)Includes $1.1 million and $2.8 million of impairment charges 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 during the years ended December 31, 2022 and 2021, respectively.
(b)Includes a $13.8 million gain on the sale of the Oklahoma City, Oklahoma facility, a $7.6 million gain on the sale of the Riverside, California facility, a $1.0 million gain on the sale of the Fernley, Nevada facility and a $2.4 million gain on the sale of other facilities during the year ended December 31, 2021.
(c)Includes a $20.9 million gain on the sale of a business during the year ended December 31, 2021.
International
The following table summarizes net sales, operating income, operating margin, certain items impacting comparability and equity in loss of unconsolidated entities within the International segment: | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | | | |
| | | | | | | |
| | | |
| 2022 | | 2021 | | $ Change | | % Change |
| (dollars in millions) |
Net sales: | | | | | | | |
Products | $ | 401.7 | | | $ | 311.3 | | | $ | 90.4 | | | 29.0 | % |
Services | 20.6 | | | 20.5 | | | 0.1 | | | 0.5 | % |
Operating loss (including restructuring, impairment and transaction-related charges) | (4.5) | | | (16.1) | | | 11.6 | | | (72.0) | % |
Operating margin | (1.1) | % | | (4.9) | % | | N/A | | N/A |
Restructuring, impairment and transaction-related charges | $ | 30.7 | | | $ | 31.3 | | | $ | (0.6) | | | (1.9) | % |
Equity in earnings | — | | | (0.3) | | | 0.3 | | | 100.0 | % |
Net Sales
Product sales for the International segment increased $90.4 million, or 29.0%, for the year ended December 31, 2022, compared to the year ended December 31, 2021, primarily due to a $62.5 million increase in paper sales and a $48.0 million increase in print pricing and volume, primarily in Mexico and Colombia, partially offset by $20.1 million in unfavorable foreign exchange impacts, primarily in Europe, Argentina and Colombia.
Service sales for the International segment increased $0.1 million, or 0.5%, for the year ended December 31, 2022, compared to the year ended December 31, 2021, primarily due to an increase in marketing services in Europe.
Operating Loss
Operating loss for the International segment decreased $11.6 million, or 72.0%, for the year ended December 31, 2022, compared to the year ended December 31, 2021, primarily due to an $11.0 million increase in operating income from increased print pricing and volume and a $0.6 million decrease in restructuring, impairment and transaction-related charges.
Restructuring, Impairment and Transaction-Related Charges
Restructuring, impairment and transaction-related charges for the International segment decreased $0.6 million, or 1.9%, for the year ended December 31, 2022, compared to the year ended December 31, 2021, primarily due to the following: | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | |
| 2022 | | 2021 | | $ Change |
| (dollars in millions) |
Employee termination charges | $ | 3.2 | | | $ | 1.2 | | | $ | 2.0 | |
Impairment charges (a) | 1.1 | | | 32.1 | | | (31.0) | |
Transaction-related charges | 0.1 | | | — | | | 0.1 | |
Integration costs | 0.7 | | | — | | | 0.7 | |
Other restructuring charges (income) (b) | 25.6 | | | (2.0) | | | 27.6 | |
Total restructuring, impairment and transaction-related charges | $ | 30.7 | | | $ | 31.3 | | | $ | (0.6) | |
______________________________
(a)Includes $1.1 million of impairment charges 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 during the year ended December 31, 2022 and includes $32.1 million of impairment charges related to the Company’s decision to sell the investment in Plural during the year ended December 31, 2021.
(b)Includes a $23.1 million loss on the sale of its Argentina print business during the year ended December 31, 2022. Also includes $1.8 million and $0.6 million in charges from foreign currency losses as result of the economy in Argentina being classified as highly inflationary during the years ended December 31, 2022 and 2021, respectively, and a $2.7 million gain from the reclassification of foreign currency translation adjustments during the year ended December 31, 2021.
Equity in Earnings of Unconsolidated Entities
Investments in entities where Quad has the ability to exert significant influence, but not control, are accounted for using the equity method of accounting. At December 31, 2021, the Company held a 49% ownership interest in Plural, a commercial printer based in São Paulo, Brazil. The equity in earnings of unconsolidated entity in the International segment was $0.3 million for the year ended December 31, 2021. In January 2022, the Company sold its investment in Plural. As a result of the planned sale, the Company recorded a $32.1 million impairment charge during the year ended December 31, 2021.
Corporate
The following table summarizes unallocated operating expenses presented as Corporate: | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | | | |
| | | | | | | |
| | | |
| 2022 | | 2021 | | $ Change | | % Change |
| (dollars in millions) |
Operating expenses (including restructuring, impairment and transaction-related charges) | $ | 50.3 | | | $ | 54.2 | | | $ | (3.9) | | | (7.2) | % |
Restructuring, impairment and transaction-related charges | 2.0 | | | 2.1 | | | (0.1) | | | (4.8) | % |
Operating Expenses
Corporate operating expenses decreased $3.9 million, or 7.2%, for the year ended December 31, 2022, compared to the year ended December 31, 2021, primarily due to the following: (1) a $2.0 million decrease in employee-related costs; (2) a $1.6 million decrease in professional fees; and (3) a $0.1 million decrease in restructuring, impairment and transaction-related charges.
Restructuring, Impairment and Transaction-Related Charges
Corporate restructuring, impairment and transaction-related charges decreased $0.1 million, or 4.8%, for the year ended December 31, 2022, compared to the year ended December 31, 2021, primarily due to the following: | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | |
| 2022 | | 2021 | | $ Change |
| (dollars in millions) |
Employee termination charges | $ | — | | | $ | 0.5 | | | $ | (0.5) | |
| | | | | |
Transaction-related charges | 1.9 | | | 0.6 | | | 1.3 | |
| | | | | |
Other restructuring charges | 0.1 | | | 1.0 | | | (0.9) | |
Total restructuring, impairment and transaction-related charges | $ | 2.0 | | | $ | 2.1 | | | $ | (0.1) | |
Liquidity and Capital Resources
The Company utilizes cash flows from operating activities and borrowings under its credit facilities to satisfy its liquidity and capital requirements. The Company had total liquidity of $425.0 million as of December 31, 2022, which consisted of up to $399.8 million of unused capacity under its revolving credit arrangement, which was net of $32.7 million of issued letters of credit, and cash and cash equivalents of $25.2 million. Total liquidity is reduced to $398.0 million under the Company’s most restrictive debt covenants, and consists of $25.2 million in cash and cash equivalents and $372.8 million available under its revolving credit arrangement. There were no borrowings under the $432.5 million revolving credit facility as of December 31, 2022.
The Company believes its expected future cash flows from operating activities and its current liquidity and capital resources, are sufficient to fund ongoing operating requirements and service debt and pension requirements for both the next 12 months and beyond.
Net Cash Provided by Operating Activities
Year Ended December 31, 2022, Compared to Year Ended December 31, 2021
Net cash provided by operating activities was $154.6 million for the year ended December 31, 2022, compared to $136.5 million for the year ended December 31, 2021, resulting in a $18.1 million increase in cash provided by operating activities. The increase was primarily due to a $24.4 million increase in cash from earnings, offset by a $6.3 million decrease in cash flows provided by changes in operating assets and liabilities.
Net Cash (Used in) Provided by Investing Activities
Year Ended December 31, 2022, Compared to Year Ended December 31, 2021
Net cash used in investing activities was $60.5 million for the year ended December 31, 2022, compared to $129.4 million cash provided by investing activities for the year ended December 31, 2021, resulting in a $189.9 million increase in cash used in investing activities. The increase was primarily due to the following: (1) a $121.7 million decrease in proceeds from the sale of property, plant and equipment; (2) a $39.7 million decrease in proceeds from the sale of a business; (3) a $15.0 million decrease in proceeds from a property insurance claim; (4) a $10.3 million increase in purchases of property, plant and equipment; (5) a $2.6 million increase in cash used in the acquisition of a business; and (6) a $1.9 million increase in cost investment in unconsolidated entities. These increases were partially offset by a $1.3 million increase in cash provided by other investing activities.
Net Cash Used in Financing Activities
Year Ended December 31, 2022, Compared to Year Ended December 31, 2021
Net cash used in financing activities was $248.7 million for the year ended December 31, 2022, compared to $140.9 million for the year ended December 31, 2021, resulting in a $107.8 million increase in cash used in financing activities. The increase was primarily due to the following: (1) a $112.2 million increase in net payments of debt and lease obligations in 2022 compared to 2021; (2) a $10.0 million increase in purchases of treasury stock; and (3) a $1.4 million increase in equity awards redeemed to pay employees’ tax obligations. These increases were partially offset by (1) an $8.0 million decrease in cash used in other financing activities; (2) a $5.9 million decrease in payments of debt issuance costs and financing fees; and (3) a $1.9 million decrease in cash used in changes in ownership of noncontrolling interests.
Free Cash Flow
Free Cash Flow is defined as net cash provided by operating activities less purchases of property, plant and equipment.
The Company’s management assesses Free Cash Flow as a measure to quantify cash available for (1) strengthening the balance sheet (debt reduction), (2) strategic capital allocation and deployment through investments in the business (acquisitions and strategic investments) and (3) 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 Free Cash Flow can be significantly impacted by the Company’s restructuring activities and other unusual items.
Free Cash Flow is a non-GAAP financial measure and should not be considered an alternative to cash flows provided by operating activities as a measure of liquidity. Quad’s calculation of Free Cash Flow may be different from similar calculations used by other companies, and therefore, comparability may be limited.
Free Cash Flow for the years ended December 31, 2022 and 2021, was as follows: | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | |
| (dollars in millions) |
Net cash provided by operating activities | $ | 154.6 | | | $ | 136.5 | | | |
| | | | | |
Less: purchases of property, plant and equipment | (60.3) | | | (50.0) | | | |
| | | | | |
| | | | | |
Free Cash Flow (non-GAAP) | $ | 94.3 | | | $ | 86.5 | | | |
Free Cash Flow increased $7.8 million for the year ended December 31, 2022, compared to the year ended December 31, 2021, primarily due to an $18.1 million increase in net cash provided by operating activities, partially offset by a $10.3 million increase in capital expenditures. See the “Net Cash Provided by Operating Activities” section above for further explanations of the change in operating cash flows and the “Net Cash (Used in) Provided by Investing Activities” section above for further explanations of the changes in purchases of property, plant and equipment.
Debt Leverage Ratio
The Debt Leverage Ratio is defined as total debt and finance lease obligations less cash and cash equivalents (Net Debt) divided by the trailing twelve months Adjusted EBITDA, comprised of the sum of the following: (1) the last twelve months of EBITDA (see the definition of EBITDA and the reconciliation of net earnings to EBITDA in the “Results of Operations” section above); (2) restructuring, impairment and transaction-related charges; (3) gains from sale and leaseback; (4) loss on debt extinguishment; (5) equity in earnings of unconsolidated entity; and (6) Adjusted EBITDA for unconsolidated equity method investments (calculated in a consistent manner with the calculation for Quad).
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 through debt and pension liability reduction, for strategic capital allocation and deployment through investments in the business, and for returning capital to the shareholders. 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 Debt Leverage Ratio is a non-GAAP measure, and should not be considered an alternative to cash flows provided by operating activities as a measure of liquidity. Quad’s calculation of the Debt Leverage Ratio may be different from similar calculations used by other companies and, therefore, comparability may be limited.
The Debt Leverage Ratio calculated below differs from the Total Leverage Ratio, the Total Net Leverage Ratio and Senior Secured Leverage Ratio included in the Company’s debt covenant calculations (see “Covenants and Compliance” section below for further information on debt covenants). The Total Leverage Ratio included in the Company’s debt covenants includes interest rate swap liabilities, letters of credit and surety bonds as debt, and excludes non-cash stock-based compensation expense from EBITDA. The Total Net Leverage Ratio includes and excludes the same adjustments as the Total Leverage Ratio, in addition to netting domestic unrestricted cash with debt. Similarly, the Senior Secured Leverage Ratio includes and excludes the same adjustments as the Total Leverage Ratio, in addition to the exclusion of the outstanding balance of the surety bonds from debt and netting domestic unrestricted cash with debt.
The Debt Leverage Ratio as of December 31, 2022 and 2021, was as follows: | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| (dollars in millions) |
Total debt and finance lease obligations on the consolidated balance sheets | $ | 570.2 | | | $ | 803.7 | |
Less: Cash and cash equivalents | 25.2 | | | 179.9 | |
Net Debt (non-GAAP) | $ | 545.0 | | | $ | 623.8 | |
| | | |
| | | |
| | | |
| | | |
Divided by: Adjusted EBITDA for the year ended (non-GAAP) | $ | 252.2 | | | $ | 260.5 | |
| | | |
| | | |
| | | |
Debt Leverage Ratio (non-GAAP) | 2.16 | x | | 2.39 | x |
The calculation of Adjusted EBITDA for the years ended December 31, 2022 and 2021, was as follows: | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 |
| (dollars in millions) |
Net earnings | $ | 9.3 | | | $ | 37.8 | |
Interest expense | 48.4 | | | 59.6 | |
Income tax expense | 8.4 | | | 9.5 | |
Depreciation and amortization | 141.3 | | | 157.3 | |
EBITDA (non-GAAP) | $ | 207.4 | | | $ | 264.2 | |
Restructuring, impairment and transaction-related charges | 44.8 | | | 18.9 | |
| | | |
| | | |
Gains from sale and leaseback | — | | | (24.5) | |
Loss on debt extinguishment | — | | | 0.7 | |
Other (1) | — | | | 1.2 | |
Adjusted EBITDA (non-GAAP) (2) | $ | 252.2 | | | $ | 260.5 | |
______________________________
(1)Other is comprised of equity in earnings of unconsolidated entity and Adjusted EBITDA for unconsolidated equity method investments.
(2)The Company made a change in its definition of Adjusted EBITDA to include net pension income. This change is reflected in all periods presented.
The Debt Leverage Ratio, at December 31, 2022, decreased 0.23x to 2.16x compared to December 31, 2021, primarily due to a $78.8 million decrease in debt and finance lease obligations, partially offset by an $8.3 million decrease in Adjusted EBITDA. The Debt Leverage Ratio, at December 31, 2022, is within management’s desired target Debt Leverage Ratio range of 2.0x to 2.5x; however, the Company will operate at times above the Debt Leverage Ratio target range depending on the timing of compelling strategic investment opportunities, as well as seasonal working capital needs.
Description of Significant Outstanding Debt Obligations as of December 31, 2022
As of December 31, 2022, the Company utilized a combination of debt instruments to fund cash requirements, including the following:
•Senior Secured Credit Facility:
◦$432.5 million revolving credit facility (no outstanding balance as of December 31, 2022); and
◦$825.0 million Term Loan A ($556.7 million outstanding as of December 31, 2022);
•Master Note and Security Agreement ($4.4 million outstanding as of December 31, 2022).
Senior Secured Credit Facility
On April 28, 2014, the Company entered into its Senior Secured Credit Facility, which included a revolving credit facility, Term Loan A and Term Loan B (Term Loan B was retired in July 2019) . The Company completed the fifth amendment to the Senior Secured Credit Facility on November 2, 2021. The Senior Secured Credit Facility was amended to (a) reduce the aggregate amount of the existing revolving credit facility from $500.0 million to $432.5 million, and extend the maturity of a portion of the revolving credit facility such that $90.0 million under the revolving credit facility is due on the existing maturity date of January 31, 2024 (the “Existing Maturity Date”) and $342.5 million under the revolving credit facility is due on November 2, 2026 (the “Extended Maturity Date”); (b) extend the maturity of a portion of the existing term loan facility such that $91.5 million of such term loan facility is due on the Existing Maturity Date and $483.9 million is due on the Extended Maturity Date; (c) make certain adjustments to pricing, including an increase of 0.50% to the interest rate margin applicable to the loans maturing on the Extended Maturity Date; (d) modify certain financial and operational covenants; and (e) modify the interest rate provisions relating to the phase-out of LIBOR as a reference rate.
The Company completed the sixth amendment to the Senior Secured Credit Facility on March 25, 2022, which expanded the number of currencies available for letters of credit. The Company completed the seventh amendment to the Senior Secured Credit Facility on January 24, 2023, which transitioned the Company’s reference rate from LIBOR to SOFR effective February 1, 2023. The transition from LIBOR to SOFR does not have a material impact on the consolidated financial statements.
Borrowings under the revolving credit facility and Term Loan A made under the Senior Secured Credit Facility bear interest at 2.75% in excess of reserve adjusted LIBOR, or 1.75% in excess of an alternate base rate with a LIBOR floor of 0.75% for the extended tranche and bear interest at 2.50% in excess of reserve adjusted LIBOR, or 1.50% in excess of an alternate base rate with a LIBOR floor of 0.75% for the non-extending tranche.
At December 31, 2022, the Company had no outstanding borrowings on the revolving credit facility, and had $32.7 million of issued letters of credit, leaving up to $399.8 million available for future borrowings. The Senior Secured Credit Facility is secured by substantially all of the unencumbered assets of the Company. The Senior Secured Credit Facility also requires the Company to provide additional collateral to the lenders in certain limited circumstances.
Senior Unsecured Notes
The Company issued $300.0 million aggregate principal amount of its Senior Unsecured Notes due May 1, 2022, on April 28, 2014. During the first quarter of 2022, the Company repurchased $2.4 million of its outstanding Senior Unsecured Notes in the open market. During the year ended December 31, 2021, the Company repurchased $27.2 million of its outstanding Senior Unsecured Notes in the open market, resulting in a net loss on debt extinguishment of $0.5 million. All repurchased Senior Unsecured Notes were canceled. The Company used cash flows from operating activities and borrowings under its revolving credit facility 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, outstanding at the time, of its Senior Unsecured Notes.
Master Note and Security Agreement
On September 1, 1995, and as last amended on November 24, 2014, the Company entered into its Master Note and Security Agreement pursuant to which the Company issued over time senior notes in an aggregate principal amount of $1.1 billion in various tranches, of which $4.4 million was outstanding as of December 31, 2022. The senior notes under the Master Note and Security Agreement had a weighted average interest rate of 7.92% at December 31, 2022, which is fixed to maturity, with interest payable semiannually. Principal payments commenced September 1997 and extend through 2026 in various tranches. The notes are collateralized by certain United States press equipment under the terms of the Master Note and Security Agreement.
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). Among these covenants, the Company was required to maintain the following as of December 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 December 31, 2022, the Company’s Total Leverage Ratio was 2.22 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 December 31, 2022, the Company’s Senior Secured Leverage Ratio was 2.13 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 December 31, 2022, the Company’s Interest Coverage Ratio was 6.39 to 1.00).
The Company was in compliance with all financial covenants in its debt agreements as of December 31, 2022. While the Company currently expects to be in compliance in future periods with all of the financial covenants, there can be no assurance that these covenants will continue to be met. The Company’s failure to maintain compliance with the covenants could prevent the Company from borrowing additional amounts and could result in a default under any of the debt agreements. Such default could cause the outstanding indebtedness to become immediately due and payable, by virtue of cross-acceleration or cross-default provisions.
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 December 31, 2022, was 2.22 to 1.00, the limitations described above are not applicable at this time.
•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 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 2.13 to 1.00 and Total Net Leverage Ratio was 2.14 to 1.00, as of December 31, 2022.
Net Pension Obligations
The net underfunded pension and MEPPs obligations increased by $13.2 million during the year ended December 31, 2022, from $51.4 million at December 31, 2021, to $64.6 million at December 31, 2022. This increase was primarily due to an overall decrease in pension plan assets due to a negative actual return on pension plan assets of (21.76%) during the year ended December 31, 2022, which was below the expected return on plan assets assumption of 5.25%. This decrease in plan assets was partially offset by a decrease in overall pension obligations, primarily due to a 269 basis point increase in the pension discount rate from 2.77% at December 31, 2021 to 5.46% at December 31, 2022, payments totaling $6.2 million made to the MEPPs and $1.0 million in pension benefit payments during the year ended December 31, 2022.
The Company continues to focus on reducing pension obligations through cash contributions to the plans, lump-sum settlements and plan design changes.
Share Repurchase Program
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. Under the authorization, share repurchases may be made at the Company’s discretion, from time to time, in the open market and/or in privately negotiated transactions as permitted by federal securities laws and other legal requirements. The timing, manner, price and amount of any repurchase will depend on economic and market conditions, share price, trading volume, applicable legal requirements and other factors. The program may be suspended or discontinued at any time.
During the year ended December 31, 2022, the Company repurchased 3,093,662 shares of its Class A common stock at a weighted average price of $3.21 per share for a total purchase price of $9.9 million ($10.0 million, including commissions). There were no shares repurchased during the year ended December 31, 2021. As of December 31, 2022, there were $90.1 million of authorized repurchases remaining under the program.
Risk Management
For a discussion of the Company’s exposure to market risks and management of those market risks, see Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” of this Annual Report on Form 10-K.
Contractual Obligations and Other Commitments
The Company’s contractual cash obligations at December 31, 2022, were as follows (in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Payments Due by Period |
| Total | | 2023 | | 2024 | | 2025 | | 2026 | | 2027 | | Thereafter |
Debt obligations(1) | $ | 677.2 | | | $ | 95.0 | | | $ | 177.2 | | | $ | 94.0 | | | $ | 311.0 | | | $ | — | | | $ | — | |
Operating lease obligations(2) | 131.3 | | | 33.1 | | | 25.7 | | | 21.4 | | | 17.1 | | | 13.9 | | | 20.1 | |
MEPPs withdrawal obligations(3) | 38.9 | | | 6.1 | | | 4.0 | | | 3.9 | | | 3.9 | | | 3.9 | | | 17.1 | |
Pension benefit obligations(4) | 35.3 | | | 1.5 | | | 9.7 | | | 8.2 | | | 8.4 | | | 7.5 | | | — | |
Finance lease obligations(5) | 2.7 | | | 0.9 | | | 0.6 | | | 0.5 | | | 0.2 | | | 0.2 | | | 0.3 | |
Purchase obligations(6) | 35.4 | | | 35.4 | | | — | | | — | | | — | | | — | | | — | |
Total(7)(8) | $ | 920.8 | | | $ | 172.0 | | | $ | 217.2 | | | $ | 128.0 | | | $ | 340.6 | | | $ | 25.5 | | | $ | 37.5 | |
______________________________
(1)Debt obligations include $102.5 million for anticipated future interest payments, including $3.9 million of estimated interest payment refunds from the interest rate swaps, and excludes $6.9 million for future amortization of debt issuance costs. During 2021, the Company paid in advance $62.4 million of required amortization payments on its Term Loan A for the year ended December 31, 2023.
(2)Operating lease obligations include $16.4 million for anticipated future interest payments.
(3)MEPPs withdrawal obligations include $10.5 million for anticipated future interest payments. See Note 14, “Employee Retirement Plans,” to the consolidated financial statements in Part II, Item 8, “Financial Statements and Supplementary Data,” of this Annual Report on Form 10-K for further discussion of the MEPPs withdrawal liability.
(4)For the pension benefit obligations, contributions and benefit payments to be funded from Company assets included in the table have been actuarially estimated over a five year period. While benefit payments under these benefit plans are expected to continue beyond 2027, the Company believes that an estimate beyond this period is unreasonable.
(5)Finance lease obligations include $0.3 million for anticipated future interest payments.
(6)Purchase obligations consist primarily of $32.9 million in firm commitments to purchase press and finishing equipment and $2.5 million of other purchase obligations.
(7)The contractual obligations table above does not include reserves for uncertain tax positions recorded in accordance with the accounting guidance on uncertainties in income taxes. The Company has taken tax positions for which the ultimate amount and the year(s) any necessary payments will be made that pertain to those tax positions is uncertain. The reserve for uncertain tax positions prior to interest and penalties was $11.1 million as of December 31, 2022, of which $6.7 million was included in deferred income taxes and $4.4 million was included in other long-term liabilities.
(8)The contractual obligations table above does not include the share repurchase program as no repurchases are required under the program. See the “Share Repurchase Program” section above for further discussion, including the maximum potential cash payments under the program.
Critical Accounting Policies and Estimates
The Company’s consolidated financial statements are prepared in accordance with GAAP. The Company’s most critical accounting policies are those that are most important to the portrayal of its financial condition and results of operations, and which require the Company to make its most difficult and subjective estimates. Management is required to make judgments and estimates that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the statements, and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. The Company’s management believes that such judgments and estimates are made with consistent and appropriate methods based on information available at the time, and that any reasonable deviation from those judgments and estimates would not have a material impact on the Company’s consolidated financial position or results of operations. Actual results may differ from these estimates under different assumptions or conditions. To the extent that the estimates used differ from actual results, adjustments to the consolidated statements of operations and corresponding consolidated balance sheets would be necessary. These adjustments would be made in future statements.
The Company has identified the following as its critical accounting policies and estimates.
Revenue Recognition
Performance Obligations
At contract inception, the Company assesses the products and services promised in its contracts with customers and identifies performance obligations for each promise to transfer to the customer a product or service that is distinct. To identify the performance obligations, the Company considers the goods or services promised in the contract regardless of whether they are explicitly stated or are implied by customary business practices. The Company determined that the following distinct products and services represent separate performance obligations:
•Pre-Press Services
•Print
•Other Services
For Pre-Press and Other Services, the Company recognizes revenue at point-in-time upon completion of the performed service and acceptance by the customer. The Company considers transfer of control to occur once the service is performed as the Company has right to payment and the customer has legal title and risk and reward of ownership.
The Company recognizes its Print revenues upon transfer of title and the passage of risk of loss, which is point-in-time upon shipment to the customer, and when there is a reasonable assurance as to collectability. Revenues related to the Company’s logistics operations, which includes the delivery of printed material, are included in the Print performance obligation and are also recognized at point-in-time as services are completed. Revenues related to the Company’s imaging operations, which include digital content management, photography, color services and page production, are recognized in accordance with the terms of the contract, typically upon completion of the performed service and acceptance by the customer. Under agreements with certain customers, products may be stored by the Company for future delivery and revenue is recognized upon shipment to the customer. In these situations, the Company may receive warehouse management fees for the services it provides.
Certain revenues earned by the Company require judgment to determine if revenue should be recorded gross as principal or net of related costs as an agent. Billings for third-party shipping and handling costs, primarily in the Company’s logistics operations, and out-of-pocket expenses are recorded gross in net sales and cost of sales in the consolidated statements of operations in Item 8, “Financial Statements and Supplementary Data,” of this Annual Report on Form 10-K. Many of the Company’s operations process materials, primarily paper, that may be supplied directly by customers or may be purchased by the Company and sold to customers. No revenue is recognized for customer-supplied paper. Revenues for the Company-supplied paper are recognized on a gross basis. In some instances, the Company will deliver print work for a customer and bill the customer for postage. In these cases, the Company is acting as an agent and billings are recorded on a net basis in net sales.
Significant Payment Terms
Payment terms and conditions for contracts with customers vary. The Company typically offers standard terms of net 30 days. It is not the Company’s standard business practice to offer extended payment terms longer than one year. The Company may offer cash discounts or prepayment and extended terms depending on certain facts and circumstances. As such, when the timing of the Company’s delivery of products and services differs from the timing of payment, the Company will record either a contract asset or a contract liability.
Variable Consideration
When evaluating the transaction price, the Company analyzes on a contract by contract basis all applicable variable considerations and non-cash consideration and also performs a constraint analysis. The nature of the Company’s contracts give rise to variable consideration, including, volume rebates, credits, discounts, and other similar items that generally decrease the transaction price. These variable amounts generally are credited to the customer, based on achieving certain levels of sales activity, when contracts are signed, or making payments within specific terms.
Product returns are not significant because the products are customized; however, the Company accrues for the estimated amount of customer allowances at the time of sale based on historical experience and known trends.
When the transaction price requires allocation to multiple performance obligations, the Company uses the estimated stand-alone selling prices using the adjusted market assessment approach.
Impairment of Property, Plant and Equipment and Finite-lived Intangible Assets
The Company performs impairment evaluations of its long-lived assets whenever business conditions, events or circumstances indicate that those assets may be impaired, including whether the estimated useful life of such long-lived assets may warrant revision or whether the remaining balance of an asset may not be recoverable. The Company’s most significant long-lived assets are property, plant and equipment and customer relationship intangible assets recorded in conjunction with an acquisition. Assessing the impairment of long-lived assets requires the Company to make important estimates and assumptions, including, but not limited to, the expected future cash flows that the assets will generate, how the assets will be used based on the strategic direction of the Company, their remaining useful life and their residual value, if any. Considerable judgment is also applied in incorporating the potential impact of the current economic climate on customer demand and selling prices, the cost of production and the limited activity on secondary markets for the assets and on the cost of capital. When the estimated future undiscounted cash flows to be generated by the assets are less than the carrying value of the long-lived assets, the assets are written down to fair value and a charge is recorded to current operations. The Company uses internal discounted cash flow estimates, quoted market prices when available and independent appraisals, as appropriate, to determine fair value. This fair value determination was categorized as Level 3 in the fair value hierarchy (see Note 13, “Financial Instruments and Fair Value Measurements,” to the consolidated financial statements in Part II, Item 8, “Financial Statements and Supplementary Data,” of this Annual Report on Form 10-K for the definition of Level 3 inputs).
The Company classifies long-lived assets to be sold as held for sale in the period in which: (i) there is an approved plan to sell the asset and the Company is committed to that plan, (ii) the asset is available for immediate sale in its present condition, (iii) an active program to locate a buyer and other actions required to sell the asset have been initiated, (iv) the sale of the asset is probable, (v) the asset is being actively marketed for sale at a price that is reasonable in relation to its current fair value, and (vi) it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. Assets held for sale are initially measured at the lower of the carrying value or the fair value less cost to sell. Losses resulting from this measurement are recognized in the period in which the held for sale criteria are met while gains are not recognized until the date of sale. Once designated as held for sale, the Company stops recording depreciation expense on the property, plant and equipment. The fair value less cost to sell of long-lived assets held for sale is assessed at each reporting period until it no longer meets this classification.
Based on the assessments completed during the years ended December 31, 2022, and 2021, the Company recognized property, plant and equipment impairment charges of $2.2 million and $2.8 million, respectively, primarily related to facility consolidations, as well as other capacity reduction and strategic divestiture activities. There were no finite-lived intangible asset impairment charges recorded during the years ended December 31, 2022 and 2021.
The Company continues to monitor groups of assets to identify any new events or changes in circumstances that could indicate that their carrying values are not recoverable, particularly in light of potential declines in profitability that may result from the highly competitive industry landscape and continued uncertainty in the global economy. In the event that there are significant and unanticipated changes in circumstances, such as significant adverse changes in business climate, adverse actions by regulators, unanticipated competition, loss of key customers and/or changes in technology or markets, or that actual results differ from management’s estimates, a provision for impairment could be required in a future period.
Workers’ Compensation
The Company is self-insured for a significant portion of its expected workers’ compensation program. Insurance is purchased for individual workers’ compensation claims that exceed $0.8 million. The Company establishes reserves for unresolved claims and for an estimate of incurred but not reported (“IBNR”) claims. These reserves and estimates of IBNR claims are based upon an actuarial study, which is performed annually as of October 31st and is adjusted by the actuarially determined losses and actual claims payments for November and December. The Company also monitors actual claim developments, including incurrence or settlement of individual large claims during the interim periods between actuarial studies as another means of estimating the adequacy of the reserves. As of December 31, 2022, the Company has net reserves for workers’ compensation of $29.9 million, of which $6.6 million was recorded in other current liabilities and $34.5 million was recorded in other long-term liabilities in the consolidated balance sheets (see Note 8, “Other Current and Long-Term Liabilities”). These reserves are net of $11.2 million recorded in other long-term assets in the consolidated balance sheets for claims covered by purchased insurance.
New Accounting Pronouncements
See Note 21, “New Accounting Pronouncements,” to the consolidated financial statements in Part II, Item 8, “Financial Statements and Supplementary Data,” of this Annual Report on Form 10-K.
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Quad/Graphics, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Quad/Graphics, Inc. (the Company) as of December 31, 2022, and the related consolidated statement of operations, comprehensive income, cash flows, and shareholders’ equity in the year ended December 31, 2022, and the related notes (collectively referred to as the “financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022, and the results of its operations and its cash flows for the year ended December 31, 2022, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 24, 2023, expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Measurement of accrued liabilities for workers’ compensation claims
| | | | | |
Description of the Matter | At December 31, 2022, the Company’s consolidated accrued liabilities for workers’ compensation claims were $41.1 million and included within other current and long-term liabilities. As discussed in Note 1, the Company establishes accrued liabilities for workers’ compensation claims reported plus an estimate for loss development and potential claims that have been incurred but not reported (IBNR) to the Company or its insurance provider. The IBNR calculation utilizes a variety of assumptions, including but not limited to selected loss development factors, loss trend rates, increased limit factors and loss rates. The accrued liabilities for workers’ claims are based upon an actuarial analysis performed annually by actuarial specialists as of October 31st and are adjusted by the actuarially determined losses and actual claims payments to update through year end.
Auditing management’s estimate of the IBNR was especially challenging due to the various assumptions and the complexity of the actuarial analysis.
|
How We Addressed the Matter in Our Audit | We tested certain of the Company’s controls over the measurement of accrued liabilities for workers’ compensation claims process, which included, among others, management’s review and approval of the actuarial analysis and related year-end update, management’s validation of data inputs as well as their review and approval of assumptions used in the analysis.
To test the measurement of accrued liabilities for workers’ compensation claims, we performed audit procedures that included, among other others, assessing methodologies and testing the significant assumptions discussed above, as well as testing the completeness and accuracy of the underlying data used by the Company in its analysis. We also involved our actuarial professionals with specialized skills and knowledge, who assisted in: (1) assessing the actuarial models and procedures used by the Company by comparing them to generally accepted actuarial methods and procedures to estimate the ultimate losses, (2) evaluating the Company’s key assumptions and judgments underlying the Company’s estimate by developing an independent range of the IBNR and comparing it against the Company’s recorded amount and (3) evaluating the qualifications of the external actuarial specialists. |
/s/ Ernst & Young LLP
We have served as the Company's auditor since 2022.
Milwaukee, Wisconsin
February 24, 2023
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Quad/Graphics, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Quad/Graphics, Inc. and subsidiaries (the “Company”) as of December 31, 2021, the related consolidated statements of operations, comprehensive income, shareholders' equity, and cash flows, for the year ended December 31, 2021, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021, and the results of its operations and its cash flows for the year ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Deloitte & Touche LLP
Milwaukee, Wisconsin
February 23, 2022
We began serving as the Company’s auditor in 2002. In 2022 we became the predecessor auditor.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Quad/Graphics, Inc.
Opinion on Internal Control over Financial Reporting
We have audited Quad/Graphics, Inc.’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Quad/Graphics, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of the Company as of December 31, 2022 and the related consolidated statement of operations, comprehensive income, cash flows, and shareholders’ equity in the year ended December 31, 2022, and the related notes listed in the accompanying index and our report dated February 24, 2023 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Milwaukee, Wisconsin
February 24, 2023
QUAD/GRAPHICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data) | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | |
Net sales | | | | | |
Products | $ | 2,528.3 | | | $ | 2,247.1 | | | |
Services | 688.7 | | | 713.3 | | | |
Total net sales | 3,217.0 | | | 2,960.4 | | | |
Cost of sales | | | | | |
Products | 2,156.2 | | | 1,861.0 | | | |
Services | 462.6 | | | 528.9 | | | |
Total cost of sales | 2,618.8 | | | 2,389.9 | | | |
Operating expenses | | | | | |
Selling, general and administrative expenses | 358.6 | | | 326.0 | | | |
Gains from sale and leaseback | — | | | (24.5) | | | |
Depreciation and amortization | 141.3 | | | 157.3 | | | |
Restructuring, impairment and transaction-related charges | 44.8 | | | 18.9 | | | |
| | | | | |
Total operating expenses | 3,163.5 | | | 2,867.6 | | | |
Operating income | 53.5 | | | 92.8 | | | |
Interest expense | 48.4 | | | 59.6 | | | |
Net pension income | (12.6) | | | (14.5) | | | |
Loss on debt extinguishment | — | | | 0.7 | | | |
Earnings before income taxes and equity in earnings of unconsolidated entity | 17.7 | | | 47.0 | | | |
Income tax expense | 8.4 | | | 9.5 | | | |
Earnings before equity in earnings of unconsolidated entity | 9.3 | | | 37.5 | | | |
Equity in earnings of unconsolidated entity | — | | | (0.3) | | | |
Net earnings | $ | 9.3 | | | $ | 37.8 | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Earnings per share | | | | | |
| | | | | |
| | | | | |
| | | | | |
Basic | $ | 0.18 | | | $ | 0.74 | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Diluted | $ | 0.18 | | | $ | 0.71 | | | |
| | | | | |
Weighted average number of common shares outstanding | | | | | |
Basic | 50.7 | | | 51.3 | | | |
Diluted | 52.5 | | | 53.0 | | | |
See accompanying Notes to Consolidated Financial Statements.
QUAD/GRAPHICS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions) | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | |
Net earnings | $ | 9.3 | | | $ | 37.8 | | | |
| | | | | |
Other comprehensive income | | | | | |
Translation adjustments | | | | | |
Foreign currency translation adjustments | (3.2) | | | (8.2) | | | |
Translation of long-term loans to foreign subsidiaries | 0.9 | | | (1.1) | | | |
| | | | | |
Revaluation loss from the dissolution of an equity method investment entity | 29.4 | | | — | | | |
Total translation adjustments | 27.1 | | | (9.3) | | | |
| | | | | |
Reclassification of foreign currency translation adjustments | 27.3 | | | (2.7) | | | |
| | | | | |
Interest rate swap adjustments | 3.4 | | | 7.1 | | | |
| | | | | |
Pension benefit plan adjustments | | | | | |
Net gain (loss) arising during period | (30.7) | | | 20.4 | | | |
| | | | | |
| | | | | |
Settlement charge on pension benefit plans included in net earnings | — | | | 0.9 | | | |
| | | | | |
Total pension benefit plan adjustments | (30.7) | | | 21.3 | | | |
| | | | | |
Other comprehensive income, before tax | 27.1 | | | 16.4 | | | |
| | | | | |
Income tax impact related to items of other comprehensive income | 5.8 | | | (6.3) | | | |
| | | | | |
Other comprehensive income, net of tax | 32.9 | | | 10.1 | | | |
| | | | | |
Total comprehensive income | $ | 42.2 | | | $ | 47.9 | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
See accompanying Notes to Consolidated Financial Statements.
QUAD/GRAPHICS, INC.
CONSOLIDATED BALANCE SHEETS
(in millions, except per share data) | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
ASSETS | | | |
Cash and cash equivalents | $ | 25.2 | | | $ | 179.9 | |
Receivables, less allowances for credit losses of $26.4 million at December 31, 2022, and $28.2 million at December 31, 2021 | 372.6 | | | 362.0 | |
Inventories | 260.7 | | | 226.2 | |
Prepaid expenses and other current assets | 46.0 | | | 41.0 | |
| | | |
Total current assets | 704.5 | | | 809.1 | |
Property, plant and equipment—net | 672.1 | | | 727.0 | |
Operating lease right-of-use assets—net | 111.1 | | | 125.7 | |
Goodwill | 86.4 | | | 86.4 | |
Other intangible assets—net | 46.9 | | | 75.3 | |
| | | |
| | | |
Other long-term assets | 80.8 | | | 66.5 | |
| | | |
Total assets | $ | 1,701.8 | | | $ | 1,890.0 | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | |
Accounts payable | $ | 456.6 | | | $ | 367.3 | |
Other current liabilities | 249.1 | | | 314.3 | |
Short-term debt and current portion of long-term debt | 61.1 | | | 245.6 | |
Current portion of finance lease obligations | 0.8 | | | 1.8 | |
Current portion of operating lease obligations | 27.8 | | | 28.1 | |
| | | |
Total current liabilities | 795.4 | | | 957.1 | |
Long-term debt | 506.7 | | | 554.9 | |
Finance lease obligations | 1.6 | | | 1.4 | |
Operating lease obligations | 87.1 | | | 99.8 | |
Deferred income taxes | 9.3 | | | 11.9 | |
Other long-term liabilities | 128.8 | | | 128.1 | |
| | | |
Total liabilities | 1,528.9 | | | 1,753.2 | |
Commitments and contingencies (Note 9) | | | |
Shareholders’ equity (Note 17) | | | |
Preferred stock, $0.01 par value; Authorized: 0.5 million shares; Issued: None | — | | | — | |
Common stock, Class A, $0.025 par value; Authorized: 105.0 million shares; Issued: 42.6 million shares at December 31, 2022, and 41.7 million shares at December 31, 2021 | 1.0 | | | 1.0 | |
Common stock, Class B, $0.025 par value; Authorized: 80.0 million shares; Issued: 13.5 million shares at December 31, 2022 and 2021 | 0.4 | | | 0.4 | |
Common stock, Class C, $0.025 par value; Authorized: 20.0 million shares; Issued: 0.5 million shares at December 31, 2022 and 2021 | — | | | — | |
Additional paid-in capital | 841.8 | | | 839.3 | |
Treasury stock, at cost, 3.9 million shares at December 31, 2022, and 1.4 million shares at December 31, 2021 | (23.5) | | | (14.9) | |
Accumulated deficit | (518.5) | | | (527.8) | |
Accumulated other comprehensive loss | (128.3) | | | (161.2) | |
| | | |
| | | |
Total shareholders’ equity | 172.9 | | | 136.8 | |
Total liabilities and shareholders’ equity | $ | 1,701.8 | | | $ | 1,890.0 | |
See accompanying Notes to Consolidated Financial Statements.
QUAD/GRAPHICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions) | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | |
OPERATING ACTIVITIES | | | | | |
Net earnings | $ | 9.3 | | | $ | 37.8 | | | |
Adjustments to reconcile net earnings to net cash provided by operating activities: | | | | | |
Depreciation and amortization | 141.3 | | | 157.3 | | | |
Impairment charges | 2.2 | | | 34.9 | | | |
Reclassification of foreign currency translation adjustments | — | | | (2.7) | | | |
Settlement charges on pension plan | — | | | 0.9 | | | |
| | | | | |
Amortization of debt issuance costs and original issue discount | 2.2 | | | 3.0 | | | |
Loss on debt extinguishment | — | | | 0.7 | | | |
Stock-based compensation | 6.0 | | | 6.2 | | | |
Gain on the sale or disposal of property, plant and equipment | (2.3) | | | (49.0) | | | |
(Gain) loss on the sale of a business | 23.1 | | | (20.9) | | | |
Gain from a property insurance claim | — | | | (13.4) | | | |
| | | | | |
| | | | | |
Deferred income taxes | 2.4 | | | 5.3 | | | |
Equity in earnings of unconsolidated entity | — | | | (0.3) | | | |
| | | | | |
Changes in operating assets and liabilities—net of acquisitions and divestitures: | | | | | |
Receivables | (18.6) | | | 12.7 | | | |
Inventories | (41.1) | | | (58.3) | | | |
Prepaid expenses and other current assets | 3.0 | | | 8.1 | | | |
Accounts payable and other current liabilities | 63.9 | | | 49.0 | | | |
Other | (36.8) | | | (34.8) | | | |
Net cash provided by operating activities | 154.6 | | | 136.5 | | | |
| | | | | |
INVESTING ACTIVITIES | | | | | |
Purchases of property, plant and equipment | (60.3) | | | (50.0) | | | |
Cost investment in unconsolidated entities | (3.3) | | | (1.4) | | | |
Proceeds from the sale of property, plant and equipment | 4.6 | | | 126.3 | | | |
Proceeds from the sale of a business | — | | | 39.7 | | | |
Proceeds from a property insurance claim | — | | | 15.0 | | | |
| | | | | |
| | | | | |
Acquisition of a business | (2.6) | | | — | | | |
Other investing activities | 1.1 | | | (0.2) | | | |
Net cash (used in) provided by investing activities | (60.5) | | | 129.4 | | | |
| | | | | |
FINANCING ACTIVITIES | | | | | |
Payments of current and long-term debt | (235.9) | | | (139.5) | | | |
Payments of finance lease obligations | (2.1) | | | (3.0) | | | |
Borrowings on revolving credit facilities | 995.7 | | | 445.1 | | | |
Payments on revolving credit facilities | (995.0) | | | (440.5) | | | |
Proceeds from issuance of long-term debt | 3.1 | | | 15.9 | | | |
Payments of debt issuance costs and financing fees | — | | | (5.9) | | | |
Change in ownership of noncontrolling interests | — | | | (1.9) | | | |
Purchases of treasury stock | (10.0) | | | — | | | |
| | | | | |
Equity awards redeemed to pay employees’ tax obligations | (2.5) | | | (1.1) | | | |
Payment of cash dividends | (1.4) | | | (1.4) | | | |
Other financing activities | (0.6) | | | (8.6) | | | |
Net cash used in financing activities | (248.7) | | | (140.9) | | | |
Effect of exchange rates on cash and cash equivalents | (0.1) | | | (0.3) | | | |
Net increase (decrease) in cash and cash equivalents | (154.7) | | | 124.7 | | | |
Cash and cash equivalents at beginning of year | 179.9 | | | 55.2 | | | |
Cash and cash equivalents at end of year | $ | 25.2 | | | $ | 179.9 | | | |
See accompanying Notes to Consolidated Financial Statements.
QUAD/GRAPHICS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in millions) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 January 1, 2021 | 54.4 | | | $ | 1.4 | | | $ | 833.1 | | | (0.8) | | | $ | (13.1) | | | $ | (566.0) | | | $ | (171.3) | | | $ | 84.1 | | | $ | 0.7 | | | |
Net earnings | — | | | — | | | — | | | — | | | — | | | 37.8 | | | — | | | 37.8 | | | — | | | |
Change in ownership of noncontrolling interests | — | | | — | | | (0.9) | | | — | | | — | | | — | | | — | | | (0.9) | | | (0.7) | | | |
Foreign currency translation adjustments | — | | | — | | | — | | | — | | | — | | | — | | | (9.6) | | | (9.6) | | | — | | | |
Reclassification of foreign currency translation adjustments | — | | | — | | | — | | | — | | | — | | | — | | | (2.7) | | | (2.7) | | | — | | | |
Pension benefit plan liability adjustments, net of tax | — | | | — | | | — | | | — | | | — | | | — | | | 16.8 | | | 16.8 | | | — | | | |
Interest rate swap adjustments, net of tax | — | | | — | | | — | | | — | | | — | | | — | | | 5.6 | | | 5.6 | | | — | | | |
Accrual reversal for cash dividends declared | — | | | — | | | — | | | — | | | — | | | 0.4 | | | — | | | 0.4 | | | — | | | |
Stock-based compensation | — | | | — | | | 6.2 | | | — | | | — | | | — | | | — | | | 6.2 | | | — | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Issuance of share-based awards, net of other activity | 1.3 | | | — | | | 0.9 | | | (0.4) | | | (0.7) | | | — | | | — | | | 0.2 | | | — | | | |
Equity awards redeemed to pay employees’ tax obligations | — | | | — | | | — | | | (0.2) | | | (1.1) | | | — | | | — | | | (1.1) | | | — | | | |
Balance at December 31, 2021 | 55.7 | | | $ | 1.4 | | | $ | 839.3 | | | (1.4) | | | $ | (14.9) | | | $ | (527.8) | | | $ | (161.2) | | | $ | 136.8 | | | $ | — | | | |
Net earnings | — | | | — | | | — | | | — | | | — | | | 9.3 | | | — | | | 9.3 | | | — | | | |
| | | | | | | | | | | | | | | | | | | |
Foreign currency translation adjustments | — | | | — | | | — | | | — | | | — | | | — | | | 27.2 | | | 27.2 | | | — | | | |
Reclassification of foreign currency translation adjustments | — | | | — | | | — | | | — | | | — | | | — | | | 27.3 | | | 27.3 | | | — | | | |
Pension benefit plan liability adjustments, net of $6.5 million tax benefit | — | | | — | | | — | | | — | | | — | | | — | | | (24.2) | | | (24.2) | | | — | | | |
Interest rate swap adjustments, net of tax | — | | | — | | | — | | | — | | | — | | | — | | | 2.6 | | | 2.6 | | | — | | | |
| | | | | | | | | | | | | | | | | | | |
Stock-based compensation | — | | | — | | | 5.8 | | | — | | | — | | | — | | | — | | | 5.8 | | | — | | | |
| | | | | | | | | | | | | | | | | | | |
Purchases of treasury stock | — | | | — | | | — | | | (3.1) | | | (10.0) | | | — | | | — | | | (10.0) | | | — | | | |
| | | | | | | | | | | | | | | | | | | |
Issuance of share-based awards, net of other activity | 0.9 | | | — | | | (3.3) | | | 1.0 | | | 3.9 | | | — | | | — | | | 0.6 | | | — | | | |
Equity awards redeemed to pay employees’ tax obligations | — | | | — | | | — | | | (0.4) | | | (2.5) | | | — | | | — | | | (2.5) | | | — | | | |
Balance at December 31, 2022 | 56.6 | | | $ | 1.4 | | | $ | 841.8 | | | (3.9) | | | $ | (23.5) | | | $ | (518.5) | | | $ | (128.3) | | | $ | 172.9 | | | $ | — | | | |
See accompanying Notes to Consolidated Financial Statements.
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
Note 1. Basis of Presentation and Summary of Significant Accounting Policies
Nature of Operations—Quad is a global marketing experience company that gives brands a more streamlined, impactful, flexible and frictionless way to go to market and reach consumers. The Company leverages its three key competitive advantages — integrated marketing platform excellence, ongoing innovation, and culture and social purpose — to create a better way for its clients, employees and communities. With a marketing platform intentionally built for integrated marketing execution, Quad helps brands reduce the complexity of working with multiple agency partners and vendors; increase marketing process efficiency; and maximize marketing effectiveness. The Company’s holistic, multichannel, through-the-line marketing solutions include strategy and consulting, data and analytics, technology solutions, media services, creative and content solutions, and managed services. With unmatched scale for client-based, on-site services and highly qualified talent with expansive subject matter expertise, the Company has the resources and knowledge to help a wide variety of clients across multiple verticals, including those in industries such as retail, publishing, consumer packaged goods, financial services, healthcare, insurance and direct-to-consumer.
Principles of Consolidation and Basis of Presentation—The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned controlled subsidiaries and have been prepared in accordance with GAAP. The results of operations and accounts of businesses acquired are included in the consolidated financial statements from the dates of acquisition.
Investments in entities where the Company has both the ability to exert significant influence but not control and an ownership interest of 50% or less but more than 20% are accounted for using the equity method of accounting. Investments in entities where the Company does not exert significant influence or control and has an ownership interest of less than 20% are accounted for using the cost method of accounting. Intercompany transactions and balances have been eliminated in consolidation.
Foreign Operations—Assets and liabilities denominated in foreign currencies are translated into United States dollars at the exchange rate existing at the respective balance sheet dates. Income and expense items are translated at the average rates during the respective periods. Translation adjustments resulting from fluctuations in exchange rates are recorded as a separate component of accumulated other comprehensive income (loss) on the consolidated statements of shareholders’ equity, while transaction gains and losses are recorded in selling, general and administrative expenses on the consolidated statements of operations. Foreign exchange transactions resulted in losses of $2.1 million and $2.9 million during the years ended December 31, 2022 and 2021, respectively.
The Company had a 49% interest in Plural, a commercial printer based in São Paulo, Brazil, as of December 31, 2021 and through the date of the Company’s sale of the investment in Plural in January 2022. The Company accounted for this entity using the equity method of accounting. The Company’s equity in the earnings of Plural’s operations was recorded in equity in earnings of unconsolidated entity in the Company’s consolidated statements of operations, and was included within the International segment. As a result of the planned sale, the Company recorded a $32.1 million impairment charge during the year ended December 31, 2021. Quad has no unconsolidated entities as of December 31, 2022.
Use of Estimates—The preparation of consolidated financial statements requires the use of management’s estimates and assumptions that affect the reported assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from these estimates. Estimates are used when accounting for items and matters including, but not limited to: allowances for doubtful accounts, inventory obsolescence, asset valuations and useful lives, pension benefits, self-insurance reserves, stock-based compensation, taxes, restructuring and other provisions and contingencies.
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
Revenue Recognition—The Company recognizes its products and services revenue based on when the transfer of control passes to the customer or when the service is completed and accepted by the customer. Under agreements with certain customers, products may be stored by the Company for future delivery and revenue is recognized upon shipment to the customer. In these situations, the Company may receive warehouse management fees for the services it provides. Product returns are not significant because the products are customized; however, the Company accrues for the estimated amount of customer allowances at the time of sale based on historical experience and known trends.
Revenue from services is recognized as services are performed. Revenues related to the Company’s imaging operations, which include digital content management, photography, color services and page production, are recognized in accordance with the terms of the contract, typically upon completion of the performed service and acceptance by the customer. Revenues related to the Company’s logistics operations, which includes the delivery of printed material, are recognized upon completion of services.
Certain revenues earned by the Company require judgment to determine if revenue should be recorded gross as a principal or net of related costs as an agent. Billings for third-party shipping and handling costs, primarily in the Company’s logistics operations, and out-of-pocket expenses are recorded gross in net sales and cost of sales in the consolidated statements of operations. Many of the Company’s operations process materials, primarily paper, that may be supplied directly by customers or may be purchased by the Company and sold to customers. No revenue is recognized for customer-supplied paper. Revenues for Company-supplied paper are recognized on a gross basis.
Financial Instruments—The Company uses derivative financial instruments for the purpose of hedging interest rate, commodity and foreign exchange exposures that exist as part of ongoing business operations, including interest rate swap and collar agreements, natural gas forward purchase contracts and foreign exchange contracts. As a policy, the Company does not engage in speculative or leveraged transactions, nor does the Company hold or issue financial instruments for trading purposes.
Derivative instruments are recorded on the consolidated balance sheets as either assets or liabilities measured at their fair value. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings. If the derivative is designated as a cash flow hedge, the effective portion of the changes in the fair value of the derivative are recorded as a component of accumulated other comprehensive income (loss) and recognized in the consolidated statements of operations when the hedged item affects earnings.
The ineffective portions of the changes in the fair value of hedges are recognized in earnings. Cash flows from derivatives that are accounted for as cash flow or fair value hedges are included in the consolidated statements of cash flows in the same category as the item being hedged.
Fair Value Measurement—The Company applies fair value accounting for all assets and liabilities that are recognized or disclosed at fair value in its consolidated financial statements on a recurring basis. Fair value represents the amount that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities that are required to be recorded at fair value, the Company considers the principal or most advantageous market and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability. See Note 13, “Financial Instruments and Fair Value Measurements,” for further discussion.
Research and Development—Research and development costs related to the development of new products or the adaptation of existing products are expensed as incurred, included in cost of sales and totaled $3.3 million and $3.1 million during the years ended December 31, 2022 and 2021, respectively.
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
Cash and Cash Equivalents and Restricted Cash—The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents.
Receivables—Receivables are stated net of allowances for credit losses. No single customer comprised more than 5% of the Company’s consolidated net sales in 2022 or 2021, or 5% of the Company’s consolidated receivables as of December 31, 2022 or 2021. In accordance with ASC 326—Financial Instruments—Credit Losses (“ASC 326”), the Company measures expected credit losses for financial instruments, including trade receivables, based on historical experience, current conditions and reasonable forecasts. See Note 5, “Receivables,” for further discussion on the transactions affecting the allowances for doubtful accounts.
Inventories—Inventories include material, labor, and plant overhead and are stated at the lower of cost or net realizable value. At December 31, 2022 and 2021, all inventories were valued using the first-in, first-out method. See Note 6, “Inventories,” for the components of the Company’s inventories.
Leases—Leases are accounted for under the right-of-use model, which requires a lessee to record a right-of-use asset and a lease liability on the balance sheet for all leases with terms longer than twelve months. Leases are classified as either finance or operating, with classification affecting the pattern of expense recognition. See Note 11, “Leases,” for additional accounting policies.
Property, Plant and Equipment—Property, plant and equipment are recorded at cost, and are depreciated over the estimated useful lives of the assets using the straight-line method for financial reporting purposes. See Note 7, “Property, Plant and Equipment,” for the components of the Company’s property, plant and equipment. Major improvements that extend the useful lives of existing assets are capitalized and charged to the asset accounts. Repairs and maintenance, which do not significantly improve or extend the useful lives of the respective assets, are expensed as incurred. Leasehold improvements are depreciated over the shorter of the lease term or the estimated useful life of the respective asset. When an asset is retired or disposed, the associated costs and accumulated depreciation are eliminated, and the resulting gain or loss is recognized in the Company’s consolidated statements of operations. | | | | | | | | |
Asset Category | | Range of Useful Lives |
Buildings | | 10 to 40 Years |
Machinery and equipment | | 3 to 15 Years |
Other | | 3 to 10 Years |
Other Intangible Assets—Identifiable intangible assets are recognized apart from goodwill and are amortized over their estimated useful lives.
Impairment of Long-Lived and Other Intangible Assets—The Company evaluates long-lived assets and other intangible assets (of which the most significant are property, plant and equipment; right-of-use assets and customer relationship intangible assets) whenever events and circumstances have occurred that indicate the carrying value of an asset may not be recoverable. Determining whether impairment has occurred typically requires various estimates and assumptions, including determining which cash flows are directly related to the potentially impaired asset, the useful life over which cash flows will occur, their amount and the asset’s residual value, if any. In turn, assessing whether there is an impairment loss requires a determination of recoverability, which is generally estimated by the ability to recover the balance of the assets from expected future operating cash flows on an undiscounted basis. If impairment is determined to exist, any related impairment loss is calculated based on the difference in the fair value and carrying value of the asset.
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
Goodwill—Goodwill is reviewed 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. In performing this analysis, the Company compares each reporting unit’s fair value to its carrying value. The fair value is estimated based on comparable company market valuations and/or expected future discounted cash flows to be generated by the reporting unit. If the carrying value exceeds the reporting unit’s fair value, an impairment loss would be charged to operations in the period identified. See Note 4, “Goodwill and Other Intangible Assets,” for further discussion.
Workers’ Compensation—The Company is self-insured for a significant portion of its expected workers’ compensation program. Insurance is purchased for individual workers’ compensation claims that exceed $0.8 million. The Company establishes reserves for unresolved claims and for an estimate of incurred but not reported (“IBNR”) claims. These reserves and estimates of IBNR claims are based upon an actuarial study, which is performed annually as of October 31st and is adjusted by the actuarially determined losses and actual claims payments for November and December. The Company also monitors actual claim developments, including incurrence or settlement of individual large claims during the interim periods between actuarial studies as another means of estimating the adequacy of the reserves. As of December 31, 2022, the Company has net reserves for workers’ compensation of $29.9 million, of which $6.6 million was recorded in other current liabilities and $34.5 million was recorded in other long-term liabilities in the consolidated balance sheets (see Note 8, “Other Current and Long-Term Liabilities”). These reserves are net of $11.2 million recorded in other long-term assets in the consolidated balance sheets for estimated claims covered by purchased insurance. As of December 31, 2021, the Company had net reserves for workers’ compensation of $34.2 million, of which $7.5 million was recorded in other current liabilities and $40.1 million was recorded in other long-term liabilities in the consolidated balance sheets (see Note 8, “Other Current and Long-Term Liabilities”). These reserves were net of $13.4 million recorded in other long-term assets in the consolidated balance sheets for estimated claims covered by purchased insurance.
Income Taxes—The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of items reported in the financial statements. Under this method, deferred tax assets and liabilities are measured based on the differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the effective date of enactment.
The Company records net deferred tax assets to the extent the Company believes these assets will more likely than not be realized. This determination is based upon all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies, and recent financial operations. If the Company determines that a deferred income tax asset will not be fully realized in the future, then a valuation allowance is established or increased to reflect the amount at which the asset will more likely than not be realized, which would increase the Company’s provision for income taxes. In a period after a valuation allowance has been established, if the Company determines the related deferred income tax assets will be realized in the future in excess of their net recorded amount, then an adjustment to reduce the related valuation allowance will be made, which would reduce the Company’s provision for income taxes.
The Company is regularly audited by foreign and domestic tax authorities. These audits occasionally result in proposed assessments where the ultimate resolution might result in the Company owing additional taxes, including in some cases, penalties and interest. The Company recognizes a tax position in its consolidated financial statements when it is more likely than not that the position would be sustained upon examination by tax authorities. This recognized tax position is then measured at the largest amount of benefit that is more likely than not of being recognized upon ultimate settlement. The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense.
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
The determination of the Company’s worldwide tax provision and related tax assets and liabilities requires the use of significant judgment in estimating the impact of uncertainties in the application of GAAP and the interpretation of complex tax laws. In the ordinary course of business, there are transactions and calculations where the final tax outcome is uncertain. Where fair market value is required to measure a tax asset or liability for GAAP purposes, the Company periodically obtains independent, third party assistance to validate that such value is determined in conformity with Internal Revenue Service fair market value guidelines. While the Company believes it has the appropriate support for the positions taken, certain positions may be successfully challenged by taxing authorities. Resolution of these uncertainties in a manner inconsistent with management’s expectations could have a material impact on the Company’s financial condition and operating results. The Company applies the provisions of the authoritative guidance on accounting for uncertain tax positions to determine the appropriate amount of tax benefits to be recognized with respect to uncertain tax positions. The determination of the Company’s worldwide tax provision includes the impact of any changes to the amount of tax benefits recognized with respect to uncertain tax positions. See Note 12, “Income Taxes,” for further discussion.
Pension Plans—The Company assumed certain frozen underfunded defined benefit pension plans as part of the 2010 World Color Press acquisition. Pension plan costs are determined using actuarial methods and are funded through contributions. The Company records amounts relating to its pension plans based on calculations which include various actuarial assumptions including discount rates, assumed rates of return, and mortality. The Company reviews its actuarial assumptions on an annual basis and modifies the assumptions based on current rates and trends when it is appropriate to do so. The effects of modifications are recognized immediately on the consolidated balance sheets, but are generally amortized into operating income over future periods, with the deferred amount recorded in accumulated other comprehensive loss on the consolidated balance sheets. The Company believes that the assumptions utilized in recording its obligations under its plans are reasonable based on its experience, market conditions and input from its actuaries and investment advisors. For the purposes of calculating the expected return on plan assets, those assets are valued at fair value. When an event gives rise to both a curtailment and a settlement, the curtailment is accounted for prior to the settlement. The Company’s measurement date to measure the defined benefit plan assets and the projected benefit obligation is December 31.
The Company has previously participated in MEPPs as a result of the acquisition of World Color Press. Due to the significant underfunded status of the 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, which is the form of retirement benefit provided to Quad’s employees. As a result of the decision to withdraw, the Company recorded a withdrawal liability for the MEPPs based on information received from the MEPPs’ trustees. See Note 14, “Employee Retirement Plans,” for further discussion.
Stock-Based Compensation—The Company recognizes stock-based compensation expense over the vesting period for all stock-based awards made to employees and directors based on the fair value of the instrument at the time of grant. Equity awards accounted for as liabilities are recorded at fair value on the initial issuance date and are remeasured to fair value at each reporting period, with the change in fair value being recorded in selling, general and administrative expense in the consolidated statements of operations. See Note 16, “Equity Incentive Programs,” for further discussion.
Accumulated Other Comprehensive Income (Loss)—Accumulated other comprehensive income (loss) consists primarily of unrecognized actuarial gains and losses and prior service costs for pension plans, foreign currency translation adjustments and interest rate swap adjustments, and is presented in the consolidated statements of shareholders’ equity. See Note 18, “Accumulated Other Comprehensive Loss,” for further discussion.
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
COVID-19 Pandemic Impacts and Response—Throughout the COVID-19 pandemic, the Company implemented cost reduction and cash conservation initiatives in response to the pandemic’s adverse impact on its business, financial condition, cash flows, results of operations, supply chain and raw materials availability. With ongoing advancements against the COVID-19 pandemic, the effects on the Company have lessened from previous periods, particularly from the heavily impacted year of 2020. The COVID-19 pandemic weakened demand for the Company’s products and services, disrupted the Company’s supply chain and resulted in rising inflationary cost and labor pressures, distribution challenges, recessionary concerns and other evolving macroeconomic conditions. The Company continues to evaluate the current economic environment and may implement additional cost reduction measures as necessary.
Supplemental Cash Flow Information—The following table summarizes certain supplemental cash flow information for the years ended December 31, 2022 and 2021: | | | | | | | | | | | | | |
| 2022 | | 2021 | | |
Interest paid, net of amounts capitalized | $ | 44.0 | | | $ | 41.8 | | | |
Income taxes paid | 6.2 | | | 4.3 | | | |
Non-cash investing and financing activities: | | | | | |
Non-cash finance lease additions | 1.1 | | | 1.4 | | | |
Non-cash operating lease additions | 17.6 | | | 74.6 | | | |
Acquisition of a business: | | | | | |
Fair value of assets acquired | 5.0 | | | — | | | |
Liabilities assumed | (2.4) | | | — | | | |
| | | | | |
| | | | | |
| | | | | |
Acquisition of a business | $ | 2.6 | | | $ | — | | | |
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 years ended December 31, 2022 and 2021: | | | | | | | | | | | | | | | | | |
| United States Print and Related Services | | International | | Total |
Year ended December 31, 2022 | | | | | |
Catalog, publications, retail inserts and directories | $ | 1,476.3 | | | $ | 282.5 | | | $ | 1,758.8 | |
Direct mail and other printed products | 640.6 | | | 118.2 | | | 758.8 | |
Other | 9.7 | | | 1.0 | | | 10.7 | |
Total Products | 2,126.6 | | | 401.7 | | | 2,528.3 | |
Logistics services | 310.4 | | | 19.3 | | | 329.7 | |
Marketing services and medical services | 357.7 | | | 1.3 | | | 359.0 | |
Total Services | 668.1 | | | 20.6 | | | 688.7 | |
Total Net Sales | $ | 2,794.7 | | | $ | 422.3 | | | $ | 3,217.0 | |
| | | | | |
Year ended December 31, 2021 | | | | | |
Catalog, publications, retail inserts and directories | $ | 1,368.6 | | | $ | 231.5 | | | $ | 1,600.1 | |
Direct mail and other printed products | 558.9 | | | 78.8 | | | 637.7 | |
Other | 8.3 | | | 1.0 | | | 9.3 | |
Total Products | 1,935.8 | | | 311.3 | | | 2,247.1 | |
Logistics services | 345.8 | | | 19.5 | | | 365.3 | |
Marketing services and medical services | 347.0 | | | 1.0 | | | 348.0 | |
Total Services | 692.8 | | | 20.5 | | | 713.3 | |
Total Net Sales | $ | 2,628.6 | | | $ | 331.8 | | | $ | 2,960.4 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
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 data and analytics, technology solutions, media services, creative and content solutions, managed services and execution in non-print channels (e.g., digital and broadcast), as well as medical services.
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
Performance Obligations
At contract inception, the Company assesses the products and services promised in its contracts with customers and identifies performance obligations for each promise to transfer to the customer a product or service that is distinct. To identify the performance obligations, the Company considers the goods or services promised in the contract regardless of whether they are explicitly stated or are implied by customary business practices. The Company determined that the following distinct products and services represent separate performance obligations:
•Pre-Press Services
•Print
•Other Services
For Pre-Press and Other Services, the Company recognizes revenue at point-in-time upon completion of the performed service and acceptance by the customer. The Company considers transfer of control to occur once the service is performed as the Company has right to payment and the customer has legal title and risk and reward of ownership.
The Company recognizes its Print revenues upon transfer of title and the passage of risk of loss, which is point-in-time upon shipment to the customer, and when there is a reasonable assurance as to collectability. Revenues related to the Company’s logistics operations, which includes the delivery of printed material, are included in the Print performance obligation and are also recognized at point-in-time as services are completed. Revenues related to the Company’s imaging operations, which include digital content management, photography, color services and page production, are recognized in accordance with the terms of the contract, typically upon completion of the performed service and acceptance by the customer. Under agreements with certain customers, products may be stored by the Company for future delivery and revenue is recognized upon shipment to the customer. In these situations, the Company may receive warehouse management fees for the services it provides. Revenue from warehouse management fees was immaterial for the years ended December 31, 2022 and 2021.
Certain revenues earned by the Company require judgment to determine if revenue should be recorded gross as principal or net of related costs as an agent. Billings for third-party shipping and handling costs, primarily in the Company’s logistics operations, and out-of-pocket expenses are recorded gross in net sales and cost of sales in the consolidated statements of operations. Many of the Company’s operations process materials, primarily paper, that may be supplied directly by customers or may be purchased by the Company and sold to customers. No revenue is recognized for customer-supplied paper. Revenues for the Company-supplied paper are recognized on a gross basis. In some cases, the Company will print items that are mailed to consumers and bill the customer for postage. In these cases, the Company is acting as an agent and billings are recorded on a net basis in net sales.
Significant Payment Terms
Payment terms and conditions for contracts with customers vary. The Company typically offers standard terms of net 30 days. It is not the Company’s standard business practice to offer extended payment terms longer than one year. The Company may offer cash discounts or prepayment and extended terms depending on certain facts and circumstances. As such, when the timing of the Company’s delivery of products and services differs from the timing of payment, the Company will record either a contract asset or a contract liability.
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
Variable Consideration
When evaluating the transaction price, the Company analyzes on a contract by contract basis all applicable variable considerations and non-cash consideration and also performs a constraint analysis. The nature of the Company’s contracts give rise to variable consideration, including, volume rebates, credits, discounts, and other similar items that generally decrease the transaction price. These variable amounts generally are credited to the customer, based on achieving certain levels of sales activity, when contracts are signed, or making payments within specific terms.
Product returns are not significant because the products are customized; however, the Company accrues for the estimated amount of customer allowances at the time of sale based on historical experience and known trends.
When the transaction price requires allocation to multiple performance obligations, the Company uses the estimated stand-alone selling prices using the adjusted market assessment approach.
Costs to Obtain Contracts
In accordance with ASC 606 — Revenue from Contracts with Customers (“ASC 606”), 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 year ended December 31, 2022, was as follows: | | | | | |
| Costs to Obtain Contracts |
Balance at January 1, 2022 | $ | 5.1 | |
Costs to obtain contracts | 0.4 | |
Amortization of costs to obtain contracts | (2.2) | |
Balance at December 31, 2022 | $ | 3.3 | |
Practical Expedients
The Company has elected to apply the following practical expedients allowed under ASC 606:
•For certain performance obligations related to print contracts, the Company has elected not to disclose the value of unsatisfied performance obligations for the following: (1) contracts that have an original expected length of one year or less; (2) contracts where revenue is recognized as invoiced; or (3) contracts with variable consideration related to unsatisfied performance obligations. The Company had no volume commitments in contracts that extend beyond one year as of December 31, 2022.
•The Company expenses costs to obtain contracts as incurred when the contract duration is less than one year.
•The transaction amount is not adjusted for a significant financing component as the period between transfer of the products or services and payment is less than one year.
•The Company accounts for shipping and handling activities, which includes postage, that occur after control of the related products or services transfers to the customer as fulfillment activities and are therefore recognized at time of shipping.
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
•The Company excludes from its transaction price any amounts collected from customers for sales taxes.
Note 3. Restructuring, Impairment and Transaction-Related Charges
The Company recorded restructuring, impairment and transaction-related charges for the years ended December 31, 2022 and 2021, as follows: | | | | | | | | | | | | | |
| 2022 | | 2021 | | |
Employee termination charges | $ | 7.3 | | | $ | 9.9 | | | |
Impairment charges | 2.2 | | | 34.9 | | | |
Transaction-related charges | 2.0 | | | 0.6 | | | |
Integration costs | 0.7 | | | — | | | |
Other restructuring charges | 32.6 | | | (26.5) | | | |
Total | $ | 44.8 | | | $ | 18.9 | | | |
The costs related to these activities have been recorded on the consolidated statements of operations as restructuring, impairment and transaction-related charges. See Note 19, “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.
•Integration costs are incurred primarily for the integration of acquired companies.
•Other restructuring charges are presented net of the gains or losses on the sale of facilities and businesses. During the year ended December 31, 2021, the Company recognized gains from the sale of the facilities located in Riverside, California, Oklahoma City, Oklahoma, and Fernley, Nevada. The Company also recognized a $20.9 million gain on the sale of a business and a $2.7 million gain from the reclassification of foreign currency translation adjustments during the year ended December 31, 2021, which are included within other restructuring activities below. The components of other restructuring charges consisted of the following during the years ended December 31, 2022 and 2021: | | | | | | | | | | | | | |
| Year Ended December 31, | | |
| 2022 | | 2021 | | |
Vacant facility carrying costs and lease exit charges | $ | 5.4 | | | $ | 19.8 | | | |
Equipment and infrastructure removal costs | 0.7 | | | 1.6 | | | |
Gains on the sale of facilities | — | | | (24.8) | | | |
Loss on the sale of Argentina print business | 23.1 | | | — | | | |
Other restructuring activities | 3.4 | | | (23.1) | | | |
Other restructuring charges | $ | 32.6 | | | $ | (26.5) | | | |
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
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 $2.2 million during the year ended December 31, 2022, 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 Company recognized impairment charges of $34.9 million during the year ended December 31, 2021, which consisted of $2.8 million 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, including $32.1 million of impairment charges related to the Company’s investment in Plural, which was sold in January 2022.
The fair values of the impaired assets were determined by the Company to be Level 3 under the fair value hierarchy (see Note 13, “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 $2.0 million and $0.6 million were recorded during the years ended December 31, 2022 and 2021, respectively.
Restructuring Reserves
Activity impacting the Company’s restructuring reserves for the years ended December 31, 2022 and 2021, was as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Employee Termination Charges | | Impairment Charges | | Transaction-Related Charges (Income) | | Integration Costs | | Other Restructuring Charges | | Total |
Balance at January 1, 2021 | $ | 14.6 | | | $ | — | | | $ | 0.5 | | | $ | — | | | $ | 25.8 | | | $ | 40.9 | |
Expense (income), net | 9.9 | | | 34.9 | | | 0.6 | | | — | | | (26.5) | | | 18.9 | |
Cash payments, net | (19.0) | | | — | | | (0.7) | | | — | | | (13.3) | | | (33.0) | |
Non-cash adjustments/reclassifications | (0.8) | | | (34.9) | | | — | | | — | | | 64.2 | | | 28.5 | |
Balance at December 31, 2021 | $ | 4.7 | | | $ | — | | | $ | 0.4 | | | $ | — | | | $ | 50.2 | | | $ | 55.3 | |
Expense, net | 7.3 | | | 2.2 | | | 2.0 | | | 0.7 | | | 32.6 | | | 44.8 | |
Cash payments, net | (4.1) | | | — | | | (0.9) | | | (0.7) | | | (15.7) | | | (21.4) | |
Non-cash adjustments/reclassifications | (5.0) | | | (2.2) | | | — | | | — | | | (61.9) | | | (69.1) | |
Balance at December 31, 2022 | $ | 2.9 | | | $ | — | | | $ | 1.5 | | | $ | — | | | $ | 5.2 | | | $ | 9.6 | |
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
The Company’s restructuring reserves at December 31, 2022, included a short-term and a long-term component. The short-term portion included $4.2 million in other current liabilities (see Note 8, “Other Current and Long-Term Liabilities”) and $1.1 million in accounts payable in the consolidated balance sheets as the Company expects these reserves to be settled within the next twelve months. The long-term portion of $4.3 million was included in other long-term liabilities (see Note 8, “Other Current and Long-Term Liabilities”) in the consolidated balance sheets.
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.
Due to the Company’s decision to sell its third-party logistics business on June 30, 2021, goodwill included in the carrying amount of the third-party logistics business sold of $16.6 million was determined based on the relative fair value of the third-party logistics business and the portion of the Core Print and Related Services reporting unit retained. When only a portion of goodwill is allocated to a business to be sold, an interim goodwill impairment test was completed on the remaining $86.4 million of goodwill in the Core Print and Related Services reporting unit. No impairment was recorded as a result of the 2021 interim impairment test.
The Company completed its annual impairment test as of October 31, 2022, and identified no indicators of impairment in any of the Company's reporting units during the year ended December 31, 2022. Fair value was determined using an equal weighting of both the income and market approaches. Under the income approach, the Company determined fair value based on estimated future cash flows discounted by an estimated weighted-average cost of capital, which reflects the overall level of inherent risk and the rate of return an outside investor would expect to earn. Under the market approach, the Company derived the fair value of the reporting units based on market multiples of comparable publicly-traded companies. This fair value determination was categorized as Level 3 in the fair value hierarchy (see Note 13, “Financial Instruments and Fair Value Measurements,” for the definition of Level 3 inputs).
No goodwill impairment charges were recorded during the years ended December 31, 2022 or 2021. The accumulated goodwill impairment losses and the carrying value of goodwill at December 31, 2022 and 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 | | | | | | | |
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
There was no activity impacting goodwill for the year ended December 31, 2022. Activity impacting goodwill for the year ended December 31, 2021, was as follows: | | | | | | | | | | | | | | | | | |
| United States Print and Related Services | | International | | Total |
Balance at January 1, 2021 | $ | 103.0 | | | $ | — | | | $ | 103.0 | |
Sale of third-party logistics business | (16.6) | | | — | | | (16.6) | |
| | | | | |
| | | | | |
Balance at December 31, 2021 | $ | 86.4 | | | $ | — | | | $ | 86.4 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Other Intangible Assets
The components of other intangible assets at December 31, 2022 and 2021, were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2022 | | | | December 31, 2021 |
| Weighted Average Amortization Period (Years) | | Gross Carrying Amount | | Accumulated Amortization | | Net Book Value | | | | Gross Carrying Amount | | Accumulated Amortization | | Net Book Value |
Finite-lived intangible assets: | | | | | | | | | | | | | | |
Trademarks, patents, licenses and agreements | 6 | | $ | 67.2 | | | $ | (57.2) | | | $ | 10.0 | | | | | $ | 68.1 | | | $ | (50.7) | | | $ | 17.4 | |
Capitalized software | 5 | | 21.5 | | | (17.4) | | | 4.1 | | | | | 19.2 | | | (14.3) | | | 4.9 | |
Acquired technology | 5 | | 3.6 | | | (1.9) | | | 1.7 | | | | | 3.6 | | | (1.2) | | | 2.4 | |
Customer relationships | 6 | | 559.9 | | | (528.8) | | | 31.1 | | | | | 560.1 | | | (509.5) | | | 50.6 | |
Total finite-lived intangible assets | | $ | 652.2 | | | $ | (605.3) | | | $ | 46.9 | | | | | $ | 651.0 | | | $ | (575.7) | | | $ | 75.3 | |
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 years ended December 31, 2022 and 2021.
Amortization expense for other intangible assets was $30.9 million and $31.5 million for the years ended December 31, 2022 and 2021, respectively. The following table outlines the estimated future amortization expense related to other intangible assets as of December 31, 2022: | | | | | |
| Amortization Expense |
2023 | $ | 28.1 | |
2024 | 15.6 | |
2025 | 2.4 | |
2026 | 0.6 | |
2027 | 0.2 | |
| |
Total | $ | 46.9 | |
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
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 $3.4 million and $1.3 million during the years ended December 31, 2022 and 2021, respectively, which is included in selling, general and administrative expenses in the consolidated statements of operations.
Activity impacting the allowance for credit losses for the years ended December 31, 2022 and 2021, was as follows: | | | | | | | | | | | | | |
| 2022 | | 2021 | | |
Balance at January 1, | $ | 28.2 | | | $ | 33.8 | | | |
| | | | | |
| | | | | |
Provisions | 3.4 | | | 1.3 | | | |
Write-offs | (5.2) | | | (6.9) | | | |
| | | | | |
| | | | | |
Balance at December 31, | $ | 26.4 | | | $ | 28.2 | | | |
Note 6. Inventories
The components of inventories at December 31, 2022 and 2021, were as follows: | | | | | | | | | | | |
| 2022 | | 2021 |
Raw materials and manufacturing supplies | $ | 173.7 | | | $ | 148.6 | |
Work in process | 38.3 | | | 31.6 | |
Finished goods | 48.7 | | | 46.0 | |
Total | $ | 260.7 | | | $ | 226.2 | |
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
Note 7. Property, Plant and Equipment
The components of property, plant and equipment at December 31, 2022 and 2021, were as follows: | | | | | | | | | | | |
| 2022 | | 2021 |
Land | $ | 68.2 | | | $ | 73.6 | |
Buildings | 651.9 | | | 658.4 | |
Machinery and equipment | 2,854.0 | | | 2,883.7 | |
Other(1) | 165.0 | | | 181.9 | |
Construction in progress | 30.5 | | | 25.1 | |
Property, plant and equipment—gross | 3,769.6 | | | 3,822.7 | |
Less: accumulated depreciation | (3,097.5) | | | (3,095.7) | |
Property, plant and equipment—net | $ | 672.1 | | | $ | 727.0 | |
______________________________
(1)Other consists of computer equipment and software, vehicles, furniture and fixtures, leasehold improvements and communication related equipment.
The Company recorded impairment charges of $2.2 million and $2.8 million during the years ended December 31, 2022 and 2021, respectively, to reduce the carrying amounts of certain property, plant and equipment no longer utilized in production, or due to other capacity reduction and strategic divestiture activities, to fair value (see Note 3, “Restructuring, Impairment and Transaction-Related Charges,” for further discussion on impairment charges).
The Company recognized depreciation expense of $110.4 million and $125.8 million for the years ended December 31, 2022 and 2021, respectively.
Gains from Sale and Leaseback
On June 29, 2021, the Company executed a sale and leaseback of its Chalfont, Pennsylvania facility for net proceeds of $20.0 million, which resulted in a $13.7 million gain. The leaseback is for a term of seven years and was determined to be an operating lease. As of December 31, 2022, the leaseback consisted of an $8.2 million asset included in the operating lease right of use assets - net, current operating lease obligation of $1.3 million and operating lease obligation of $7.1 million in the consolidated balance sheet.
On September 28, 2021, the Company executed a sale and leaseback of its West Allis, Wisconsin facility for net proceeds of $31.9 million, which resulted in a $10.8 million gain. The leaseback is for a term of ten years and was determined to be an operating lease. As of December 31, 2022, the leaseback consisted of a $20.8 million asset included in the operating lease right of use assets - net, current operating lease obligation of $1.8 million and operating lease obligation of $19.3 million in the consolidated balance sheet.
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
Note 8. Other Current and Long-Term Liabilities
The components of other current and long-term liabilities at December 31, 2022 and 2021, were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 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) | $ | 117.6 | | | $ | 45.3 | | | $ | 162.9 | | | $ | 128.8 | | | $ | 52.8 | | | $ | 181.6 | |
Single employer pension plan obligations | 1.4 | | | 34.9 | | | 36.3 | | | 1.6 | | | 17.6 | | | 19.2 | |
Multiemployer pension plans – withdrawal liability | 4.1 | | | 24.2 | | | 28.3 | | | 3.8 | | | 28.4 | | | 32.2 | |
Deferred revenue | 53.1 | | | 1.2 | | | 54.3 | | | 66.4 | | | 2.1 | | | 68.5 | |
Tax-related liabilities | 18.9 | | | 4.4 | | | 23.3 | | | 20.0 | | | 5.3 | | | 25.3 | |
Restructuring liabilities | 4.2 | | | 4.3 | | | 8.5 | | | 47.5 | | | 6.1 | | | 53.6 | |
Interest and rent liabilities | 0.4 | | | — | | | 0.4 | | | 2.8 | | | — | | | 2.8 | |
Interest rate swap liabilities | — | | | — | | | — | | | 0.7 | | | 4.4 | | | 5.1 | |
| | | | | | | | | | | |
Other | 49.4 | | | 14.5 | | | 63.9 | | | 42.7 | | | 11.4 | | | 54.1 | |
Total | $ | 249.1 | | | $ | 128.8 | | | $ | 377.9 | | | $ | 314.3 | | | $ | 128.1 | | | $ | 442.4 | |
______________________________
(1)Employee-related liabilities consist primarily of payroll, bonus, vacation, health and workers’ compensation.
Note 9. Commitments and Contingencies
Commitments
The Company had firm commitments of $32.9 million as of December 31, 2022, to purchase press, finishing and other equipment.
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 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 consolidated financial position.
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
Note 10. Debt
The weighted average interest rate for the year ended December 31, 2022 and the components of long-term debt at December 31, 2022 and 2021, were as follows: | | | | | | | | | | | | | | | | | |
| Weighted Average Interest Rate | | 2022 | | 2021 |
Master note and security agreement | 7.92 | % | | $ | 4.4 | | | $ | 7.2 | |
Term loan A | 4.54 | % | | 556.7 | | | 575.4 | |
| | | | | |
Revolving credit facility | 4.99 | % | | — | | | — | |
Senior unsecured notes | 7.00 | % | | — | | | 211.5 | |
International term loans | 5.39 | % | | 5.2 | | | 5.3 | |
International revolving credit facilities | 3.00 | % | | 8.4 | | | 8.8 | |
Other | — | % | | — | | | 1.4 | |
Debt issuance costs | | | (6.9) | | | (9.1) | |
Total debt | | | $ | 567.8 | | | $ | 800.5 | |
Less: short-term debt and current portion of long-term debt | | | (61.1) | | | (245.6) | |
Long-term debt | | | $ | 506.7 | | | $ | 554.9 | |
Description of Debt Obligations
Master Note and Security Agreement
On September 1, 1995, and as last amended on November 24, 2014, the Company entered into its Master Note and Security Agreement. As of December 31, 2022, the borrowings outstanding under the Master Note and Security Agreement were $4.4 million. The senior notes under the Master Note and Security Agreement had a weighted average interest rate of 7.92% at December 31, 2022, which is fixed to maturity, with interest payable semiannually. Principal payments commenced September 1997 and extend through 2026 in various tranches. The notes are collateralized by certain United States press equipment under the terms of the Master Note and Security Agreement.
Senior Secured Credit Facility
On April 28, 2014, the Company entered into its Senior Secured Credit Facility, which included a revolving credit facility, Term Loan A and Term Loan B (Term Loan B was retired in July 2019). The Company completed the fifth amendment to the Senior Secured Credit Facility on November 2, 2021. The Senior Secured Credit Facility was amended to (a) reduce the aggregate amount of the existing revolving credit facility from $500.0 million to $432.5 million, and extend the maturity of a portion of the revolving credit facility such that $90.0 million under the revolving credit facility is due on the existing maturity date of January 31, 2024 (the “Existing Maturity Date”) and $342.5 million under the revolving credit facility is due on November 2, 2026 (the “Extended Maturity Date”); (b) extend the maturity of a portion of the existing term loan facility such that $91.5 million of such term loan facility is due on the Existing Maturity Date and $483.9 million is due on the Extended Maturity Date; (c) make certain adjustments to pricing, including an increase of 0.50% to the interest rate margin applicable to the loans maturing on the Extended Maturity Date; (d) modify certain financial and operational covenants; and (e) modify the interest rate provisions relating to the phase-out of LIBOR as a reference rate.
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
Borrowings under the revolving credit facility and Term Loan A made under the Senior Secured Credit Facility bear interest at 2.75% in excess of reserve adjusted LIBOR, or 1.75% in excess of an alternate base rate with a LIBOR floor of 0.75% for the extended tranche and bear interest at 2.50% in excess of reserve adjusted LIBOR, or 1.50% in excess of an alternate base rate with a LIBOR floor of 0.75% for the non-extending tranche.
At December 31, 2022, the Company had no outstanding borrowings on the revolving credit facility, and had $32.7 million of issued letters of credit, leaving up to $399.8 million available for future borrowings. The Senior Secured Credit Facility is secured by substantially all of the unencumbered assets of the Company. The Senior Secured Credit Facility also requires the Company to provide additional collateral to the lenders in certain limited circumstances.
The Company completed the sixth amendment to the Senior Secured Credit Facility on March 25, 2022, which expanded the number of currencies available for letters of credit. The Company completed the seventh amendment to the Senior Secured Credit Facility on January 24, 2023, which transitioned the Company’s reference rate from LIBOR to SOFR effective February 1, 2023. The transition from LIBOR to SOFR does not have a material impact on the consolidated financial statements.
Senior Unsecured Notes
The Company issued $300.0 million aggregate principal amount of its Senior Unsecured Notes due May 1, 2022, on April 28, 2014. During the first quarter of 2022, the Company repurchased $2.4 million of its outstanding Senior Unsecured Notes in the open market. During the year ended December 31, 2021, the Company repurchased $27.2 million of its outstanding Senior Unsecured Notes in the open market, resulting in a net loss on debt extinguishment of $0.5 million. All repurchased Senior Unsecured Notes were canceled. The Company used cash flows from operating activities and borrowings under its revolving credit facility 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, outstanding at the time, of its Senior Unsecured Notes.
International Debt Obligations
The Company has two fixed rate, Euro denominated, international term loans for purposes of financing certain capital expenditures and general business needs. The first international term loan in the amount of $21.7 million was entered into on December 28, 2015, was fully funded during 2016 with a term of six years, and matured on December 28, 2021. The second international term loan in the amount of $12.8 million was entered into on December 21, 2018, bears interest at 1.96% and has a term of five years, maturing on December 31, 2023. As of December 31, 2022, $2.5 million remained outstanding on the second international term loan. In addition, there are $2.7 million of term loans in Colombia and Peru.
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
The Company has two multicurrency international revolving credit facilities that are used for financing working capital and general business needs. The Company had $8.4 million of borrowings outstanding at a weighted average interest rate of 3.00% on the international revolving credit facilities as of December 31, 2022, leaving $7.7 million available for future borrowing. The terms of the international revolving credit facilities includes certain financial covenants, a guarantee of the international revolving credit facilities by the Company and a security agreement that includes collateralizing substantially all of the Quad Europe Sp. z.o.o. assets. The first multicurrency international revolving credit facility expires on October 29, 2023, and bears interest at the aggregate of the Warsaw Interbank Offered Rate (“WIBOR”) plus 1.40% for any Polish Zloty denominated borrowings, the aggregate of Euro Interbank Offered Rate (“EURIBOR”) plus 1.45% for any Euro denominated borrowings or the aggregate of British pound sterling LIBOR plus 1.45% for any British pound sterling denominate borrowings. The second multicurrency international revolving credit facility expires on December 15, 2023, and bears interest at the aggregate of WIBOR plus 1.00% for any Polish Zloty denominated borrowings or the aggregate of EURIBOR plus 1.00% for any Euro denominated borrowings.
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 $0.6 billion and $0.8 billion at December 31, 2022 and 2021, respectively. The fair value determination of the Company’s total debt was categorized as Level 2 in the fair value hierarchy (see Note 13, “Financial Instruments and Fair Value Measurements,” for the definition of Level 2 inputs). As of December 31, 2022, approximately $1.3 billion of the Company’s assets were pledged as security under various loans and other agreements.
Debt Issuance Costs
The debt issuance costs are amortized on a straight-line basis over the lives of the related debt instruments. Activity impacting the Company’s capitalized debt issuance costs for the years ended December 31, 2022 and 2021, was as follows: | | | | | | | |
| Capitalized Debt Issuance Costs | | |
Balance at January 1, 2021 | $ | 6.9 | | | |
Debt issuance costs from November 2, 2021 debt financing arrangement | 5.2 | | | |
Write off of debt issuance costs from Term Loan A pre-payments | (0.4) | | | |
| | | |
Amortization expense | (2.6) | | | |
Balance at December 31, 2021 | 9.1 | | | |
| | | |
| | | |
Amortization expense | (2.2) | | | |
Balance at December 31, 2022 | $ | 6.9 | | | |
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
Loss on Debt Extinguishment
2021 Loss on Debt Extinguishment
The loss on debt extinguishment recorded during the year ended December 31, 2021, was comprised of the following: | | | | | |
| 2021 Loss on Debt Extinguishment |
| |
| |
Debt issuance costs from November 2, 2021 debt financing arrangement | 0.2 | |
Loss on debt extinguishment from Senior Unsecured Note Repurchases | 0.5 | |
Total | $ | 0.7 | |
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). Among these covenants, the Company was required to maintain the following as of December 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 December 31, 2022, the Company’s Total Leverage Ratio was 2.22 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 December 31, 2022, the Company’s Senior Secured Leverage Ratio was 2.13 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 December 31, 2022, the Company’s Interest Coverage Ratio was 6.39 to 1.00).
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
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 December 31, 2022, was 2.22 to 1.00, the limitations described above are not applicable at this time.
•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 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 2.13 to 1.00 and Total Net Leverage Ratio was 2.14 to 1.00, as of December 31, 2022.
Estimated Principal Payments
The approximate annual principal amounts due on long-term debt, excluding $6.9 million for future amortization of debt issuance costs, at December 31, 2022, were as follows: | | | | | |
| Principal Payments |
2023 | $ | 55.5 | |
2024 | 149.2 | |
2025 | 72.8 | |
2026 | 297.2 | |
| |
| |
| |
Total | $ | 574.7 | |
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
Note 11. Leases
The Company determines if an arrangement is or contains a lease at contract inception. The Company recognizes a right-of-use (“ROU”) asset and a lease liability at the lease commencement date.
For operating and finance leases, the lease liability is initially measured at the present value of the unpaid lease payments at the lease commencement date, and is subsequently measured at amortized cost using the effective interest method.
Key estimates and judgments include how the Company determines the discount rate, lease term and lease payments.
•ASC 842 requires a lessee to discount its unpaid lease payments using the interest rate implicit in the lease or, if that rate cannot be readily determined, its incremental borrowing rate. Generally, the Company cannot determine the implicit interest rate as it does not have access to the lessor’s estimated residual value or the amount of the lessor’s deferred initial direct costs. Therefore, the Company generally uses its incremental borrowing rate as the discount rate for the lease. The Company’s incremental borrowing rate for a lease is the rate of interest it would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms based on the published United States Treasury rates as well as the Company’s credit rating at implementation or at the lease inception date.
•The lease term for all of the Company’s leases includes the non-cancelable period of the lease, plus or minus any additional periods covered by an option to extend or terminate the lease that the Company is reasonably certain to exercise.
•Lease payments included in the lease liability are comprised of fixed payments as well as any exercise price of a Company option to purchase the underlying asset if the Company is reasonably certain to exercise. The Company’s leases do not contain variable lease payments.
ROU assets are initially measured at cost, which comprises the initial amount of the lease liability adjusted for lease payments made at or before the lease commencement date, plus any initial direct costs incurred less any lease incentives received. For operating leases, the ROU asset is subsequently amortized by the straight-line lease expense adjusted by the lease liability accretion over the lease term.
For finance leases, the ROU asset is subsequently amortized on a straight-line basis from the lease commencement date to the earlier of the end of its useful life or the end of the lease term. Amortization of the ROU asset is recognized and presented separately from interest expense on the lease liability.
The Company’s ROU assets for both operating and finance leases are reviewed for impairment losses on a quarterly basis in line with ASC 360-10 — Property, Plant, and Equipment — Overall. The Company has not recognized any impairment losses to date.
The Company also monitors its leases for events or changes in circumstances that require a reassessment of the lease. When a reassessment results in the remeasurement of a lease liability, a corresponding adjustment is made to the carrying amount of the ROU asset.
Operating leases are included in operating lease right-of-use assets—net, current portion of operating lease obligations, and operating lease obligations in the consolidated balance sheets. Finance leases are included in property and equipment—net, current portion of finance lease obligations, and finance lease obligations in the consolidated balance sheets.
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
The Company has elected not to recognize ROU assets and lease liabilities for short-term leases that have an original lease term of twelve months or less. Therefore, the Company recognizes the lease payments associated with these short-term leases as an expense over the lease term in the consolidated statement of operations.
Practical Expedients
The Company has elected to apply the following practical expedients allowed under Accounting Standards Update 842:
•The Company elected the practical expedient package and therefore did not reassess for any existing leases:
◦whether contracts are or contain leases;
◦the lease classification for any existing leases; and
◦any initial direct costs.
•The Company elected the practical expedient related to land easements, allowing to carry forward the accounting treatment for land easements on existing agreements.
•The Company used “hindsight” judgments that impact the lease term.
•The Company elected to combine lease and non-lease components into one lease component for select underlying lease asset categories. Real estate leases are accounted for separately while all other leases, primarily equipment leases, with separate lease and non-lease components are accounted for as a single lease component.
Leases Financial Information
The Company enters into various lease agreements for real estate, such as office space and manufacturing facilities, as well as equipment leases, including press, finishing and transportation equipment. Many of these leases provide the Company with options to renew, terminate, or in the case of equipment leases, purchase the related equipment at the termination value, as defined, and at various early buyout dates during the term of the lease. In general, the Company has determined these options were not reasonably certain to be exercised, and therefore are not included in the determination of the lease term.
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
The following summarizes certain lease information for the years ended December 31, 2022 and 2021: | | | | | | | | | | | |
| Year Ended | | Year Ended |
| December 31, 2022 | | December 31, 2021 |
Lease cost | | | |
Finance lease cost: | | | |
Amortization of right-of-use assets | $ | 1.8 | | | $ | 2.9 | |
Interest on lease liabilities | 0.1 | | | 0.2 | |
Operating lease cost | 29.7 | | | 28.4 | |
Short-term lease cost | 0.2 | | | — | |
Sublease income | (1.9) | | | (2.0) | |
Total lease cost | $ | 29.9 | | | $ | 29.5 | |
| | | |
Other information | | | |
Cash paid for amounts included in the measurement of lease liabilities | | | |
Operating cash flows from finance leases | $ | — | | | $ | — | |
Operating cash flows from operating leases | 28.1 | | | 27.9 | |
Financing cash flows from finance leases | 2.1 | | | 3.0 | |
Right-of-use assets obtained in exchange for new finance lease liabilities | 1.1 | | | 1.4 | |
Right-of-use assets obtained in exchange for new operating lease liabilities | 17.6 | | | 74.6 | |
Weighted-average remaining lease term — finance leases | 4.2 years | | 2.3 years |
Weighted-average remaining lease term — operating leases | 5.2 years | | 5.7 years |
Weighted-average discount rate — finance leases | 5.2 | % | | 4.5 | % |
Weighted-average discount rate — operating leases | 5.4 | % | | 5.4 | % |
The components of finance lease assets at December 31, 2022 and 2021, were as follows: | | | | | | | | | | | |
| 2022 | | 2021 |
Leased equipment—gross | $ | 24.3 | | | $ | 23.8 | |
Less: accumulated depreciation | (21.9) | | | (20.7) | |
Leased equipment—net | $ | 2.4 | | | $ | 3.1 | |
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
Future maturities of lease liabilities at December 31, 2022, were as follows: | | | | | | | | | | | |
| Future Maturities of Operating Leases | | Future Maturities of Finance Leases |
2023 | $ | 33.1 | | | $ | 0.9 | |
2024 | 25.7 | | | 0.6 | |
2025 | 21.4 | | | 0.5 | |
2026 | 17.1 | | | 0.2 | |
2027 | 13.9 | | | 0.2 | |
2028 and thereafter | 20.1 | | | 0.3 | |
Total minimum payments | 131.3 | | | 2.7 | |
Less: present value discount | (16.4) | | | (0.3) | |
Present value of minimum payments | 114.9 | | | 2.4 | |
Less: current portion | (27.8) | | | (0.8) | |
Long-term lease liability | $ | 87.1 | | | $ | 1.6 | |
Note 12. Income Taxes
Income taxes have been based on the following components of earnings before income taxes and equity in earnings of unconsolidated entity for the years ended December 31, 2022 and 2021: | | | | | | | | | | | | | |
| 2022 | | 2021 | | |
United States | $ | (13.9) | | | $ | 52.4 | | | |
Foreign | 31.6 | | | (5.4) | | | |
Total | $ | 17.7 | | | $ | 47.0 | | | |
The components of income tax expense for the years ended December 31, 2022, and 2021, were as follows: | | | | | | | | | | | | | |
| 2022 | | 2021 | | |
Federal: | | | | | |
Current | $ | 0.4 | | | $ | 0.9 | | | |
Deferred | 3.3 | | | 3.2 | | | |
State: | | | | | |
Current | 1.4 | | | — | | | |
Deferred | (0.3) | | | — | | | |
Foreign: | | | | | |
Current | 4.2 | | | 3.3 | | | |
Deferred | (0.6) | | | 2.1 | | | |
Total income tax expense | $ | 8.4 | | | $ | 9.5 | | | |
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
The following table outlines the reconciliation of differences between the Federal statutory tax rate and the Company’s income tax expense for the years ended December 31, 2022 and 2021: | | | | | | | | | | | | | |
| 2022 | | 2021 | | |
Federal statutory rate | $ | 3.7 | | | $ | 9.9 | | | |
Loss on the sale of Argentina print business | (5.1) | | | — | | | |
Adjustment to valuation allowances | 3.1 | | | (17.1) | | | |
Executive compensation limitation | 2.9 | | | — | | | |
Impact from foreign branches | 1.9 | | | 4.5 | | | |
Adjustment of deferred tax liabilities | 1.5 | | | 3.5 | | | |
Credits | (1.5) | | | — | | | |
State taxes, net of federal benefit | 1.1 | | | (0.1) | | | |
Adjustment of uncertain tax positions | (0.3) | | | 0.2 | | | |
Impairment on investment in Plural | — | | | 6.2 | | | |
Foreign rate differential | — | | | (1.9) | | | |
| | | | | |
Other | 1.1 | | | 4.3 | | | |
Income tax expense | $ | 8.4 | | | $ | 9.5 | | | |
The $3.1 million adjustment to valuation allowance in 2022 primarily relates to increasing reserves related to deferred tax assets for credits and interest limitation that are not expected to be realized in the future for federal income tax purposes. The $17.1 million adjustment to valuation allowance in 2021 primarily relates to releasing reserves related to deferred tax assets for net operating losses and interest limitation. The $1.1 million effective rate reconciling item for State taxes, net of federal benefit, in 2022 includes a $2.8 million adjustment for partial release of valuation allowance reserves. The $0.1 million effective rate reconciling item for State taxes, net of federal benefit, in 2021 includes a $4.8 million adjustment for partial release of valuation allowance reserves.
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
Deferred Income Taxes
The significant deferred tax assets and liabilities as of December 31, 2022 and 2021, were as follows: | | | | | | | | | | | |
| 2022 | | 2021 |
Deferred tax assets: | | | |
Net operating loss and other tax carryforwards | $ | 108.8 | | | $ | 125.2 | |
Goodwill and intangible assets | 24.0 | | | 24.4 | |
Pension and workers compensation benefits | 23.9 | | | 21.9 | |
Interest limitation | 12.8 | | | 11.5 | |
Accrued liabilities | 9.4 | | | 12.9 | |
Research or experimental expenditures | 8.0 | | | — | |
Accrued compensation | 7.6 | | | 8.1 | |
Allowance for doubtful accounts | 5.9 | | | 6.5 | |
Other | 8.6 | | | 10.8 | |
Total deferred tax assets | 209.0 | | | 221.3 | |
Valuation allowance | (113.9) | | | (116.3) | |
| | | |
Net deferred tax assets | $ | 95.1 | | | $ | 105.0 | |
| | | |
Deferred tax liabilities: | | | |
Property, plant and equipment | $ | (86.0) | | | $ | (99.2) | |
Other | (6.9) | | | (5.9) | |
Total deferred tax liabilities | (92.9) | | | (105.1) | |
| | | |
Net deferred tax assets (liabilities) | $ | 2.2 | | | $ | (0.1) | |
The Company has recorded deferred income tax liabilities of $9.3 million and $11.9 million as of December 31, 2022 and 2021, respectively, which were included in deferred income taxes in the consolidated balance sheets. The Company has also recorded deferred income tax assets of $11.5 million and $11.8 million as of December 31, 2022 and 2021, respectively, which were included in other long-term assets in the consolidated balance sheets.
At December 31, 2022, the Company had the following gross amounts of tax-related carryforwards:
•Net operating loss carryforwards of $3.8 million, $32.6 million and $567.9 million for federal, foreign and state, respectively. The federal net operating loss carryforward was generated in 2020 and is available without expiration. Of the foreign net operating loss carryforwards, $8.6 million is available without expiration, while the remainder expires through 2042. Of the state net operating loss carryforwards, $79.7 million is available without expiration, while the remainders expire through 2042.
•Various credit carryforwards of $9.7 million, $24.3 million and $36.2 million for federal, foreign and state, respectively. The federal carryforward expires through 2041, the foreign credit carryforward expires in 2026, and the state credit carryforwards include $25.5 million that is available without expiration, while the remainder expires through 2036.
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
As of December 31, 2022, the Company has recorded a valuation allowance of $113.9 million on its consolidated balance sheet primarily related to the tax-affected amounts of the above carryforwards. The valuation allowance includes $13.2 million, $31.3 million and $69.4 million of federal, foreign and state deferred tax assets, respectively, that are not expected to be realized.
Uncertain Tax Positions
The following table summarizes the activity of the Company’s liability for unrecognized tax benefits at December 31, 2022 and 2021: | | | | | | | | | | | | | |
| 2022 | | 2021 | | |
Balance at January 1, | $ | 11.7 | | | $ | 11.6 | | | |
| | | | | |
| | | | | |
Additions for tax positions of prior years | 0.2 | | | 0.5 | | | |
Reductions for tax positions of prior years | (0.3) | | | (0.3) | | | |
Lapses of applicable statutes of limitations | (0.5) | | | (0.1) | | | |
| | | | | |
| | | | | |
Balance at December 31, | $ | 11.1 | | | $ | 11.7 | | | |
As of December 31, 2022, $8.0 million of unrecognized tax benefits would impact the Company’s effective tax rate, if recognized. Of that amount, it is reasonably possible that $4.4 million of the total amount of unrecognized tax benefits will decrease within the next twelve months due to resolution of income tax audits or statute expirations.
The Company classified interest income and any related refunds related to income tax uncertainties as a component of income tax expense. The following table summarizes the Company’s interest income related to tax uncertainties and refunds recognized during the years ended December 31, 2022 and 2021: | | | | | | | | | | | | | |
| 2022 | | 2021 | | |
Interest income | $ | (0.1) | | | $ | (0.5) | | | |
Refunds | — | | | (0.1) | | | |
Accrued interest and penalties related to income tax uncertainties are reported as components of other current liabilities and other long-term liabilities in the consolidated balance sheets. The following table summarizes the Company’s liabilities for accrued interest and penalties related to income tax uncertainties at December 31, 2022 and 2021: | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| Accrued interest | | Accrued penalties | | Accrued interest | | Accrued penalties |
Other current liabilities | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Other long-term liabilities | 0.1 | | | — | | | 0.2 | | | — | |
Total liabilities | $ | 0.1 | | | $ | — | | | $ | 0.2 | | | $ | — | |
The Company has tax years from 2013 through 2022 that remain open and subject to examination by the Internal Revenue Service. Tax years from 2013 through 2022 remain open and subject to examination in the Company’s various major state jurisdictions within the United States.
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
The Company’s practice and intention is to reinvest certain earnings of its non-U.S. subsidiaries in those operations. The Company has analyzed its global working capital and cash requirements and the potential tax liabilities attributable to repatriation of earnings, and has determined not to change its permanent reinvestment assertion. The Company does not have significant prior year untaxed, undistributed earnings from its foreign operations at December 31, 2022, and the Company does not provide for, nor expect to incur, any significant, additional taxes which could become payable upon repatriation of such amounts.
Note 13. 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 Level 3 recurring measurements of assets or liabilities as of December 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 swaps were previously designated as cash flow hedges as they effectively converted the notional value of the Company’s variable rate debt based on one-month 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 was then amortized to interest expense on a straight-line basis over the remaining lives of the swap contracts. The Company expects to reclassify $2.7 million of this balance to interest expense over the next twelve months.
| | | | | | | |
| 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% | | |
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
The Company classifies 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 December 31, 2022 and 2021, were as follows:
| | | | | | | | | | | | | | | | | |
| Balance Sheet Location | | December 31, 2022 | | December 31, 2021 |
Interest rate swap assets | Prepaid expenses and other current assets | | $ | 3.8 | | | $ | — | |
Interest rate swap liabilities | Other current liabilities | | — | | | (0.7) | |
Interest rate swap liabilities | Other long-term liabilities | | — | | | (4.4) | |
Prior to the Company’s de-designation of the interest rate swaps as a cash flow hedge, the interest rate swaps were considered highly effective, with no amount of ineffectiveness recorded into earnings. The change in the fair value of the interest rate swaps are recorded as an adjustment to interest expense in the consolidated statements of operations. The cash flows associated with the interest rate swaps have been recognized as an adjustment to interest expense in the consolidated statements of operations: | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 |
Cash Flow Impacts | | | |
Net interest paid | $ | 1.7 | | | $ | 7.6 | |
| | | |
Impacts with Swaps as Nonhedging Instruments | | | |
Income recognized in interest expense excluded from hedge effectiveness assessments | $ | (9.0) | | | $ | (9.3) | |
Amounts reclassified out of accumulated other comprehensive loss to interest expense | 3.4 | | | 7.1 | |
Net interest expense | 1.7 | | | 7.6 | |
Total impact of swaps to interest expense | $ | (3.9) | | | $ | 5.4 | |
Interest Rate Collars
The Company has entered into two interest rate collar contracts, both effective February 1, 2023. The purpose of entering into the contracts is to reduce the variability of cash flows from interest payments related to a portion of Quad’s variable-rate debt. The interest rate collars will be designated as cash flow hedges as they effectively convert the notional value of the Company’s variable rate debt based on one-month term SOFR to a fixed rate if that month’s interest rate is outside of the collars’ floor and ceiling rates, including a spread on underlying debt, and a monthly reset in the variable interest rate. The key terms of the interest rate collars are as follows: | | | | | | | | | | |
| December 12, 2022 Interest Rate Collar | December 14, 2022 Interest Rate Collar | | |
Effective date | February 1, 2023 | February 1, 2023 | | |
Termination date | October 30, 2026 | October 31, 2025 | | |
Term | 45 Months | 33 Months | | |
Notional amount | $75.0 | $75.0 | | |
Floor Rate | 2.09% | 2.25% | | |
Ceiling Rate | 5.00% | 5.00% | | |
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
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. As of December 31, 2022, there were six open foreign currency exchange contracts designated as cash flow hedges, with a total notional value of $7.7 million.
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 years ended December 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 10, “Debt,” for the fair value of the Company’s debt as of December 31, 2022 and 2021.
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”; Note 4, “Goodwill and Other Intangible Assets”; 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.
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 December 31, 2022 and 2021. See Note 14, “Employee Retirement Plans,” for the details of Level 1 and Level 2 inputs related to employee retirement plans.
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
Note 14. Employee Retirement Plans
Defined Contribution Plans
The Quad/Graphics, Inc. Diversified Plan is comprised of participant-directed 401(k) contributions, Company match and profit sharing contributions, with total participant assets of $1.9 billion as of December 31, 2022. Company 401(k) matching contributions were $16.8 million and $13.2 million for the years ended December 31, 2022 and 2021, respectively. The Company’s 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 for the years ended December 31, 2022 and 2021.
Defined Benefit 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 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.
The components of net pension income for the years ended December 31, 2022 and 2021, were as follows: | | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | | | |
| 2022 | | 2021 | | | | | | | | |
| | | | | | | | | | | |
Interest cost | $ | (9.7) | | | $ | (8.8) | | | | | | | | | |
Expected return on plan assets | 22.3 | | | 24.2 | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Net periodic pension income | 12.6 | | | 15.4 | | | | | | | | | |
Settlement charge | — | | | (0.9) | | | | | | | | | |
| | | | | | | | | | | |
Net pension income | $ | 12.6 | | | $ | 14.5 | | | | | | | | | |
The Company made $1.0 million in benefit payments to its non-qualified defined benefit pension plans and made no contributions to its qualified defined benefit pension plans during the year ended December 31, 2022.
The Company incurred non-cash settlement charges of $0.9 million during the year ended December 31, 2021 due to the significance of lump sum payments made in 2021. The non-cash settlement charges result in accelerated recognition of actuarial losses on the consolidated statement of operations.
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
The underfunded pension obligations are calculated using generally accepted actuarial methods and are measured annually as of December 31. The following table provides a reconciliation of the projected benefit obligation, fair value of plan assets and the funded status of the pension plans as of December 31, 2022 and 2021: | | | | | | | | | | | | | | | |
| Pension Benefits | | |
| 2022 | | 2021 | | | | |
Changes in benefit obligation | | | | | | | |
Projected benefit obligation, beginning of year | $ | (462.7) | | | $ | (525.6) | | | | | |
| | | | | | | |
Interest cost | (9.7) | | | (8.8) | | | | | |
| | | | | | | |
| | | | | | | |
Actuarial gain | 86.1 | | | 23.1 | | | | | |
Benefits paid | 37.0 | | | 47.5 | | | | | |
Liability benefit from settlement | — | | | 1.1 | | | | | |
Projected benefit obligation, end of year | (349.3) | | | (462.7) | | | | | |
| | | | | | | |
Changes in plan assets | | | | | | | |
Fair value of plan assets, beginning of year | 443.5 | | | 469.0 | | | | | |
Actual return on plan assets | (94.5) | | | 20.4 | | | | | |
Employer contributions | 1.0 | | | 1.6 | | | | | |
| | | | | | | |
Benefits paid | (37.0) | | | (47.5) | | | | | |
Fair value of plan assets, end of year | 313.0 | | | 443.5 | | | | | |
| | | | | | | |
Funded status | $ | (36.3) | | | $ | (19.2) | | | | | |
The net underfunded defined benefit plan obligations increased by $17.1 million during the year ended December 31, 2022. This increase was primarily due to an overall decrease in pension plan assets due to a negative actual return on pension plan assets of (21.76)% during the year ended December 31, 2022, which was below the expected return on plan assets assumption of 5.25%. This decrease in plan assets was partially offset by a decrease in overall pension obligations due to a 269 basis point increase in the pension discount rate from 2.77% at December 31, 2021, to 5.46% at December 31, 2022 and $1.0 million of benefit payments.
Amounts recognized on the consolidated balance sheets as of December 31, 2022 and 2021, were as follows: | | | | | | | | | | | | | | | |
| Pension Benefits | | |
| 2022 | | 2021 | | | | |
Current liabilities | $ | (1.4) | | | $ | (1.6) | | | | | |
Noncurrent liabilities | (34.9) | | | (17.6) | | | | | |
Total amount recognized | $ | (36.3) | | | $ | (19.2) | | | | | |
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
The following table provides a reconciliation of the Company’s accumulated other comprehensive loss prior to any deferred tax effects at December 31, 2022 and 2021: | | | | | | | | | | | |
| Actuarial Gain / (Loss), net | | | | | | |
Balance at January 1, 2021 | $ | (38.1) | | | | | | | |
Amount arising during the period | 20.3 | | | | | | | |
| | | | | | | |
Impact of pension plan settlement charge included in net loss | 0.9 | | | | | | | |
Balance at December 31, 2021 | (16.9) | | | | | | | |
Amount arising during the period | (30.7) | | | | | | | |
| | | | | | | |
| | | | | | | |
Balance at December 31, 2022 | $ | (47.6) | | | | | | | |
Actuarial gains and losses in excess of 10% of the greater of the projected benefit obligation or the market-related value of plan assets are recognized as a component of net periodic benefit costs over the average remaining service period of a plan’s active employees. Unrecognized prior service costs or credits are also recognized as a component of net periodic benefit cost over the average remaining service period of a plan’s active employees.
The weighted average assumptions used to determine net periodic benefit costs for the years ended December 31, 2022 and 2021, were as follows: | | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | |
| 2022 | | 2021 | | | | | | | | |
Discount rate | 2.77 | % | | 2.37 | % | | | | | | | | |
Expected long-term return on plan assets | 5.25 | % | | 5.50 | % | | | | | | | | |
The weighted average assumptions used to determine pension benefit obligations at December 31, 2022 and 2021, were as follows: | | | | | | | | | | | | | | | |
| Pension Benefits | | |
| 2022 | | 2021 | | | | |
Discount rate (end of year rate) | 5.46 | % | | 2.77 | % | | | | |
The Company determines its assumed discount rate based on an index of high-quality corporate bond yields and matched-funding yield curve analysis as of the measurement date.
Estimated Company Contributions and Benefit Payments
In 2023, the Company does not expect to make any cash contributions to its qualified defined benefit pension plans and expects to make estimated benefit payments of $1.5 million to its non-qualified defined benefit pension plans. The actual pension contributions may differ based on the funding calculations, and the Company may choose to make additional discretionary contributions. The estimated benefit payments may differ based on actual experience.
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
Estimated Future Benefit Payments by the Plans to or on Behalf of Plan Participants
An estimate of the Plans’ present value of future benefit payments to be made from funded qualified plans and unfunded non-qualified plans to plan participants at December 31, 2022, were as follows: | | | | | |
| Future Pension Benefit Payments |
2023 | $ | 35.4 | |
2024 | 33.7 | |
2025 | 33.0 | |
2026 | 31.7 | |
2027 | 30.8 | |
2028 - 2032 | 134.7 | |
Thereafter | 50.0 | |
Total | $ | 349.3 | |
Plan Assets and Investment Strategy
The Company follows a disciplined investment strategy, which provides diversification of investments by asset class, foreign currency, sector and company. The Pension Committee has an approved investment policy for the pension plan that establishes long-term asset mix targets based on several factors including the following: the funded status, historical returns achieved by worldwide investment markets, the time horizon of the pension plan’s obligations, and the investment risk. An allocation range by asset class is developed whereby a mix of equity securities and debt securities are used to provide an appropriate risk-adjusted long-term return on plan assets. Third-party investment managers are employed to invest assets in both passively-indexed and actively-managed strategies and investment returns and risks are monitored on an ongoing basis. Derivatives are used at certain times to hedge foreign currency exposure. Gains or losses on the derivatives are offset by a corresponding change in the value of the hedged assets. Derivatives are strictly used for hedging purposes and not speculative purposes.
The current target allocations for plan assets on a weighted average basis are 25% equity securities and 75% debt securities, including cash and cash equivalents. The actual asset allocation as of December 31, 2022, was approximately 23% equity securities and 77% debt securities, and as of December 31, 2021, was approximately 26% equity securities and 74% debt securities. Equity investments are diversified by country, issuer and industry sector. Debt securities primarily consist of government bonds and corporate bonds from diversified industries.
The expected long-term rate of return on assets assumption is selected by first identifying the expected range of long-term rates of return for each major asset class. Expected long-term rates of return are developed based on long-term historical averages, current expectations of future returns, anticipated inflation rates and active investment management of the portfolio. The expected long-term rate of return on plan assets is then calculated by weighting each asset class.
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
The fair values of the Company’s pension plan assets at December 31, 2022 and 2021, by asset category were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 | | December 31, 2021 |
Asset Category | | Total | | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 |
Cash and cash equivalents | | $ | 0.6 | | | $ | 0.6 | | | $ | — | | | $ | — | | | $ | 3.2 | | | $ | 3.2 | | | $ | — | | | $ | — | |
Debt securities | | 76.2 | | | — | | | 76.2 | | | — | | | 120.6 | | | — | | | 120.6 | | | — | |
Equity securities | | 13.4 | | | — | | | 13.4 | | | — | | | 22.2 | | | — | | | 22.2 | | | — | |
Total pension plan assets, excluding those measured at net asset value (“NAV”) | | 90.2 | | | $ | 0.6 | | | $ | 89.6 | | | $ | — | | | 146.0 | | | $ | 3.2 | | | $ | 142.8 | | | $ | — | |
Investments measured at NAV (1) | | 222.8 | | | | | | | | | 297.5 | | | | | | | |
Total pension plan assets | | $ | 313.0 | | | | | | | | | $ | 443.5 | | | | | | | |
______________________________
(1)These investments consist of privately placed funds that are valued based on NAV. NAV of the funds is based on the fair value of each fund’s underlying investments. In accordance with ASC Subtopic 820-10, certain investments that are measured at fair value using the NAV per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy.
There were no Level 3 assets as of December 31, 2022 and 2021. See Note 13, “ Financial Instruments and Fair Value Measurements,” for definitions of fair value levels.
The Company segregated its plan assets by the following major categories and levels for determining their fair value as of December 31, 2022:
Cash and cash equivalents. Carrying value approximates fair value and these assets are classified as Level 1.
Debt Securities. This category consists of bonds, short-term fixed income securities and fixed income pooled funds fair valued based on a compilation of primarily observable market information or broker quotes in over-the-counter markets and are classified as Level 2.
Equity Securities. This category consists of equity pooled funds that are classified as Level 2 in the fair value hierarchy. Level 2 assets are valued using quoted prices in markets that are not active, broker dealer quotations, and other methods by which all significant input was observable at the measurement date.
The valuation methodologies described above may generate a fair value calculation that may not be indicative of net realizable value or future fair values. While the Company believes the valuation methodologies used are appropriate, the use of different methodologies or assumptions in calculating fair value could result in different amounts. The Company invests in various assets in which valuation is determined by NAV. The Company believes that NAV is representative of fair value at the reporting date, as there are no significant restrictions on redemption on these investments or other reasons to indicate that the investment would be redeemed at an amount different than NAV.
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
The fair value measurements in common/collective trusts, calculated using a NAV and their redemption restrictions, for the years ended December 31, 2022 and 2021, are as follows: | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value | | Redemption Frequency (If Currently Eligible) | | Redemption Notice Period |
| 2022 | | 2021 | |
JP Morgan Chase Bank Strategic Property Fund | $ | 11.7 | | | $ | 12.8 | | | Quarterly | | 30 days |
Pyramis Long Corporate A or Better | 24.0 | | | 55.4 | | | Daily | | 15 days |
Pyramis Long Duration | 12.4 | | | 46.9 | | | Daily | | 15 days |
Pyramis 810 Corporate | 124.7 | | | 101.3 | | | Daily | | 15 days |
Russell 3000 Index NL | 46.0 | | | 81.1 | | | Daily | | 1 day |
NT Collective Short Term Investment Fund | 4.0 | | | — | | | Daily | | 1 day |
Total value of investments measured at NAV | $ | 222.8 | | | $ | 297.5 | | | | | |
Risk Management
For all directly invested funds, the concentration risk is monitored through specific guidelines in the investment manager mandates. The investment manager mandates were developed by the Company’s external investment advisor, and specify diversification standards such as the maximum exposure per issuer, and concentration limits per type of security, industry and country when applicable.
For the investments made through pooled funds, the investment mandates of the funds were again reviewed by the Company’s external investment advisor, to determine that the investment objectives and guidelines were consistent with the Company’s overall pension plan risk management objectives. In managing the plan assets, management reviews and manages risk associated with funded status risk, interest rate risk, market risk, counterparty risk, liquidity risk and operational risk. Liability management and asset class diversification are central to the Company’s risk management approach and are integral to the overall investment strategy.
Given the process in place to ensure a proper diversification of the portfolio, management believes that the Company pension plan assets are not exposed to significant concentration risk.
Multiemployer Pension Plans
The Company has previously participated in a number of MEPPs under terms of collective bargaining agreements that cover a number of its employees. The risks of participating in these MEPPs are different from single employer plans in the following aspects:
•Assets contributed to the MEPPs by one company may be used to provide benefits to employees of other participating companies.
•If a participating company stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating companies.
•If the Company stops participating in some or all of its MEPPs, and continues in business, the Company would be required to pay an amount, referred to as a withdrawal liability, based on the unfunded status of the plan.
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
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 GCIU and GCC, are significantly underfunded, and will 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 the estimated withdrawal liability based on information provided by each plan’s trustee.
The GCIU Plan is a defined benefit plan that provides retirement benefits, total and permanent disability benefits, and pre-retirement death benefits for the participating union employees of the Company. The funded status of the GCIU Plan is classified as critical and declining based on the GCIU Plan’s 2022 certification to the United States Department of Labor, as the plan is projected to become insolvent within 20 years. As of January 1, 2022, the plan was projected to be insolvent in 2033. As a result, the GCIU Plan implemented a rehabilitation plan to improve the plan’s funded status. In 2019, the Company and the GCIU reached a settlement agreement for all claims, with scheduled payments until April 2032.
The GCC Plan is a defined benefit plan that provides retirement benefits, disability benefits, and early retirement benefits for the participating union employees of the Company. The funded status of the GCC Plan is classified as critical based on the GCC Plan’s 2022 certification to the United States Department of Labor, improved from critical and declining status because it received Special Financial Assistance from the Pension Benefit Guaranty Corporation in 2022. The plan is still projected to become insolvent in 2037. As a result, the GCC Plan implemented a rehabilitation plan to improve the plan’s funded status. In 2016, the Company and the GCC reached a settlement agreement for all claims, with scheduled payments until February 2024.
The Company made payments totaling $6.2 million for the years ended December 31, 2022 and 2021. The Company has reserved $28.3 million as the total MEPPs withdrawal liability as of December 31, 2022, of which $24.2 million was recorded in other long-term liabilities and $4.1 million was recorded in other current liabilities in the consolidated balance sheets.
Note 15. Earnings Per Share
Basic earnings per share is computed as net earnings divided by the basic weighted average common shares outstanding. The calculation of diluted earnings 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. Anti-dilutive equity instruments excluded from the computation of diluted net earnings per shares were 0.2 million and 0.4 million class A common shares for the year ended December 31, 2022 and 2021, respectively.
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 years ended December 31, 2022 and 2021, are summarized as follows: | | | | | | | | | | | | | |
| 2022 | | 2021 | | |
Numerator: | | | | | |
Net earnings | $ | 9.3 | | | $ | 37.8 | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Denominator: | | | | | |
Basic weighted average number of common shares outstanding for all classes of common stock | 50.7 | | | 51.3 | | | |
Plus: effect of dilutive equity incentive instruments | 1.8 | | | 1.7 | | | |
Diluted weighted average number of common shares outstanding for all classes of common shares | 52.5 | | | 53.0 | | | |
| | | | | |
Earnings per share: | | | | | |
| | | | | |
| | | | | |
| | | | | |
Basic | $ | 0.18 | | | $ | 0.74 | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Diluted | $ | 0.18 | | | $ | 0.71 | | | |
| | | | | |
| | | | | |
Note 16. 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 the date of approval of the 2020 Plan, 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 1,173,520 shares of class A common stock reserved for issuance under the 2020 Plan as of December 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, restricted stock, restricted stock units and deferred stock units. The Company recognizes these compensation costs for only those awards expected to vest, on a straight-line basis over the requisite approximate three year service period of the awards, except DSU awards, 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 CONSOLIDATED FINANCIAL STATEMENTS
(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 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 years ended December 31, 2022 and 2021, was as follows: | | | | | | | | | | | |
| Year ended December 31, |
| 2022 | | 2021 |
RS and RSU equity awards expense | $ | 5.1 | | | $ | 5.4 | |
RSU liability awards expense | 0.2 | | | — | |
DSU awards expense | 0.7 | | | 0.8 | |
Total equity incentive compensation expense | $ | 6.0 | | | $ | 6.2 | |
Total future compensation expense related to all equity incentive programs granted as of December 31, 2022, was estimated to be $6.0 million, which consists entirely of expense for RS and RSU awards. Estimated future compensation expense is $3.5 million for 2023, $2.2 million for 2024 and $0.3 million for 2025.
Stock Options
Options vested over four years, with no vesting in the first year and one-third vesting upon the second, third and fourth anniversary dates. Options expire no later than the tenth anniversary of the grant date and are not credited with dividend declarations. Stock options were only to be granted to employees.
There were no stock options granted, and no compensation expense was recognized related to stock options during the years ended December 31, 2022 and 2021. There is no future compensation expense for stock options granted as of December 31, 2022. The following table is a summary of the stock option activity for the year ended December 31, 2022: | | | | | | | | | | | | | | | | | | | | | | | |
| Shares Under Option | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Term (years) | | Aggregate Intrinsic Value (millions) |
Outstanding and exercisable at December 31, 2021 | 56,034 | | | $ | 14.14 | | | 0.0 | | $ | — | |
Granted | — | | | — | | | | | |
Exercised | — | | | — | | | | | |
Canceled/forfeited/expired | (56,034) | | | 14.14 | | | | | |
Outstanding and exercisable at December 31, 2022 | — | | | $ | — | | | 0.0 | | $ | — | |
| | | | | | | |
| | | | | | | |
The intrinsic value of options outstanding and exercisable as of December 31, 2021 was based on the fair value of the stock price. There were no stock options exercised for the years ended December 31, 2022 and 2021.
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
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 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 grants 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 RSUs are not entitled to vote but do earn dividends. Upon vesting, RSUs will be settled either through cash payment equal to the fair market value of the RSUs on the vesting date or through issuance of Company class A 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.
The following table is a summary of RS and RSU award activity for the year ended December 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 | 1,693,743 | | | 3.97 | | | | | 54,014 | | | 4.00 | | | |
Vested | (1,039,567) | | | 12.31 | | | | | (169,489) | | | 12.33 | | | |
Forfeited | (100,900) | | | 4.22 | | | | | (5,675) | | | 4.68 | | | |
Nonvested at December 31, 2022 | 3,606,295 | | | $ | 4.11 | | | 1.4 | | 100,943 | | | $ | 4.08 | | | 1.5 |
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 consolidated statements of operations. The change in fair value of the awards classified as liabilities resulted in $0.2 million of expense for the year ended December 31, 2022. The fair value of the RSU awards classified as liabilities was $0.5 million as of the year ended December 31, 2021.
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. Compensation expense recognized for RS and RSUs classified as equity was $5.1 million and $5.4 million for the years ended December 31, 2022 and 2021, respectively.
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
Deferred Stock Units
Deferred stock units are awards of rights to shares of the Company’s class A stock and are awarded to non-employee directors of the Company. The following table is a summary of DSU award activity for the year ended December 31, 2022: | | | | | | | | | | | |
| Deferred Stock Units |
| Units | | Weighted Average Grant Date Fair Value Per Share |
Outstanding at December 31, 2021 | 687,391 | | | $ | 8.26 | |
Granted | 187,632 | | | 3.89 | |
| | | |
Settled | (101,829) | | | 7.90 | |
| | | |
Outstanding at December 31, 2022 | 773,194 | | | $ | 7.25 | |
Each DSU award entitles the grantee to receive one share of class A 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 stock. Compensation expense recognized for DSUs was $0.7 million and $0.8 million for the years ended December 31, 2022 and 2021, respectively. As DSU awards are fully vested on the grant date, all compensation expense was recognized at the date of grant.
Note 17. Shareholders’ Equity
The Company has three classes of common stock as follows (share data in millions): | | | | | | | | | | | | | | | | | | | | | | | |
| | | Issued Common Stock |
| Authorized Shares | | Outstanding | | Treasury | | Total Issued Shares |
Class A stock ($0.025 par value) | | | | | | | |
December 31, 2022 | 105.0 | | | 39.2 | | | 3.4 | | | 42.6 | |
December 31, 2021 | 105.0 | | | 40.8 | | | 0.9 | | | 41.7 | |
| | | | | | | |
| | | | | | | |
Class B stock ($0.025 par value) | | | | | | | |
December 31, 2022 | 80.0 | | | 13.5 | | | — | | | 13.5 | |
December 31, 2021 | 80.0 | | | 13.5 | | | — | | | 13.5 | |
| | | | | | | |
| | | | | | | |
Class C stock ($0.025 par value) | | | | | | | |
December 31, 2022 | 20.0 | | | — | | | 0.5 | | | 0.5 | |
December 31, 2021 | 20.0 | | | — | | | 0.5 | | | 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 stock.
The Company also has 0.5 million shares of $0.01 par value preferred stock authorized, of which none were issued at December 31, 2022 and 2021. The Company has no present plans to issue any preferred stock.
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
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. Under the authorization, share repurchases may be made at the Company’s discretion, from time to time, in the open market and/or in privately negotiated transactions as permitted by federal securities laws and other legal requirements. The timing, manner, price and amount of any repurchase will depend on economic and market conditions, share price, trading volume, applicable legal requirements and other factors. The program may be suspended or discontinued at any time. During the year ended December 31, 2022, the Company repurchased 3,093,662 shares of its Class A common stock at a weighted average price of $3.21 per share for a total purchase price of $9.9 million ($10.0 million, including commissions). There were no shares repurchased during the year ended December 31, 2021. As of December 31, 2022, there were $90.1 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.
Note 18. Accumulated Other Comprehensive Loss
The changes in accumulated other comprehensive loss by component, net of tax, for the years ended December 31, 2022 and 2021, were as follows: | | | | | | | | | | | | | | | | | | | | | | | |
| Translation Adjustments | | Interest Rate Swap Adjustments | | Pension Benefit Plan Adjustments | | Total |
Balance at January 1, 2021 | $ | (130.8) | | | $ | (12.3) | | | $ | (28.2) | | | $ | (171.3) | |
Other comprehensive income (loss) before reclassifications | (9.6) | | | — | | | 16.1 | | | 6.5 | |
Amounts reclassified from accumulated other comprehensive loss to net earnings | (2.7) | | | 5.6 | | | 0.7 | | | 3.6 | |
Net other comprehensive income (loss) | (12.3) | | | 5.6 | | | 16.8 | | | 10.1 | |
Balance at December 31, 2021 | (143.1) | | | (6.7) | | | (11.4) | | | (161.2) | |
Other comprehensive income (loss) before reclassifications | 27.2 | | | — | | | (24.2) | | | 3.0 | |
Amounts reclassified from accumulated other comprehensive loss to net earnings | 27.3 | | | 2.6 | | | — | | | 29.9 | |
Net other comprehensive income (loss) | 54.5 | | | 2.6 | | | (24.2) | | | 32.9 | |
Balance at December 31, 2022 | $ | (88.6) | | | $ | (4.1) | | | $ | (35.6) | | | $ | (128.3) | |
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
The details about the reclassifications from accumulated other comprehensive loss to net earnings for the years ended December 31, 2022 and 2021, were as follows: | | | | | | | | | | | | | | | | | | | | | |
Details about Accumulated Other Comprehensive Loss Components | | | Year Ended December 31, | | Consolidated Statements of Operations Presentation |
| | 2022 | | 2021 | |
Amortization of amounts accumulated for interest rate swaps de-designated as cash flow hedges | | | $ | 3.4 | | | $ | 7.1 | | | Interest expense |
Impact of income taxes | | | (0.8) | | | (1.5) | | | Income tax expense |
Amortization of amounts accumulated for interest rate swaps de-designated as cash flow hedges, net of tax | | | 2.6 | | | 5.6 | | | |
| | | | | | | |
Reclassification of foreign currency translation adjustments | | | 27.3 | | | (2.7) | | | Restructuring, impairment and transaction-related charges |
Impact of income taxes | | | — | | | — | | | Income tax expense |
Reclassification of foreign currency translation adjustments, net of tax | | | 27.3 | | | (2.7) | | | |
| | | | | | | |
Plan settlements on pension benefit plans | | | — | | | 0.9 | | | Pension income |
Impact of income taxes | | | — | | | (0.2) | | | Income tax expense |
Plan settlements on pension benefit plans, net of tax | | | — | | | 0.7 | | | |
| | | | | | | |
Total reclassifications for the period, net of tax | | | $ | 29.9 | | | $ | 3.6 | | | |
Note 19. Segment Information
Quad is a global marketing experience company that gives brands a more streamlined, impactful, flexible and frictionless way to go to market and reach consumers. The Company leverages its three key competitive advantages — integrated marketing platform excellence, ongoing innovation, and 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
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 print execution and logistics for retail inserts, catalogs, long-run publications, special interest publications, journals, direct mail, directories, in-store marketing and promotion, packaging, newspapers, custom print products, as well as other commercial and specialty printed products, along with global paper procurement, and marketing and other complementary services, such as data and analytics, technology solutions, media services, creative and content solutions, managed services and execution in non-print channels (e.g., digital and broadcast). This segment also includes the manufacture of ink.
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
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.
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 years ended December 31, 2022 and 2021: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Operating Income (Loss) | | | | | | | | Restructuring, Impairment and Transaction-Related Charges | | |
| Net Sales | | | | | Depreciation and Amortization | | Capital Expenditures | | | |
| Products | | Services | | | | | | |
Year ended December 31, 2022 | | | | | | | | | | | | | | | |
United States Print and Related Services | $ | 2,126.6 | | | $ | 668.1 | | | $ | 108.3 | | | | | $ | 124.7 | | | $ | 46.4 | | | $ | 12.1 | | | |
International | 401.7 | | | 20.6 | | | (4.5) | | | | | 16.1 | | | 13.9 | | | 30.7 | | | |
Total operating segments | 2,528.3 | | | 688.7 | | | 103.8 | | | | | 140.8 | | | 60.3 | | | 42.8 | | | |
Corporate | — | | | — | | | (50.3) | | | | | 0.5 | | | — | | | 2.0 | | | |
Total | $ | 2,528.3 | | | $ | 688.7 | | | $ | 53.5 | | | | | $ | 141.3 | | | $ | 60.3 | | | $ | 44.8 | | | |
| | | | | | | | | | | | | | | |
Year ended December 31, 2021 | | | | | | | | | | | | | | | |
United States Print and Related Services | $ | 1,935.8 | | | $ | 692.8 | | | $ | 163.1 | | | | | $ | 138.7 | | | $ | 46.4 | | | $ | (14.5) | | | |
International | 311.3 | | | 20.5 | | | (16.1) | | | | | 17.5 | | | 3.6 | | | 31.3 | | | |
Total operating segments | 2,247.1 | | | 713.3 | | | 147.0 | | | | | 156.2 | | | 50.0 | | | 16.8 | | | |
Corporate | — | | | — | | | (54.2) | | | | | 1.1 | | | — | | | 2.1 | | | |
Total | $ | 2,247.1 | | | $ | 713.3 | | | $ | 92.8 | | | | | $ | 157.3 | | | $ | 50.0 | | | $ | 18.9 | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Restructuring, impairment and transaction-related charges for the years ended December 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.
A reconciliation of operating income to earnings before income taxes and equity in earnings of unconsolidated entity as reported in the consolidated statements of operations for the years ended December 31, 2022 and 2021, was as follows: | | | | | | | | | | | | | |
| 2022 | | 2021 | | |
Operating income | $ | 53.5 | | | $ | 92.8 | | | |
Less: interest expense | 48.4 | | | 59.6 | | | |
Less: net pension income | (12.6) | | | (14.5) | | | |
Less: loss on debt extinguishment | — | | | 0.7 | | | |
Earnings before income taxes and equity in earnings of unconsolidated entity | $ | 17.7 | | | $ | 47.0 | | | |
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
Total assets by segment at December 31, 2022 and 2021, are shown in the following table. | | | | | | | | | | | | | |
| 2022 | | 2021 | | |
United States Print and Related Services | $ | 1,390.2 | | | $ | 1,459.7 | | | |
International | 289.5 | | | 252.7 | | | |
Total operating segments | 1,679.7 | | | 1,712.4 | | | |
Corporate | 22.1 | | | 177.6 | | | |
Total | $ | 1,701.8 | | | $ | 1,890.0 | | | |
Note 20. Geographic Area Information
The table below presents the Company’s net sales and long-lived assets as of and for the years ended December 31, 2022 and 2021, by geographic region. The amounts in this table differ from the segment data presented in Note 19, “Segment Information,” because each operating segment includes operations in multiple geographic regions, based on the Company’s management reporting structure. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| United States | | Europe | | Latin America | | Other | | Combined |
2022 | | | | | | | | | |
Net sales | | | | | | | | | |
Products | $ | 2,076.9 | | | $ | 181.3 | | | $ | 259.6 | | | $ | 10.5 | | | $ | 2,528.3 | |
Services | 668.1 | | | 20.6 | | | — | | | — | | | 688.7 | |
Property, plant and equipment—net | 563.6 | | | 51.6 | | | 46.9 | | | 10.0 | | | 672.1 | |
Operating lease right-of-use assets—net | 102.6 | | | 2.3 | | | 3.8 | | | 2.4 | | | 111.1 | |
Other intangible assets—net | 45.2 | | | 0.3 | | | 1.4 | | | — | | | 46.9 | |
Other long-term assets | 67.8 | | | 7.4 | | | 5.1 | | | 0.5 | | | 80.8 | |
| | | | | | | | | |
2021 | | | | | | | | | |
Net sales | | | | | | | | | |
Products | $ | 1,892.0 | | | $ | 161.3 | | | $ | 183.0 | | | $ | 10.8 | | | $ | 2,247.1 | |
Services | 692.8 | | | 20.5 | | | — | | | — | | | 713.3 | |
Property, plant and equipment—net | 616.8 | | | 60.4 | | | 41.6 | | | 8.2 | | | 727.0 | |
Operating lease right-of-use assets—net | 118.9 | | | 3.3 | | | 0.7 | | | 2.8 | | | 125.7 | |
Other intangible assets—net | 71.9 | | | 1.4 | | | 2.0 | | | — | | | 75.3 | |
Other long-term assets | 53.1 | | | 6.0 | | | 6.9 | | | 0.5 | | | 66.5 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
Note 21. 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. Additionally, 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. ASU 2020-04 was further updated by Accounting Standards Update 2021-01 “Reference Rate Reform (Topic 848)” (“ASU 2021-01”) which further clarified the scope of Topic 848. As amended in ASU 2022-06, this optional guidance is effective as of March 12, 2020, through December 31, 2024. The Company expects to elect the practical expedient outlined in ASU 2020-04 and ASU 2021-01 which allows the Company to prospectively adjust the effective interest rate after a reference rate change. Reference rate reform is not expected to have a material impact on the consolidated financial statements upon the transition from LIBOR to SOFR as the Company’s reference rate, effective February 1, 2023.