Quad/Graphics, Inc 10-Q for FY2021 Q3
Quad/Graphics, Inc. (QUAD)
10-Q
2021-11-03
For: 2021-09-30
View Original
Added on
April 06, 2026
About this 10-Q
Quad/Graphics, Inc filed this 10-Q on November 3, 2021, covering the quarter ended September 30, 2021 (FY2021 Q3).
Headline figures
Quarter ended September 30, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $706.1M
- up 3.9% from $679.3M a year earlier
- Net income
- $14.3M
- up 793.8% from net income of $1.6M a year earlier
- Diluted EPS
- $0.27
- up 800.0% from $0.03 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended September 30, 2021
or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from to
Commission File Number 001-34806
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
(Address of principal executive offices) (Zip Code)
(414 ) 566-6000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
par value $0.025 per share | ||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | ☒ | ||||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ||||||||||||
| Emerging growth company | ||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.
| Class | Outstanding as of October 29, 2021 | |||||||
| Class A Common Stock | ||||||||
| Class B Common Stock | ||||||||
| Class C Common Stock | ||||||||
QUAD/GRAPHICS, INC.
FORM 10-Q INDEX
For the Quarter Ended September 30, 2021
| Page No. | |||||||||||
2
PART I — FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements (Unaudited)
QUAD/GRAPHICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data)
(UNAUDITED)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Net sales | |||||||||||||||||||||||
| Products | $ | $ | $ | $ | |||||||||||||||||||
| Services | |||||||||||||||||||||||
| Total net sales | |||||||||||||||||||||||
| Cost of sales | |||||||||||||||||||||||
| Products | |||||||||||||||||||||||
| Services | |||||||||||||||||||||||
| Total cost of sales | |||||||||||||||||||||||
| Operating expenses | |||||||||||||||||||||||
| Selling, general and administrative expenses | |||||||||||||||||||||||
| Gains from sale and leaseback | ( | ( | |||||||||||||||||||||
| Depreciation and amortization | |||||||||||||||||||||||
| Restructuring, impairment and transaction-related charges | ( | ||||||||||||||||||||||
| Total operating expenses | |||||||||||||||||||||||
| Operating income from continuing operations | |||||||||||||||||||||||
| Interest expense | |||||||||||||||||||||||
| Net pension income | ( | ( | ( | ( | |||||||||||||||||||
| Loss on debt extinguishment | |||||||||||||||||||||||
| Earnings (loss) from continuing operations before income taxes and equity in (earnings) loss of unconsolidated entity | ( | ( | |||||||||||||||||||||
| Income tax expense (benefit) | ( | ( | |||||||||||||||||||||
| Earnings (loss) from continuing operations before equity in (earnings) loss of unconsolidated entity | ( | ||||||||||||||||||||||
| Equity in (earnings) loss of unconsolidated entity | ( | ( | |||||||||||||||||||||
| Net earnings (loss) from continuing operations | ( | ||||||||||||||||||||||
| Loss from discontinued operations, net of tax | ( | ( | |||||||||||||||||||||
| Net earnings (loss) | ( | ||||||||||||||||||||||
| Less: net loss attributable to noncontrolling interests | ( | ||||||||||||||||||||||
| Net earnings (loss) attributable to Quad common shareholders | $ | $ | $ | $ | ( | ||||||||||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
3
QUAD/GRAPHICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (continued)
(in millions, except per share data)
(UNAUDITED)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Earnings (loss) per share attributable to Quad common shareholders | |||||||||||||||||||||||
| Basic: | |||||||||||||||||||||||
| Continuing operations | $ | $ | $ | $ | ( | ||||||||||||||||||
| Discontinued operations | ( | ( | |||||||||||||||||||||
| Basic earnings (loss) per share attributable to Quad common shareholders | $ | $ | $ | $ | ( | ||||||||||||||||||
| Diluted: | |||||||||||||||||||||||
| Continuing operations | $ | $ | $ | $ | ( | ||||||||||||||||||
| Discontinued operations | ( | ( | |||||||||||||||||||||
| Diluted earnings (loss) per share attributable to Quad common shareholders | $ | $ | $ | $ | ( | ||||||||||||||||||
| Weighted average number of common shares outstanding | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
4
QUAD/GRAPHICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in millions)
(UNAUDITED)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Net earnings (loss) | $ | $ | $ | $ | ( | ||||||||||||||||||
| Other comprehensive income (loss) | |||||||||||||||||||||||
| Translation adjustments | ( | ( | ( | ||||||||||||||||||||
| Interest rate swap adjustments | ( | ||||||||||||||||||||||
| Pension benefit plan adjustments | |||||||||||||||||||||||
| Other comprehensive income (loss), before tax | ( | ( | ( | ||||||||||||||||||||
| Income tax impact related to items of other comprehensive income (loss) | ( | ||||||||||||||||||||||
| Other comprehensive income (loss), net of tax | ( | ( | ( | ||||||||||||||||||||
| Total comprehensive income (loss) | ( | ||||||||||||||||||||||
| Less: comprehensive income (loss) attributable to noncontrolling interests | ( | ||||||||||||||||||||||
| Comprehensive income (loss) attributable to Quad common shareholders | $ | $ | $ | $ | ( | ||||||||||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
5
QUAD/GRAPHICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions)
(UNAUDITED)
| September 30, 2021 | December 31, 2020 | ||||||||||
| ASSETS | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
Receivables, less allowance for credit losses of $ | |||||||||||
| Inventories | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Total current assets | |||||||||||
| Property, plant and equipment—net | |||||||||||
| Operating lease right-of-use assets—net | |||||||||||
| Goodwill | |||||||||||
| Other intangible assets—net | |||||||||||
| Equity method investment in unconsolidated entity | |||||||||||
| Other long-term assets | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Other current liabilities | |||||||||||
| Short-term debt and current portion of long-term debt | |||||||||||
| Current portion of finance lease obligations | |||||||||||
| Current portion of operating lease obligations | |||||||||||
| Total current liabilities | |||||||||||
| Long-term debt | |||||||||||
| Finance lease obligations | |||||||||||
| Operating lease obligations | |||||||||||
| Deferred income taxes | |||||||||||
| Other long-term liabilities | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies (Note 10) | |||||||||||
| Shareholders’ equity | |||||||||||
| Preferred stock | |||||||||||
| Common stock, Class A | |||||||||||
| Common stock, Class B | |||||||||||
| Common stock, Class C | |||||||||||
| Additional paid-in capital | |||||||||||
| Treasury stock, at cost | ( | ( | |||||||||
| Accumulated deficit | ( | ( | |||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Quad’s shareholders’ equity | |||||||||||
| Noncontrolling interests | |||||||||||
| Total shareholders’ equity and noncontrolling interests | |||||||||||
| Total liabilities and shareholders’ equity | $ | $ | |||||||||
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
6
QUAD/GRAPHICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(UNAUDITED)
| Nine Months Ended September 30, | |||||||||||
| 2021 | 2020 | ||||||||||
| OPERATING ACTIVITIES | |||||||||||
| Net earnings (loss) | $ | $ | ( | ||||||||
| Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Impairment charges | |||||||||||
| Settlement charges on pension plans | |||||||||||
| Amortization of debt issuance costs and original issue discount | |||||||||||
| Loss on debt extinguishment | |||||||||||
| Stock-based compensation | |||||||||||
| Gain from property insurance claims | ( | ( | |||||||||
| Gain on the sale of businesses | ( | ( | |||||||||
| Gain on the sale or disposal of property, plant and equipment | ( | ( | |||||||||
| Deferred income taxes | |||||||||||
| Equity in (earnings) loss of unconsolidated entity | ( | ||||||||||
| Changes in operating assets and liabilities—net of acquisitions and divestitures | ( | ( | |||||||||
| Net cash provided by operating activities | |||||||||||
| INVESTING ACTIVITIES | |||||||||||
| Purchases of property, plant and equipment | ( | ( | |||||||||
| Cost investment in unconsolidated entities | ( | ( | |||||||||
| Proceeds from the sale of property, plant and equipment | |||||||||||
| Proceeds from the sale of businesses | |||||||||||
| Proceeds from property insurance claims | |||||||||||
| Acquisition of businesses—net of cash acquired | ( | ||||||||||
| Other investing activities | ( | ||||||||||
| Net cash provided by investing activities | |||||||||||
| FINANCING ACTIVITIES | |||||||||||
| Proceeds from issuance of long-term debt | |||||||||||
| Payments of long-term debt | ( | ( | |||||||||
| Payments of finance lease obligations | ( | ( | |||||||||
| Borrowings on revolving credit facilities | |||||||||||
| Payments on revolving credit facilities | ( | ( | |||||||||
| Payments of debt issuance costs and financing fees | ( | ||||||||||
| Changes in ownership of noncontrolling interests | ( | ( | |||||||||
| Equity awards redeemed to pay employees’ tax obligations | ( | ( | |||||||||
| Payment of cash dividends | ( | ( | |||||||||
| Other financing activities | ( | ||||||||||
| Net cash used in financing activities | ( | ( | |||||||||
| Effect of exchange rates on cash and cash equivalents | ( | ( | |||||||||
| Net (decrease) increase in cash and cash equivalents | ( | ||||||||||
| Cash and cash equivalents at beginning of period | |||||||||||
| Cash and cash equivalents at end of period | $ | $ | |||||||||
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
7
QUAD/GRAPHICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
AND NONCONTROLLING INTERESTS
(in millions)
(UNAUDITED)
Condensed Consolidated Statement of Shareholders’ Equity For the Nine Months Ended September 30, 2021
| Common Stock | Additional Paid-in Capital | Treasury Stock | Accumulated Deficit | Accumulated Other Comprehensive Loss | Quad’s Shareholders’ Equity | Noncontrolling Interests | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | $ | $ | ( | $ | ( | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Net earnings | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | — | — | — | ( | ( | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest rate swap adjustments, net of tax | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of share-based awards, net of other activity | — | ( | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Awards redeemed to pay employees’ tax obligations | — | — | — | ( | ( | — | — | ( | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2021 | $ | $ | ( | $ | ( | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Net earnings | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Change in ownership of noncontrolling interests | — | — | ( | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest rate swap adjustments, net of tax | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pension benefit plan liability adjustments, net of tax | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cash dividends declared | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of share-based awards, net of other activity | — | — | ( | ( | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2021 | $ | $ | ( | $ | ( | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Net earnings | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | — | — | — | ( | ( | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest rate swap adjustments, net of tax | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pension benefit plan liability adjustments, net of tax | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of share-based awards, net of other activity | — | — | ( | — | — | — | ( | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2021 | $ | $ | ( | $ | ( | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||||
8
Condensed Consolidated Statement of Shareholders’ Equity For the Nine Months Ended September 30, 2020
| Common Stock | Additional Paid-in Capital | Treasury Stock | Accumulated Deficit | Accumulated Other Comprehensive Loss | Quad’s Shareholders’ Equity | Noncontrolling Interests | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2019 | $ | $ | ( | $ | ( | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||||
| — | — | — | — | — | ( | — | ( | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at January 1, 2020 | $ | $ | ( | $ | ( | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Change in ownership of noncontrolling interests | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | — | — | — | ( | ( | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest rate swap adjustments, net of tax | — | — | — | — | — | — | ( | ( | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Cash dividends declared ($ | — | — | — | — | — | ( | — | ( | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of share-based awards, net of other activity | — | ( | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Awards redeemed to pay employees’ tax obligations | — | — | — | ( | ( | — | — | ( | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2020 | $ | $ | ( | $ | ( | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | ( | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Change in ownership of noncontrolling interests | — | — | ( | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of share-based awards, net of other activity | — | — | — | ( | — | — | ( | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2020 | $ | $ | ( | $ | ( | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Net earnings (loss) | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest rate swap adjustments, net of tax | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of share-based awards, net of other activity | — | — | — | ( | — | — | ( | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2020 | $ | $ | ( | $ | ( | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
9
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021
(In millions, except share and per share data and unless otherwise indicated)
Note 1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements for Quad/Graphics, Inc. and its subsidiaries (the “Company” or “Quad”) have been prepared by the Company pursuant to the rules and regulations for interim financial information of the United States Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted pursuant to such SEC rules and regulations. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated annual financial statements as of and for the year ended December 31, 2020, and notes thereto included in the Company’s latest Annual Report on Form 10-K filed with the SEC on February 24, 2021.
The Company is subject to seasonality in its quarterly results as net sales and operating income are higher in the third and fourth quarters of the calendar year as compared to the first and second quarters. The fourth quarter is typically the highest seasonal quarter for cash flows from operating activities due to the reduction of working capital requirements that reach peak levels during the third quarter. Seasonality is driven by increased retail inserts and catalogs primarily due to back-to-school and holiday-related advertising and promotions. The Company expects this seasonality impact to continue in future years.
The financial information contained herein reflects all adjustments, in the opinion of management, necessary for a fair presentation of the Company’s results of operations for the three and nine months ended September 30, 2021 and 2020. All of these adjustments are of a normal recurring nature, except as otherwise noted. All intercompany transactions have been eliminated in consolidation. These unaudited condensed consolidated financial statements include estimates and assumptions of management that affect the amounts reported in the condensed consolidated financial statements. Actual results could differ from these estimates.
Discontinued Operations - The results of operations of the Company’s Book business are reported as discontinued operations for the three and nine months ended September 30, 2020, in accordance with Accounting Standards Codification (“ASC”) 205-20 — Discontinued Operations. The sale of the Book business was completed during 2020. The financial information pertaining to discontinued operations has been excluded from all relevant notes to the consolidated financial statements, unless otherwise noted. See all required disclosures and further information in Note 4, “Discontinued Operations” for information about the Company’s sale of its Book business.
Coronavirus (“COVID-19”) Pandemic Impacts and Response - The COVID-19 pandemic has had a negative impact on the Company’s business, financial condition, cash flows, results of operations and supply chain, although the full extent is still uncertain. Throughout the pandemic, the Company implemented cost reduction and cash conservation initiatives in response to the impact of the COVID-19 pandemic on its business. The Company also amended its Senior Secured Credit Facility during the second quarter of 2020 to provide for certain financial covenant relief through the fiscal quarter ended September 30, 2021. During the third quarter of 2021, with ongoing advancements against the COVID-19 pandemic, the effects on the Company have lessened from previous periods, particularly from the heavily impacted second and third quarters of 2020. The Company is continuing to evaluate the impact and may implement additional cost reduction measures as necessary. The ultimate impact of COVID-19 on the Company’s business, financial condition, cash flows, results of operations and supply chain will depend on future developments, including the duration of the pandemic and the related length of its impact on the global economy, all of which are still highly uncertain.
10
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021
(In millions, except share and per share data and unless otherwise indicated)
Note 2. Revenue Recognition
Revenue Disaggregation
The following table provides information about disaggregated revenue by the Company’s operating segments and major products and services offerings for the three and nine months ended September 30, 2021 and 2020:
| United States Print and Related Services | International | Total | |||||||||||||||
| Three months ended September 30, 2021 | |||||||||||||||||
| Catalog, publications, retail inserts, and directories | $ | $ | $ | ||||||||||||||
| Direct mail and other printed products | |||||||||||||||||
| Other | |||||||||||||||||
| Total products | |||||||||||||||||
| Logistics services | |||||||||||||||||
| Imaging, marketing services and other services | |||||||||||||||||
| Total services | |||||||||||||||||
| Total net sales | $ | $ | $ | ||||||||||||||
| Three months ended September 30, 2020 | |||||||||||||||||
| Catalog, publications, retail inserts, and directories | $ | $ | $ | ||||||||||||||
| Direct mail and other printed products | |||||||||||||||||
| Other | |||||||||||||||||
| Total products | |||||||||||||||||
| Logistics services | |||||||||||||||||
| Imaging, marketing services and other services | |||||||||||||||||
| Total services | |||||||||||||||||
| Total net sales | $ | $ | $ | ||||||||||||||
11
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021
(In millions, except share and per share data and unless otherwise indicated)
| United States Print and Related Services | International | Total | |||||||||||||||
| Nine months ended September 30, 2021 | |||||||||||||||||
| Catalog, publications, retail inserts, and directories | $ | $ | $ | ||||||||||||||
| Direct mail and other printed products | |||||||||||||||||
| Other | |||||||||||||||||
| Total products | |||||||||||||||||
| Logistics services | |||||||||||||||||
| Imaging, marketing services and other services | |||||||||||||||||
| Total services | |||||||||||||||||
| Total net sales | $ | $ | $ | ||||||||||||||
| Nine months ended September 30, 2020 | |||||||||||||||||
| Catalog, publications, retail inserts, and directories | $ | $ | $ | ||||||||||||||
| Direct mail and other printed products | |||||||||||||||||
| Other | |||||||||||||||||
| Total products | |||||||||||||||||
| Logistics services | |||||||||||||||||
| Imaging, marketing services and other services | |||||||||||||||||
| Total services | |||||||||||||||||
| Total net sales | $ | $ | $ | ||||||||||||||
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, 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 imaging operations, which include digital content management, photography, color services, page production, marketing services, media planning and placement, facilities management and medical services.
12
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021
(In millions, except share and per share data and unless otherwise indicated)
Costs to Obtain Contracts
In accordance with ASC 606 — Revenue from Contracts with Customers, the Company capitalizes certain sales incentives of the sales compensation packages for costs that are directly attributed to being awarded a client contract or renewal and would not have been incurred had the contract not been obtained. The Company also defers certain contract acquisition costs paid to the client at contract inception. Costs to obtain contracts with a duration of less than one year are expensed as incurred. For all contract costs with contracts over one year, the Company amortizes the costs to obtain contracts on a straight-line basis over the estimated life of the contract and reviews quarterly for impairment. Activity impacting costs to obtain contracts for the nine months ended September 30, 2021, was as follows:
| Costs to Obtain Contracts | |||||
| Balance at December 31, 2020 | $ | ||||
| Costs to obtain contracts | |||||
| Amortization of costs to obtain contracts | ( | ||||
| Balance at September 30, 2021 | $ | ||||
Note 3. Strategic Investments
Changes of Ownership in Rise Interactive
On June 15, 2020, the Company purchased units of equity in Rise Interactive Media & Analytics, LLC (“Rise”) from a previous holder in the form of a $15.9 million note payable paid in full on October 1, 2020, and $1.0 million cash paid on June 15, 2020. In addition, on June 15, 2020, Rise purchased and retired units of equity from previous holders of Rise for $5.4 million in cash. These transactions resulted in the Company’s ownership interest to change from 57 % to 99 %. On April 30, 2021, Rise purchased and retired units of equity from previous holders of Rise for $1.9 million in cash. This transaction resulted in the Company’s ownership interest to change from 99 % to 100 %. The Company began consolidating the results of Rise in the Company’s condensed consolidated financial statements when its equity ownership increased to 57 % on March 14, 2018. The portion of Rise’s operating results not owned by the Company of 43 % through June 15, 2020 and of 1 % from June 15, 2020 through April 30, 2021, was recorded as net earnings (loss) attributable to noncontrolling interests on the condensed consolidated statement of operations. The portion of net assets not owned by the Company was recorded as noncontrolling interests as of the December 31, 2020 condensed consolidated balance sheet.
Note 4. Discontinued Operations
During the third quarter of 2019, the Company made a decision to sell its United States Book business as a part of an ongoing process to review its business portfolio and divest assets not core to the Company’s transformation strategy. Accordingly, the Company has classified the Book business as a discontinued operation, as required by ASC 205-20 — Discontinued Operations. The Book business primarily consists of three facilities: Versailles, Kentucky; Fairfield, Pennsylvania; and Martinsburg, West Virginia. The Company’s Book business has historically been included within the United States Print and Related Services segment and the Core Print and Related Services reporting unit.
On July 1, 2020, the Company completed the sale of its Versailles, Kentucky book manufacturing plant to CJK Group, Inc., which serves book, magazine, catalog and journal publishers, for $7.0 million in cash and the assumption of approximately $3.0 million in finance lease obligation, resulting in a $10.1 million impairment charge related to property, plant and equipment and a $3.0 million gain on the sale of the business during the year ended December 31, 2020. The Company used the proceeds from the sale to reduce debt.
13
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021
(In millions, except share and per share data and unless otherwise indicated)
On October 31, 2020, the Company completed the sale of its Fairfield, Pennsylvania and Martinsburg, West Virginia book manufacturing plants to Berryville Graphics, a division of Bertelsmann Printing Group USA, a media, services and education company, for $14.2 million in cash, resulting in a loss on the sale of the business of $3.5 million and a $1.4 million impairment charge related to property plant and equipment during the year ended December 31, 2020. The Company used the proceeds from the sale to reduce debt. This sale was the final step in the previously announced strategic decision to divest the Company’s Book business to optimize its product portfolio.
The following table summarizes the results of operations, which are included in the loss from discontinued operations in the condensed consolidated statements of operations for the three and nine months ended September 30, 2020:
| Three Months Ended September 30, 2020 | Nine Months Ended September 30, 2020 | ||||||||||||||||||||||
| Total net sales | $ | $ | |||||||||||||||||||||
| Total cost of sales, excluding depreciation and amortization | |||||||||||||||||||||||
| Selling, general and administrative expenses | |||||||||||||||||||||||
Restructuring, impairment and transaction-related charges (1) | |||||||||||||||||||||||
| Other expenses, net | |||||||||||||||||||||||
| Loss from discontinued operations before income taxes | ( | ( | |||||||||||||||||||||
| Income tax expense (benefit) | ( | ||||||||||||||||||||||
| Loss from discontinued operations, net of tax | $ | ( | $ | ( | |||||||||||||||||||
______________________________
(1)The Company recognized $11.5 million of impairment charges for tangible property, plant and equipment during the nine months ended September 30, 2020, to reduce the carrying value of the Book business to its fair value, and recognized $1.0 million in employee termination charges during the nine months ended September 30, 2020.
The condensed consolidated statement of cash flows for the nine months ended September 30, 2020 has not been adjusted to separately disclose cash flows related to discontinued operations. Cash flows related to the discontinued Book business during the nine months ended September 30, 2020, were as follows:
| Nine Months Ended September 30, 2020 | |||||||||||
| Cash flows provided by operating activities | $ | ||||||||||
| Cash flows provided by investing activities | |||||||||||
Note 5. Restructuring, Impairment and Transaction-Related Charges
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Employee termination charges | $ | $ | $ | $ | |||||||||||||||||||
| Impairment charges | |||||||||||||||||||||||
| Transaction-related charges | |||||||||||||||||||||||
| Integration costs | |||||||||||||||||||||||
| Other restructuring charges (income) | ( | ||||||||||||||||||||||
| Total | $ | $ | $ | ( | $ | ||||||||||||||||||
14
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021
(In millions, except share and per share data and unless otherwise indicated)
The costs related to these activities have been recorded in the condensed consolidated statements of operations as restructuring, impairment and transaction-related charges. See Note 20, “Segment Information,” for restructuring, impairment and transaction-related charges by segment.
Restructuring Charges
The Company began a restructuring program in 2010 related to eliminating excess manufacturing capacity and properly aligning its cost structure and has since announced a total of 50 plant closures through September 30, 2021. The Company classifies the following charges as restructuring:
•Employee termination charges are incurred when the Company reduces its workforce through separation programs and facility consolidations.
•Integration costs are incurred primarily for the integration of acquired companies (see Note 3, “Strategic Investments,” for descriptions of the Company’s recent acquisitions and strategic investments).
•Other restructuring charges (income) are presented net of the gains on the sale of facilities and a business, including a gain on the sale of the Riverside, California facility during the first quarter of 2021 and gains on the sale of other facilities during the second quarter of 2021. A gain on the sale of the Midland, Michigan facility was recorded during the third quarter of 2020 and a gain on the sale of the Shakopee, Minnesota facility was recorded during the first quarter of 2020. The Company also recognized a $20.9 million gain on the sale of a business during the second quarter of 2021 and a $2.9 million loss on the sale of a business during the first quarter of 2020, which are included within other restructuring activities below. The components of other restructuring charges (income) consisted of the following during the three and nine months ended September 30, 2021 and 2020:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Vacant facility carrying costs and lease exit charges | $ | $ | $ | $ | |||||||||||||||||||
| Equipment and infrastructure removal costs | |||||||||||||||||||||||
| Gains on the sale of facilities | ( | ( | ( | ||||||||||||||||||||
| Other restructuring activities | ( | ||||||||||||||||||||||
| Other restructuring charges (income) | $ | $ | $ | ( | $ | ||||||||||||||||||
The restructuring charges recorded were based on plans that have been committed to by management and were, in part, based upon management’s best estimates of future events. Changes to the estimates may require future restructuring charges and adjustments to the restructuring liabilities. The Company expects to incur additional restructuring charges related to these and other initiatives.
Impairment Charges
The Company recognized impairment charges of $0.3 million and $2.0 million during the three and nine months ended September 30, 2021, respectively, and $4.2 million during the nine months ended September 30, 2020. There were no impairment charges recognized during the three months ended September 30, 2020. The impairment charges were primarily for machinery and equipment no longer being utilized in production as a result of facility consolidations, as well as other capacity reduction restructuring activities.
15
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021
(In millions, except share and per share data and unless otherwise indicated)
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 $0.4 million were recorded during the nine months ended September 30, 2021, and $0.9 million and $1.7 million were recorded during the three and nine months ended September 30, 2020, respectively. There were no transaction-related charges recognized during the three months ended September 30, 2021.
Restructuring Reserves
| Employee Termination Charges | Impairment Charges | Transaction-Related Charges | Other Restructuring Charges | Total | |||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
| Expense (income), net | ( | ( | |||||||||||||||||||||||||||||||||
| Cash payments, net | ( | ( | ( | ( | |||||||||||||||||||||||||||||||
| Non-cash adjustments/reclassifications and translation | ( | ( | |||||||||||||||||||||||||||||||||
| Balance at September 30, 2021 | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
Note 6. 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, an interim goodwill impairment test was required to be completed on the remaining goodwill in the Core Print and Related Services reporting unit. No additional impairment was recorded as a result.
Goodwill included in the carrying amount of the third-party logistics business sold of $16.6 million was based on the relative fair values of the third-party logistics business and the portion of the Core Print and Related Services reporting unit retained. In addition, when only a portion of goodwill is allocated to a business to be sold, the goodwill remaining in the portion of the reporting unit to be retained of $86.4 million must be tested for impairment.
16
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021
(In millions, except share and per share data and unless otherwise indicated)
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 indicators of impairment were identified in any of the Company’s reporting units during the three and nine months ended September 30, 2021.
The accumulated goodwill impairment losses and the carrying value of goodwill at September 30, 2021, and December 31, 2020, were as follows:
| September 30, 2021 | December 31, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| United States Print and Related Services | International | Total | United States Print and Related Services | International | Total | ||||||||||||||||||||||||||||||||||||||||||||||||
| Goodwill | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||
| Accumulated goodwill impairment loss | ( | ( | ( | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Goodwill, net of accumulated goodwill impairment loss | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||
Other Intangible Assets
| September 30, 2021 | December 31, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||
| Weighted Average Amortization Period (Years) | Gross Carrying Amount | Accumulated Amortization | Net Book Value | Weighted Average Amortization Period (Years) | Gross Carrying Amount | Accumulated Amortization | Net Book Value | ||||||||||||||||||||||||||||||||||||||||
| Trademarks, patents, licenses and agreements | $ | $ | ( | $ | $ | $ | ( | ||||||||||||||||||||||||||||||||||||||||
| Capitalized software | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||
| Acquired Technology | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||
| Customer relationships | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | $ | ( | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||
The gross carrying amount and accumulated amortization within other intangible assets—net in the condensed consolidated balance sheets at September 30, 2021, and December 31, 2020, differs from the value originally recorded at acquisition due to impairment charges recorded in prior years and the effects of currency fluctuations since the purchase date.
Other intangible assets are evaluated for potential impairment whenever events or circumstances indicate that the carrying value may not be recoverable. There were no
17
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021
(In millions, except share and per share data and unless otherwise indicated)
| Amortization Expense | |||||
| Remainder of 2021 | $ | ||||
| 2022 | |||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| Total | $ | ||||
Note 7. Receivables
Prior to granting credit, the Company evaluates each client in an underwriting process, taking into consideration the prospective client’s financial condition, past payment experience, credit bureau information and other financial and qualitative factors that may affect the client’s ability to pay. Specific credit reviews and standard industry credit scoring models are used in performing this evaluation. Clients’ financial condition is continuously monitored as part of the normal course of business. Some of the Company’s clients are highly leveraged or otherwise subject to their own operating and regulatory risks.
Specific client provisions are made when a review of significant outstanding amounts, utilizing information about client creditworthiness, as well as current and future economic trends based on reasonable forecasts, indicates that collection is doubtful. The Company also records a general provision based on the overall risk profile of the receivables and through the assessment of reasonable economic forecasts. The risk profile is assessed on a quarterly basis using various methods, including external resources and credit scoring models. Accounts that are deemed uncollectible are written off when all reasonable collection efforts have been exhausted.
The Company has recorded credit loss expense of $0.2 million and $1.0 million during the three and nine months ended September 30, 2021, respectively, and a net credit loss recovery of $0.9 million and credit loss expense of $5.1 million during the three and nine months ended September 30, 2020, respectively, which is included in selling, general and administrative expenses in the condensed consolidated statements of operations.
| Allowance for Credit Losses | |||||
| Balance at December 31, 2020 | $ | ||||
| Provisions | |||||
| Write-offs | ( | ||||
| Translation and other | ( | ||||
| Balance at September 30, 2021 | $ | ||||
18
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021
(In millions, except share and per share data and unless otherwise indicated)
Note 8. Inventories
| September 30, 2021 | December 31, 2020 | ||||||||||
| Raw materials and manufacturing supplies | $ | $ | |||||||||
| Work in process | |||||||||||
| Finished goods | |||||||||||
| Total | $ | $ | |||||||||
Note 9. Property, Plant and Equipment
The components of property, plant and equipment at September 30, 2021, and December 31, 2020, were as follows:
| September 30, 2021 | December 31, 2020 | ||||||||||
| Land | $ | $ | |||||||||
| Buildings | |||||||||||
| Machinery and equipment | |||||||||||
Other(1) | |||||||||||
| Construction in progress | |||||||||||
| Property, plant and equipment—gross | $ | $ | |||||||||
| Less: accumulated depreciation | ( | ( | |||||||||
| Property, plant and equipment—net | $ | $ | |||||||||
______________________________
(1)Other consists of computer equipment, vehicles, furniture and fixtures, leasehold improvements and communication-related equipment.
The Company recorded impairment charges of $0.3 million and $2.0 million during the three and nine months ended September 30, 2021, respectively, and $4.2 million during the nine months ended September 30, 2020, to reduce the carrying amounts of certain property, plant and equipment no longer utilized in production to fair value (see Note 5, “Restructuring, Impairment and Transaction-Related Charges,” for further discussion on impairment charges). There were no impairment charges recognized during the three months ended September 30, 2020.
The Company recognized depreciation expense of $31.2 million and $95.2 million for the three and nine months ended September 30, 2021, respectively, and $35.2 million and $109.5 million for the three and nine months ended September 30, 2020, respectively.
Assets Held for Sale from Continuing Operations
The Company assessed whether certain closed facilities and facilities where the Company has received a signed letter of intent to purchase should be classified as held for sale on the condensed consolidated balance sheets. Assets held for sale are carried at the lesser of original cost or fair value, less the estimated costs to sell. Assets held for sale from continuing operations were $44.1 million and $4.9 million as of September 30, 2021, and December 31, 2020, respectively. The fair values 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 quoted market prices where available and independent appraisals, as appropriate. Assets held for sale were included in prepaid expenses and other current assets in the condensed consolidated balance sheets.
19
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021
(In millions, except share and per share data and unless otherwise indicated)
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. The leaseback resulted in a $9.7 million asset included in the operating lease right of use assets - net, current operating lease obligation of $1.1 million and operating lease obligation of $8.6 million in the condensed consolidated balance sheet as of September 30, 2021.
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. The leaseback resulted in a $23.1 million asset included in the operating lease right of use assets - net, current operating lease obligation of $1.5 million and operating lease obligation of $21.6 million in the condensed consolidated balance sheet as of September 30, 2021.
Note 10. Commitments and Contingencies
Litigation
The Company is named as a defendant in various lawsuits in which claims are asserted against the Company in the normal course of business. The liabilities, if any, which ultimately result from such lawsuits are not expected by management to have a material impact on the condensed consolidated financial statements of the Company.
Environmental Reserves
The Company is subject to various laws, regulations and government policies relating to health and safety, to the generation, storage, transportation, and disposal of hazardous substances, and to environmental protection in general. The Company provides for expenses associated with environmental remediation obligations when such amounts are probable and can be reasonably estimated. Such reserves are adjusted as new information develops or as circumstances change. The environmental reserves are not discounted. The Company believes it is in compliance with such laws, regulations and government policies in all material respects. Furthermore, the Company does not anticipate that maintaining compliance with such environmental statutes will have a material impact upon the Company’s condensed consolidated financial position.
20
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021
(In millions, except share and per share data and unless otherwise indicated)
Note 11. Debt
| September 30, 2021 | December 31, 2020 | ||||||||||
| Master note and security agreement | $ | $ | |||||||||
| Term Loan A | |||||||||||
| Revolving credit facility | |||||||||||
| Senior unsecured notes | |||||||||||
| International term loans | |||||||||||
| International revolving credit facilities | |||||||||||
| Other | |||||||||||
| Debt issuance costs | ( | ( | |||||||||
| Total debt | $ | $ | |||||||||
| Less: short-term debt and current portion of long-term debt | ( | ( | |||||||||
| Long-term debt | $ | $ | |||||||||
Fair Value of Debt
Based upon the interest rates available to the Company for borrowings with similar terms and maturities, the fair value of the Company’s total debt was approximately $0.8 billion and $0.9 billion at September 30, 2021 and December 31, 2020, 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).
Debt Issuance Costs
| Capitalized Debt Issuance Costs | |||||
| Balance at December 31, 2020 | $ | ||||
| Amortization of debt issuance costs | ( | ||||
| Balance at September 30, 2021 | $ | ||||
21
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021
(In millions, except share and per share data and unless otherwise indicated)
Loss on Debt Extinguishment
During the nine months ended September 30, 2020, the Company completed the fourth amendment to the April 28, 2014 Senior Secured Credit Facility, which resulted in a loss on debt extinguishment recorded. The Senior Secured Credit Facility was amended to (a) provide for certain financial covenant relief through the fiscal quarter ended September 30, 2021 (the “Covenant Relief Period”); (b) reduce the aggregate amount of the existing revolving credit facility from $800.0 million to $500.0 million; (c) make certain adjustments to pricing such as the addition of a 0.75 % London Interbank Offered Rate (“LIBOR”) floor; and (d) prohibit repurchases of capital stock and payments of cash dividends during the Covenant Relief Period. In addition, the Company redeemed $37.6 million of its senior notes under the Master Note and Security Agreement, at par, which resulted in a loss on debt extinguishment recorded. The Company also repurchased $4.7 million of its outstanding unsecured 7.0 % senior notes due May 1, 2022 (the “Senior Unsecured Notes”) in the open market, which resulted in a gain on debt extinguishment recorded. The loss on debt extinguishment recorded during the nine months ended September 30, 2020, was comprised of the following:
| 2020 Loss on Debt Extinguishment | |||||
| Debt issuance costs from January 31, 2019 debt financing arrangement | $ | ||||
| Debt issuance costs from June 29, 2020 debt financing arrangement | $ | ||||
| Loss on debt extinguishment from Master Note and Security Tender | $ | ||||
| Gain on debt extinguishment from Senior Unsecured Note Repurchases | ( | ||||
| Total | $ | ||||
Covenants and Compliance
The Company’s various lending arrangements include certain financial covenants (all financial terms, numbers and ratios are as defined in the Company’s debt agreements, as amended to date). Among these covenants, the Company was required to maintain the following as of September 30, 2021:
•Maximum Total Net Leverage Ratio. On a rolling twelve-month basis, the Maximum Total Net Leverage Ratio, defined as consolidated total indebtedness, net of no more than $75.0 million of unrestricted cash, to consolidated EBITDA, shall not exceed (i) 4.50 to 1.00 for the quarter ended March 31, 2021, (ii) 4.25 to 1.00 for the quarter ended June 30, 2021, and (iii) 4.125 to 1.00 for the quarter ended September 30, 2021 (for the twelve months ended September 30, 2021, the Company’s Maximum Total Net Leverage Ratio was 3.09 to 1.00). In 2020, the Company amended its Senior Secured Credit Facility to provide for certain financial covenant relief during the Covenant Relief Period. After the Covenant Relief Period, the Company will be required to comply with the Total Leverage Ratio covenant, defined as consolidated total indebtedness to consolidated EBITDA which shall not exceed 3.75 to 1.00.
•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 twelve-month basis, the Senior Secured Leverage Ratio, defined as consolidated senior secured net indebtedness to consolidated EBITDA, shall not exceed 3.50 to 1.00 (for the twelve months ended September 30, 2021, the Company’s Senior Secured Leverage Ratio was 2.18 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 September 30, 2021, the Company’s Interest Coverage Ratio was 5.31 to 1.00).
22
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021
(In millions, except share and per share data and unless otherwise indicated)
The indenture underlying the Senior Unsecured Notes contains various covenants, including, but not limited to, covenants that, subject to certain exceptions, limit the Company’s and its restricted subsidiaries’ ability to incur and/or guarantee additional debt; pay dividends, repurchase stock or make certain other restricted payments; enter into agreements limiting dividends and certain other restricted payments; prepay, redeem or repurchase subordinated debt; grant liens on assets; enter into sale and leaseback transactions; merge, consolidate, transfer or dispose of substantially all of the Company’s consolidated assets; sell, transfer or otherwise dispose of property and assets; and engage in transactions with affiliates.
In addition to those covenants, the Senior Secured Credit Facility also includes certain limitations on acquisitions, indebtedness, liens, dividends and repurchases of capital stock. The following limitations utilize a Total Net Leverage Ratio calculation, which, on a rolling twelve-month basis, is defined as consolidated net indebtedness to consolidated EBITDA (for the twelve months ended September 30, 2021, the Company’s Total Net Leverage Ratio was 3.10 to 1.00).
•If the Company’s Total Net Leverage Ratio is greater than 2.75 to 1.00, the Company is prohibited from making greater than $60.0 million of annual dividend payments, capital stock repurchases and certain other payments. If the Total Net Leverage Ratio is less than 2.75 to 1.00, there are no such restrictions, provided, however, that no such restricted payments shall be made during the Covenant Relief Period. As the Company’s Total Net Leverage Ratio as of September 30, 2021, was 3.10 to 1.00, and we were in the Covenant Relief Period, the limitations described above are currently applicable.
•If the Company’s Senior Secured Leverage Ratio is greater than 3.00 to 1.00 or the Company’s Total Net Leverage Ratio is greater than 3.50 to 1.00, the Company is prohibited from voluntarily prepaying any of the Senior Unsecured Notes and from voluntarily prepaying any other unsecured or subordinated indebtedness, with certain exceptions (including any mandatory prepayments on the Senior Unsecured Notes or any other unsecured or subordinated debt). If the Senior Secured Leverage Ratio is less than 3.00 to 1.00 and the Total Net Leverage Ratio is less than 3.50 to 1.00, there are no such restrictions. The limitations described above are currently not applicable, as the Company’s Senior Secured Leverage Ratio was 2.18 to 1.00 and the Total Net Leverage Ratio was 3.10 to 1.00, as of September 30, 2021.
Note 12. Income Taxes
The Company records income tax expense (benefit) on an interim basis. The estimated effective income tax rate is adjusted quarterly, and items discrete to a specific quarter and adjustments to valuation allowances that could result in a reduction to tax expense or benefit are reflected in income tax expense (benefit) for that interim period. Tax allocable to continuing operations is calculated without regard to the tax effects of earnings and losses allocable to discontinued operations under the incremental approach.
The effective income tax rate for the interim period can differ from the statutory tax rate, as it reflects discrete items, such as changes in the liability for unrecognized tax benefits related to the establishment and settlement of income tax exposures and benefits related to share-based compensation.
The Company currently has various open tax audits in multiple jurisdictions. From time to time, the Company will receive tax assessments as part of the process. Based on the information available as of September 30, 2021, the Company has recorded its best estimate of the potential settlements of these audits. Actual results could differ from the estimated amounts.
The Company’s liability for unrecognized tax benefits as of September 30, 2021, was $11.3 million, a decrease of $0.3 million from $11.6 million as of December 31, 2020. The Company anticipates a $0.5 million decrease to its liability for unrecognized tax benefits within the next twelve months due to the resolution of income tax audits or statute expirations.
23
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021
(In millions, except share and per share data and unless otherwise indicated)
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
Interest Rate Swaps
The Company currently holds two interest rate swap contracts. 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, will be amortized to interest expense on a straight-line basis over the remaining lives of the swap contracts. The Company expects to reclassify $4.5 million of this balance to interest expense over the next twelve months.
The key terms of the interest rate swaps are as follows:
| March 19, 2019 Interest Rate Swap | February 7, 2017 Interest Rate Swap | ||||||||||
| Effective date | March 29, 2019 | February 28, 2017 | |||||||||
| Termination date | March 28, 2024 | February 28, 2022 | |||||||||
| Term | |||||||||||
| Notional amount | $ | $ | |||||||||
| Fixed swap rate | |||||||||||
The Company classifies the interest rate swaps as Level 2 because the inputs into the valuation model are observable or can be derived or corroborated utilizing observable market data at commonly quoted intervals. The fair value of the interest rate swaps classified as Level 2 as of September 30, 2021, and December 31, 2020, were as follows:
| Balance Sheet Location | September 30, 2021 | December 31, 2020 | |||||||||||||||
| Interest rate swap liabilities | Other current liabilities | $ | ( | $ | |||||||||||||
| Interest rate swap liabilities | Other long-term liabilities | $ | ( | $ | ( | ||||||||||||
24
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021
(In millions, except share and per share data and unless otherwise indicated)
Prior to the Company’s de-designation of the interest rate swaps as cash flow hedges, the interest rate swaps were considered highly effective, with no amount of ineffectiveness recorded into earnings. The changes in the fair value of the interest rate swaps have been included in other comprehensive loss in the condensed consolidated statements of comprehensive loss through the first quarter of 2020, and have been recorded as an adjustment to interest expense in the condensed consolidated statements of operations in the periods thereafter. The cash flows associated with the interest rate swaps have been recognized as an adjustment to interest expense in the condensed consolidated statements of operations:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Cash Flow Impacts | |||||||||||||||||||||||
| Net interest paid | $ | $ | $ | $ | |||||||||||||||||||
| Impacts with Swaps as Hedging Instruments | |||||||||||||||||||||||
| Loss recognized in other comprehensive loss | |||||||||||||||||||||||
| Impacts with Swaps as Nonhedging Instruments | |||||||||||||||||||||||
| Income recognized in interest expense excluded from hedge effectiveness assessments | ( | ( | ( | ( | |||||||||||||||||||
| Amounts reclassified out of accumulated other comprehensive loss to interest expense | |||||||||||||||||||||||
| Net interest expense | |||||||||||||||||||||||
| Total impact of swaps to interest expense | $ | $ | $ | $ | |||||||||||||||||||
Foreign Exchange Contracts
The Company has operations in countries that have transactions outside their functional currencies and periodically enters into foreign exchange contracts. These contracts are used to hedge the net exposures of changes in foreign currency exchange rates and are designated as either cash flow hedges or fair value hedges. Gains or losses on net foreign currency hedges are intended to offset losses or gains on the underlying net exposures in an effort to reduce the earnings volatility resulting from fluctuating foreign currency exchange rates. There were no open foreign currency exchange contracts as of September 30, 2021.
Natural Gas Forward Contracts
The Company periodically enters into natural gas forward purchase contracts to hedge against increases in commodity costs. The Company’s commodity contracts qualified for the exception related to normal purchases and sales during the three and nine months ended September 30, 2021 and 2020, 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 11, “Debt,” for the fair value of the Company’s debt as of September 30, 2021.
25
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021
(In millions, except share and per share data and unless otherwise indicated)
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. See Note 3, “Strategic Investments,” for further discussion on acquisitions. See Note 4, “Discontinued Operations”; Note 5, “Restructuring, Impairment and Transaction-Related Charges”; Note 6, “Goodwill and Other Intangible Assets”; and Note 9, “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 September 30, 2021, and December 31, 2020.
Note 14. Other Current and Long-Term Liabilities
The components of other current and long-term liabilities as of September 30, 2021, and December 31, 2020, were as follows:
| September 30, 2021 | December 31, 2020 | ||||||||||||||||||||||||||||||||||
| Other Current Liabilities | Other Long-Term Liabilities | Total | Other Current Liabilities | Other Long-Term Liabilities | Total | ||||||||||||||||||||||||||||||
Employee-related liabilities (1) | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Single employer pension plan obligations | |||||||||||||||||||||||||||||||||||
| Multiemployer pension plans – withdrawal liability | |||||||||||||||||||||||||||||||||||
| Deferred revenue | |||||||||||||||||||||||||||||||||||
| Tax-related liabilities | |||||||||||||||||||||||||||||||||||
| Restructuring liabilities | |||||||||||||||||||||||||||||||||||
| Interest and rent liabilities | |||||||||||||||||||||||||||||||||||
| Interest rate swap liabilities | |||||||||||||||||||||||||||||||||||
| Other | |||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
______________________________
(1)Employee-related liabilities consist primarily of payroll, bonus, vacation, health and workers’ compensation.
Note 15. Employee Retirement Plans
Defined Contribution Plans
The Quad/Graphics, Inc. Employee Stock Ownership Plan (“ESOP”) holds profit sharing contributions of Company stock, which are made at the discretion of the Company’s Board of Directors. There were no
26
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021
(In millions, except share and per share data and unless otherwise indicated)
Pension Plans
The Company assumed various funded and unfunded frozen pension plans for a portion of its full-time employees in the United States as part of the acquisition of World Color Press Inc. (“World Color Press”) in 2010. Benefits are generally based upon years of service and compensation. These plans are funded in conformity with the applicable government regulations. The Company funds at least the minimum amount required for all qualified plans using actuarial cost methods and assumptions acceptable under government regulations.
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Interest cost | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Expected return on plan assets | |||||||||||||||||||||||
| Net periodic pension income | |||||||||||||||||||||||
| Settlement charge | ( | ( | |||||||||||||||||||||
| Net pension income | $ | $ | $ | $ | |||||||||||||||||||
The Company made $0.6 million in benefit payments to its non-qualified defined benefit pension plans and made $0.8 million in contributions to its qualified defined benefit pension plans during the nine months ended September 30, 2021.
The Company incurred non-cash settlement charges of $0.2 million and $0.8 million during the three and nine months ended September 30, 2021 due to the significance of lump sum payments made in the current period. The non-cash settlement charge results in accelerated recognition of actuarial losses on the condensed consolidated statement of operations.
Multiemployer Pension Plans (“MEPPs”)
Note 16. Earnings (Loss) Per Share Attributable to Quad Common Shareholders
27
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021
(In millions, except share and per share data and unless otherwise indicated)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Numerator | |||||||||||||||||||||||
| Net earnings (loss) from continuing operations | $ | $ | $ | $ | ( | ||||||||||||||||||
| Less: net earnings (loss) attributable to noncontrolling interests | ( | ||||||||||||||||||||||
| Net earnings (loss) from continuing operations attributable to Quad common shareholders | ( | ||||||||||||||||||||||
| Loss from discontinued operations, net of tax | ( | ( | |||||||||||||||||||||
| Net earnings (loss) attributable to Quad common shareholders | $ | $ | $ | $ | ( | ||||||||||||||||||
| Denominator | |||||||||||||||||||||||
| Basic weighted average number of common shares outstanding for all classes of common shares | |||||||||||||||||||||||
| Plus: effect of dilutive equity incentive instruments | |||||||||||||||||||||||
| Diluted weighted average number of common shares outstanding for all classes of common shares | |||||||||||||||||||||||
| Earnings (loss) per share attributable to Quad common shareholders | |||||||||||||||||||||||
| Basic: | |||||||||||||||||||||||
| Continuing operations | $ | $ | $ | $ | ( | ||||||||||||||||||
| Discontinued operations | ( | ( | |||||||||||||||||||||
| Basic earnings (loss) per share attributable to Quad common shareholders | $ | $ | $ | $ | ( | ||||||||||||||||||
| Diluted: | |||||||||||||||||||||||
| Continuing operations | $ | $ | $ | $ | ( | ||||||||||||||||||
| Discontinued operations | ( | ( | |||||||||||||||||||||
| Diluted earnings (loss) per share attributable to Quad common shareholders | $ | $ | $ | $ | ( | ||||||||||||||||||
| Cash dividends paid per common share for all classes of common shares | $ | $ | $ | $ | |||||||||||||||||||
28
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021
(In millions, except share and per share data and unless otherwise indicated)
Note 17. Equity Incentive Programs
The shareholders of the Company approved the Quad/Graphics, Inc. 2020 Omnibus Incentive Plan (the “2020 Plan”) at the Company’s annual meeting of shareholders held on May 18, 2020 for two complementary purposes: (1) to attract and retain outstanding individuals to serve as directors, officers and employees; and (2) to increase shareholder value. The Company’s previous plan, the Quad/Graphics, Inc. 2010 Omnibus Plan (the “2010 Plan”), was terminated on May 18, 2020, and no new awards will be granted under the 2010 Plan. All awards that were granted under the 2010 Plan that were outstanding as of May 18, 2020 will remain outstanding and will continue to be governed by the 2010 Plan.
The 2020 Plan provides for an aggregate 3,000,000 shares of class A common stock reserved for issuance, plus shares still available for issuance or re-credited under the 2010 Plan. Awards under the 2020 Plan may consist of incentive awards, stock options, stock appreciation rights, performance shares, performance share units, shares of class A common stock, restricted stock (“RS”), restricted stock units (“RSU”), deferred stock units (“DSU”) or other stock-based awards as determined by the Company’s Board of Directors. Each stock option granted has an exercise price of no less than 100 % of the fair market value of the class A common stock on the date of grant. There were 2,632,261 shares of class A common stock reserved for issuance under the 2020 Plan as of September 30, 2021. 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.
Equity Incentive Compensation Expense
Equity incentive compensation expense was recorded primarily in selling, general and administrative expenses in the condensed consolidated statements of operations and includes expense (income) recognized for liability awards that are remeasured on a quarterly basis. The total compensation expense recognized related to all equity incentive programs for the three and nine months ended September 30, 2021 and 2020, was as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| RS and RSU equity awards expense | $ | $ | $ | $ | |||||||||||||||||||
| RSU liability awards expense (income) | ( | ||||||||||||||||||||||
| DSU awards expense | |||||||||||||||||||||||
| Total equity incentive compensation expense | $ | $ | $ | $ | |||||||||||||||||||
Total future compensation expense related to all equity incentive programs granted as of September 30, 2021, was estimated to be $7.0 million, which consists entirely of expense for RS and RSU awards. Estimated future compensation expense is $1.8 million for the remainder of 2021, $3.5 million for 2022, $1.5 million for 2023 and $0.2 million for 2024.
29
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021
(In millions, except share and per share data and unless otherwise indicated)
Stock Options
Options vest over four years , with no vesting in the first year and one-third vesting upon the second, third and fourth anniversary dates. 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. Options expire no later than the tenth anniversary of the grant date, 24 months after termination for death, 36 months after termination for normal retirement or disability and 90 days after termination of employment for any other reason. Options are not credited with dividend declarations, except for the November 18, 2011 grants. Stock options are only to be granted to employees.
There were no no no future compensation expense for stock options as of September 30, 2021.
| Shares Under Option | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (years) | Aggregate Intrinsic Value (millions) | ||||||||||||||||||||
| Outstanding at December 31, 2020 | $ | $ | |||||||||||||||||||||
| Granted | |||||||||||||||||||||||
| Exercised | |||||||||||||||||||||||
| Canceled/forfeited/expired | ( | ||||||||||||||||||||||
| Outstanding and exercisable at September 30, 2021 | $ | $ | |||||||||||||||||||||
The intrinsic value of options outstanding and exercisable at September 30, 2021, and December 31, 2020, was based on the fair value of the stock price. All outstanding options are vested as of September 30, 2021. There were no
Restricted Stock and Restricted Stock Units
Restricted stock and restricted stock unit awards consist of shares or the rights to shares of the Company’s class A common stock which are awarded to employees of the Company. The awards are restricted such that they are subject to substantial risk of forfeiture and to restrictions on their sale or other transfer by the employee. RSU awards are typically granted to eligible employees outside of the United States. As defined in the individual grant agreements, acceleration of vesting may occur under a change in control, death, disability or normal retirement of the grantee. Grantees receiving RS awards are able to exercise full voting rights and receive full credit for dividends during the vesting period. All such dividends will be paid to the RS grantee within 45 days of full vesting. Grantees receiving RSU awards are not entitled to vote, but do earn dividends. Upon vesting, RSU awards will be settled either through cash payment equal to the fair market value of the RSU awards on the vesting date or through issuance of the Company’s class A common stock. In general, RS and RSU awards will vest on the third anniversary of the grant date, provided the holder of the share is continuously employed by the Company until the vesting date.
30
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021
(In millions, except share and per share data and unless otherwise indicated)
| 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, 2020 | $ | $ | |||||||||||||||||||||||||||||||||
| Granted | |||||||||||||||||||||||||||||||||||
| Vested | ( | ( | |||||||||||||||||||||||||||||||||
| Forfeited | ( | ( | |||||||||||||||||||||||||||||||||
| Nonvested at September 30, 2021 | $ | $ | |||||||||||||||||||||||||||||||||
In the first quarter of 2019, the Company issued RSU awards in connection with the acquisition of Periscope that are accounted for as liability awards that will vest on March 1, 2022. The awards were 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 condensed consolidated statements of operations. As of September 30, 2021, the fair value of the RSU awards classified as liabilities was $0.6 million and was included in other current liabilities on the condensed consolidated balance sheets.
Deferred Stock Units
Deferred stock units are awards of rights to shares of the Company’s class A common stock and are awarded to non-employee directors of the Company. The following table is a summary of DSU award activity for the nine months ended September 30, 2021:
| Deferred Stock Units | |||||||||||
| Units | Weighted-Average Grant Date Fair Value Per Share | ||||||||||
| Outstanding at December 31, 2020 | $ | ||||||||||
| Granted | |||||||||||
| Dividend equivalents granted | |||||||||||
| Settled | ( | ||||||||||
| Outstanding at September 30, 2021 | $ | ||||||||||
Each DSU award entitles the grantee to receive one share of class A common stock upon the earlier of the separation date of the grantee or the second anniversary of the grant date, but could be subject to acceleration for a change in control, death or disability as defined in the individual DSU grant agreement. Grantees of DSU awards may not exercise voting rights, but are credited with dividend equivalents, and those dividend equivalents will be converted into additional DSU awards based on the closing price of the class A common stock. As DSU awards are fully vested on the grant date, all compensation expense is recognized at the date of grant.
31
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021
(In millions, except share and per share data and unless otherwise indicated)
Note 18. Shareholders’ Equity
| Issued Common Stock | |||||||||||||||||||||||
| Authorized Shares | Outstanding | Treasury | Total Issued Shares | ||||||||||||||||||||
Class A stock ($ | |||||||||||||||||||||||
| September 30, 2021 | |||||||||||||||||||||||
| December 31, 2020 | |||||||||||||||||||||||
Class B stock ($ | |||||||||||||||||||||||
| September 30, 2021 | |||||||||||||||||||||||
| December 31, 2020 | |||||||||||||||||||||||
Class C stock ($ | |||||||||||||||||||||||
| September 30, 2021 | |||||||||||||||||||||||
| December 31, 2020 | |||||||||||||||||||||||
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 three classes of common stock.
The Company also has 0.5 0.01 none
On July 30, 2018, the Company’s Board of Directors authorized a share repurchase program of up to $100.0 million of the Company’s outstanding class A common stock. There were no 100.0 million of authorized repurchases remaining under the program. The Company was prohibited from repurchasing capital stock through the Covenant Relief Period, in accordance with the fourth amendment to the April 28, 2014 Senior Secured Credit Facility, completed on June 29, 2020 (see Note 11, “Debt,” for more details on the amendment and timing of the Covenant Relief Period).
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, and the Company is currently prohibited from making dividend payments during the Covenant Relief Period. The dividend activity related to the then outstanding shares for the nine months ended September 30, 2020 was as follows:
| Declaration Date | Record Date | Payment Date | Dividend Amount per Share | ||||||||||||||||||||
| 2020 | |||||||||||||||||||||||
| Q1 Dividend | February 18, 2020 | February 28, 2020 | March 9, 2020 | ||||||||||||||||||||
32
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021
(In millions, except share and per share data and unless otherwise indicated)
Note 19. Accumulated Other Comprehensive Loss
The changes in accumulated other comprehensive loss by component, net of tax, for the nine months ended September 30, 2021, were as follows:
| Translation Adjustments | Interest Rate Swap Adjustments | Pension Benefit Plan Adjustments | Total | ||||||||||||||||||||
| Balance at December 31, 2020 | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Other comprehensive loss before reclassifications | ( | ( | |||||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss to net earnings | |||||||||||||||||||||||
| Net other comprehensive income (loss) | ( | ( | |||||||||||||||||||||
| Balance at September 30, 2021 | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
The changes in accumulated other comprehensive loss by component, net of tax, for the nine months ended September 30, 2020, were as follows:
| Translation Adjustments | Interest Rate Swap Adjustments | Pension Benefit Plan Adjustments | Total | ||||||||||||||||||||
| Balance at December 31, 2019 | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Other comprehensive loss before reclassifications | ( | ( | ( | ||||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss to net loss | |||||||||||||||||||||||
| Net other comprehensive loss | ( | ( | ( | ||||||||||||||||||||
| Balance at September 30, 2020 | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
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QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021
(In millions, except share and per share data and unless otherwise indicated)
The details of the reclassifications from accumulated other comprehensive loss to net earnings (loss) for the three and nine months ended September 30, 2021 and 2020, were as follows:
| Details of Accumulated Other Comprehensive Loss Components | Three Months Ended September 30, | Nine Months Ended September 30, | Consolidated Statements of Operations Presentation | ||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||||||||||||
| Amortization of amounts accumulated for interest rate swaps de-designated as cash flow hedges | $ | $ | $ | $ | Interest expense | ||||||||||||||||||||||||||||||
| Impact of income taxes | ( | ( | Income tax benefit | ||||||||||||||||||||||||||||||||
| Amortization of amounts accumulated for interest rate swaps de-designated as cash flow hedges, net of tax | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
| Non-cash settlement charge on pension benefit plan | $ | $ | $ | $ | Net pension income | ||||||||||||||||||||||||||||||
| Impact of income taxes | Income tax benefit | ||||||||||||||||||||||||||||||||||
| Non-cash settlement charge on pension benefit plan, net of tax | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
| Total reclassifications for the period | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
| Impact of income taxes | ( | ( | |||||||||||||||||||||||||||||||||
| Total reclassifications for the period, net of tax | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
Note 20. Segment Information
As a worldwide marketing solutions partner, Quad leverages its 50-year heritage of platform excellence, innovation, strong culture and social purpose to create a better way for its clients, employees and communities. The Company’s operating and reportable segments are aligned with how the chief operating decision maker of the Company currently manages the business. The Company’s operating and reportable segments, including their product and service offerings, and a “Corporate” category are as follows:
•United States Print and Related Services
•International
•Corporate
United States Print and Related Services
The United States Print and Related Services segment is predominantly comprised of the Company’s United States printing operations and is managed as one integrated platform. This includes retail inserts, publications, catalogs, special interest publications, journals, direct mail, directories, in-store marketing and promotion, packaging, newspapers, custom print products, other commercial and specialty printed products and global paper procurement, together with marketing and other complementary services, including consumer insights, audience targeting, personalization, media planning and placement, process optimization, campaign planning and creation, pre-media production, videography, photography, digital execution, print execution and logistics. This segment also includes the manufacture of ink.
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QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021
(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 Brazil and India. This segment provides printed products and marketing and other complementary services consistent with the United States Print and Related Services segment. As of September 30, 2021, the Company has no unrestricted subsidiaries as defined in the Company’s Senior Unsecured Notes indenture.
Corporate
Corporate consists of unallocated general and administrative activities and associated expenses including, in part, executive, legal and finance, as well as certain expenses and income from frozen employee retirement plans, such as pension benefit plans.
| Net Sales | Operating Income (Loss) from Continuing Operations | Restructuring, Impairment and Transaction- Related Charges | |||||||||||||||||||||||||||
| Products | Services | ||||||||||||||||||||||||||||
| Three months ended September 30, 2021 | |||||||||||||||||||||||||||||
| United States Print and Related Services | $ | $ | $ | $ | |||||||||||||||||||||||||
| International | |||||||||||||||||||||||||||||
| Total operating segments | |||||||||||||||||||||||||||||
| Corporate | ( | ||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||||||||
| Three months ended September 30, 2020 | |||||||||||||||||||||||||||||
| United States Print and Related Services | $ | $ | $ | $ | |||||||||||||||||||||||||
| International | ( | ||||||||||||||||||||||||||||
| Total operating segments | |||||||||||||||||||||||||||||
| Corporate | ( | ||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||||||||
| Nine months ended September 30, 2021 | |||||||||||||||||||||||||||||
| United States Print and Related Services | $ | $ | $ | $ | ( | ||||||||||||||||||||||||
| International | |||||||||||||||||||||||||||||
| Total operating segments | ( | ||||||||||||||||||||||||||||
| Corporate | ( | ||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | ( | ||||||||||||||||||||||||
| Nine months ended September 30, 2020 | |||||||||||||||||||||||||||||
| United States Print and Related Services | $ | $ | $ | $ | |||||||||||||||||||||||||
| International | ( | ||||||||||||||||||||||||||||
| Total operating segments | |||||||||||||||||||||||||||||
| Corporate | ( | ||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||||||||
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QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021
(In millions, except share and per share data and unless otherwise indicated)
Restructuring, impairment and transaction-related charges for the three and nine months ended September 30, 2021 and 2020, are further described in Note 5, “Restructuring, Impairment and Transaction-Related Charges,” and are included in the operating income (loss) from continuing operations results by segment above.
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Operating income from continuing operations | $ | $ | $ | $ | |||||||||||||||||||
| Less: interest expense | |||||||||||||||||||||||
| Less: net pension income | ( | ( | ( | ( | |||||||||||||||||||
| Less: loss on debt extinguishment | |||||||||||||||||||||||
| Earnings (loss) from continuing operations before income taxes and equity in (earnings) loss of unconsolidated entity | $ | $ | ( | $ | $ | ( | |||||||||||||||||
Note 21. New Accounting Pronouncements
Note 22. Subsequent Events
Senior Secured Credit Facility Amendment
The Company completed the fifth amendment (the “Amendment”) to its April 28, 2014 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 will be due on the existing maturity date of January 31, 2024 (the “Existing Maturity Date”) and $342.5 million under the revolving credit facility will be 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 will be due on the Existing Maturity Date and $483.9 million will be 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.
Borrowings under the revolving credit facility and Term Loan A made under the Senior Secured Credit Facility will initially 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 will initially 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.
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QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021
(In millions, except share and per share data and unless otherwise indicated)
The following amendments were made to the quarterly financial covenants to which the Company is subject (all
financial terms, numbers and ratios are as defined in the Senior Secured Credit Facility, as amended by the fifth amendment):
•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.
•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.
•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).
In addition to the above listed covenants, the following amendment was made to certain limitations on acquisition, indebtedness, liens, dividends and repurchases of capital stock set forth in the Senior Secured Credit Facility:
•If the Company’s Total Leverage Ratio is equal to or 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.
The Senior Secured Credit Facility remains 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. See Note 11, “Debt,” for the Company’s covenant requirements as of September 30, 2021.
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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of the financial condition and results of operations of Quad should be read together with (1) the condensed consolidated financial statements for the three and nine months ended September 30, 2021 and 2020, including the notes thereto, included in Item 1, “Condensed Consolidated Financial Statements (Unaudited),” of this Quarterly Report on Form 10-Q; and (2) the audited consolidated annual financial statements as of and for the year ended December 31, 2020, and notes thereto included in the Company’s Annual Report on Form 10-K, filed with the SEC on February 24, 2021.
Management’s discussion and analysis of financial condition and results of operations is provided as a supplement to the Company’s condensed consolidated financial statements and accompanying notes to help provide an understanding of the Company’s financial condition, the changes in the Company’s financial condition and the Company’s results of operations. This discussion and analysis is organized as follows:
•Cautionary Statement Regarding Forward-Looking Statements.
•Overview. This section includes a general description of the Company’s business and segments, an overview of key performance metrics the Company’s management measures and utilizes to evaluate business performance, and an overview of trends affecting the Company, including management’s actions related to the trends.
•Results of Operations. This section contains an analysis of the Company’s results of operations by comparing the results for (1) the three months ended September 30, 2021, to the three months ended September 30, 2020; and (2) the nine months ended September 30, 2021, to the nine months ended September 30, 2020. The comparability of the Company’s results of operations between periods was impacted by the divestiture of the Omaha, Nebraska packaging plant, which was sold on January 31, 2020, the additional investment in Rise in June 2020, and the gain on the sale of the Company’s third-party logistics business on June 30, 2021. The results of operations of the divestiture are included in the Company’s condensed consolidated results until the date of disposition, and the results of operations of the investment in Rise reflect the Company’s ownership interest from the respective dates of change in ownership. The results of the Company's United States Book business have been reported as discontinued operations for the period ended September 30, 2020. Forward-looking statements providing a general description of recent and projected industry and Company developments that are important to understanding the Company’s results of operations are included in this section. This section also provides a discussion of EBITDA and EBITDA margin, financial measures that the Company uses to assess the performance of its business that are not prepared in accordance with GAAP.
•Liquidity and Capital Resources. This section provides an analysis of the Company’s capitalization, cash flows, a statement about off-balance sheet arrangements and a discussion of outstanding debt and commitments. Forward-looking statements important to understanding the Company’s financial condition are included in this section. This section also provides a discussion of Free Cash Flow and Debt Leverage Ratio, non-GAAP financial measures that the Company uses to assess liquidity and capital allocation and deployment.
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Cautionary Statement Regarding Forward-Looking Statements
To the extent any statements in this Quarterly Report on Form 10-Q contain information that is not historical, these statements are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements relate to, among other things, the objectives, goals, strategies, beliefs, intentions, plans, estimates, prospects, projections and outlook of the Company, and can generally be identified by the use of words such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “plan,” “foresee,” “believe” or “continue” or the negatives of these terms, variations on them and other similar expressions. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements.
These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond the control of the Company. These risks, uncertainties and other factors could cause actual results to differ materially from those expressed or implied by those forward-looking statements. Among risks, uncertainties and other factors that may impact Quad are those described in Part I, Item 1A, “Risk Factors,” of the Company’s 2020 Annual Report on Form 10-K, filed with the SEC on February 24, 2021, as such may be amended or supplemented in Part II, Item 1A, “Risk Factors,” of the Company’s subsequently filed Quarterly Reports on Form 10-Q (including this report), and the following:
•The negative impacts the coronavirus (COVID-19) has had and will continue to have on the Company’s business, financial condition, cash flows, results of operations and supply chain, as well as the global economy in general (including future uncertain impacts);
•The impact of decreasing demand for printed materials and significant overcapacity in a highly competitive environment creates downward pricing pressures and potential under-utilization of assets;
•The impact of digital media and similar technological changes, including digital substitution by consumers;
•The impact of increases in costs (including labor and labor-related costs, energy costs, freight rates and raw materials, including paper and the materials to manufacture ink) and the impact of fluctuations in the availability of raw materials, including paper and the materials to manufacture ink;
•The impact of inflationary cost pressures and supply chain shortages;
•The inability of the Company to reduce costs and improve operating efficiency rapidly enough to meet market conditions;
•The impact of the various restrictive covenants in the Company’s debt facilities on the Company’s ability to operate its business, as well as the uncertain negative impacts COVID-19 may have on the Company’s ability to continue to be in compliance with these restrictive covenants;
•The impact of increased business complexity as a result of the Company’s transformation to a marketing solutions partner;
•The impact negative publicity could have on our business;
•The failure to successfully identify, manage, complete and integrate acquisitions, investment opportunities or other significant transactions, as well as the successful identification and execution of strategic divestitures;
•The failure of clients to perform under contracts or to renew contracts with clients on favorable terms or at all;
•The impact of changing future economic conditions;
•The fragility and decline in overall distribution channels;
•The impact of changes in postal rates, service levels or regulations, including delivery delays due to ongoing COVID-19 impacts on daily operational staffing at the United States Postal Service;
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•The failure to attract and retain qualified talent across the enterprise;
•The impact of regulatory matters and legislative developments or changes in laws, including changes in cyber-security, privacy and environmental laws;
•Significant capital expenditures may be needed to maintain the Company’s platforms and processes and to remain technologically and economically competitive;
•The impact of risks associated with the operations outside of the United States, including costs incurred or reputational damage suffered due to improper conduct of its employees, contractors or agents;
•The impact of an other than temporary decline in operating results and enterprise value that could lead to non-cash impairment charges due to the impairment of property, plant and equipment and other intangible
assets; and
•The impact on the holders of Quad’s class A common stock of a limited active market for such shares and the inability to independently elect directors or control decisions due to the voting power of the class B common stock.
Quad cautions that the foregoing list of risks, uncertainties and other factors is not exhaustive, and you should carefully consider the other factors detailed from time to time in Quad’s filings with the SEC and other uncertainties and potential events when reviewing the Company’s forward-looking statements.
Because forward-looking statements are subject to assumptions and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. You are cautioned not to place undue reliance on such statements, which speak only as of the date of this Quarterly Report on Form 10-Q. Except to the extent required by the federal securities laws, Quad undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
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Overview
Business Overview
As a worldwide marketing solutions partner, Quad leverages its 50-year heritage of platform excellence, innovation, strong culture and social purpose to create a better way for its clients, employees and communities. The Company’s integrated marketing platform helps brands and marketers reduce complexity, increase efficiency and enhance marketing spend effectiveness. Quad provides its clients with unmatched scale for on-site services and expanded subject expertise in marketing strategy, creative solutions, media deployment and marketing management services. With a client-centric approach that drives the Company to continuously evolve its offering, combined with leading-edge technology and single-source simplicity, the Company has the resources and knowledge to help a wide variety of clients in multiple vertical industries, including retail, publishing, consumer technology, consumer packaged goods, financial services, insurance, healthcare and direct-to-consumer.
Quad believes employee pride, combined with a relentless quest to create a better way, builds the opportunity to invent the future as a preferred marketing solutions partner, helping its clients win every day. To accomplish this vision, Quad remains focused on its consistent strategic priorities as follows:
Walk in the Shoes of Clients
The Company encourages all employees, regardless of job title, to walk in the shoes of clients by putting a priority on listening to clients’ needs and challenges, doing what they can to make it easy to work with Quad, and making the client experience enjoyable at every touchpoint. With a focus on solving problems and uncomplicating the marketing process, Quad seeks to become an invaluable strategic marketing partner for its clients, helping them successfully navigate today’s constantly evolving media landscape through innovative data-driven solutions, produced and deployed efficiently across multiple media channels. A key component of Quad’s client-facing strategy is to strengthen relationships at higher levels within a client’s organization so the Company can better understand, anticipate and satisfy the organization’s requirements, including their diversity, equity and inclusion goals, and broader corporate social responsibility goals. The Company also believes its proactive thought leadership in the key issues facing its clients, including data-driven marketing, sustainability and postal reform, will foster loyalty to the Quad brand.
Grow the Business Profitably
This strategic priority centers on Quad’s ability to defend against significant media disruption and ongoing print industry headwinds and grow the business as a marketing solutions partner. Key components of this priority are:
•Expand existing account relationships by introducing clients to the Company’s ever-expanding offering that helps them market more efficiently and effectively across media channels. To this end, Quad is focused on ensuring it has the right talent in the right positions to facilitate strategic marketing conversations with its clients that lead to a better understanding of their needs, developing tailored solutions and growing market share.
•Expand in key vertical industries with growth opportunities, such as consumer technology, consumer-packaged goods, financial services, insurance, healthcare and direct-to-consumer, while continuing to capitalize on the Company’s established expertise in retail and publishing. Through existing and new offerings, Quad delivers solutions dedicated to solving client marketing and process challenges.
•Grow print segment share by providing dependable, on-time performance and ongoing investments in its platform that improve manufacturing and distribution cost efficiencies, product features and effectiveness. At a time of significant industry and economic disruption, Quad is a stable and reliable partner to its clients.
•Make disciplined investments that take many different forms. The Company intends to continue to pursue acquisitions that help expand and strengthen its integrated marketing platform as well as value-driven industry consolidating acquisitions that meet its disciplined acquisition criteria. In addition, the Company intends to continue making long-term investments in its talent, such as hiring business professionals with client-side marketing experience and consulting expertise who will bolster its position as a marketing solutions partner, as well as investments to increase employee engagement, retention and productivity.
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Strengthen the Core
The Company operates what it believes to be a superior and unparalleled integrated marketing platform, which it has consciously built to reduce complexity, enhance efficiencies and improve marketing spend effectiveness across channels. Through this unique platform, the Company offers marketing strategy, including consumer insights and data analytics; creative solutions for producing quality content at scale; media optimization for all channels, including print, broadcast and digital; and 24/7 global production, supported by industry-leading print manufacturing capabilities. Quad uses a disciplined return on capital framework to make regular, strategic investments in this platform, resulting in what it believes is the most integrated, automated, efficient, innovative and modern marketing platform of its kind. The Company’s long-standing, disciplined culture of holistic Continuous Improvement and commitment to Lean Enterprise methodologies, along with ongoing investments in employee development and retention, further supports its goal of strengthening its platform so that Quad can remain a high-quality, low-cost producer.
To strengthen its core offering, the Company continually seeks to enhance its product portfolio, especially in the direct marketing and packaging space, with innovations that support clients’ ability to stand out in the mailbox or on the store shelf. These innovations include proprietary solutions unavailable anywhere else in the marketing, communications or printing industries.
Additionally, Quad has chosen to strategically divest of those businesses that cannot be easily leveraged as part of its greater integrated marketing platform, such as books and third-party logistics. Through these types of optimization efforts, Quad strengthens its core by remaining focused on where it can provide the most value to clients by uncomplicating marketing to deliver more.
Empower Employees
Quad’s strategic priority to empower employees throughout their career journey builds on the key aspects of the Company’s distinct corporate culture, which the Company views as a competitive advantage. These aspects include the Company’s enduring values, which are centered on trust, innovation, growth and believing in people. The Company understands that its employees perform better at work when they can simply be themselves – confident in their abilities and comfortable sharing their ideas, opinions and beliefs – all of which leads to a more inclusive environment and better engagement, decision-making and business outcomes. The Company implements talent strategies to meet its labor and business transformation needs, and training and reward programs to engage, develop and retain its employees. Employees are encouraged to take advantage of the Company’s continuous growth environment, which not only teaches critical on-the-job and leadership skills, but also helps them respond to rapid change, cultivate effective networks, and create high-quality relationships necessary for personal, professional and company growth. The Company believes its approach to continuous growth for each employee is advantageously distinct from other employers. With the Company’s encouragement to do things differently, to be something greater and to create a better way, employees are more fully engaged in their day-to-day activities, producing better results for clients and advancing the Company’s strategic priorities. Additionally, the Company engages employees and fosters corporate pride by supporting community activities, initiatives and organizations that impact the quality of life near Quad’s operations.
Enhance Financial Strength and Create Shareholder Value
Quad follows a disciplined approach to maintaining and enhancing financial strength to create shareholder value, which is essential given ongoing media disruption and printing industry challenges. This strategy is centered on the Company’s ability to maximize net earnings, Free Cash Flow and operating margins; maintain consistent financial policies to ensure a strong balance sheet, liquidity level and access to capital; and retain the financial flexibility needed to strategically allocate and deploy capital as circumstances change. The priorities for capital allocation and deployment are adjusted based on prevailing circumstances and what the Company thinks is best for shareholder value creation at any particular point in time. Those priorities currently include deleveraging the Company’s balance sheet through debt and pension liability reductions, and making compelling investments that drive profitable organic growth and productivity in the Company’s print manufacturing and distribution operations, as well as expansion into higher-growth marketing services, and pursuing value-driven industry consolidation. The Company’s Board of Directors proactively suspended the Company’s quarterly dividends beginning in the second quarter of 2020, and the Company was prohibited from making dividend payments through September 30, 2021. However, the Company remains committed to paying a dividend over the long term and will seek to resume a dividend following the stabilization of its operating environment.
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To provide ongoing improvement in manufacturing productivity, the Company applies holistic Continuous Improvement and Lean Enterprise methodologies to simplify and streamline processes and to ultimately maximize operating margins. These same methodologies are applied to its selling, general and administrative functions to create a truly lean enterprise. The Company has been working diligently to lower its cost structure by consolidating its manufacturing operations into its most efficient facilities, as well as realizing purchasing, mailing and logistics efficiencies by centralizing and consolidating print manufacturing volumes, and eliminating redundancies in its administrative and corporate operations. Quad believes that its focused efforts to be the high-quality, low-cost producer generates increased Free Cash Flow and allows the Company to maintain a strong balance sheet through debt and pension liability reduction. The Company’s disciplined financial approach also allows it to maintain sufficient liquidity and to reduce refinancing risk.
Segments
The Company’s operating and reportable segments are aligned with how the chief operating decision maker of the Company currently manages the business. As a result of the decision to sell the Company’s United States Book business, all United States Print and Related Services segment amounts exclude the Book business discontinued operations for the three and nine months ended September 30, 2020. The Company’s operating and reportable segments, including their product and service offerings, and a “Corporate” category are summarized below.
•The United States Print and Related Services segment is predominantly comprised of the Company’s United States printing operations and is managed as one integrated platform. This includes retail inserts, publications, catalogs, special interest publications, journals, direct mail, directories, in-store marketing and promotion, packaging, newspapers, custom print products, other commercial and specialty printed products and global paper procurement, together with marketing and other complementary services, including consumer insights, audience targeting, personalization, media planning and placement, process optimization, campaign planning and creation, pre-media production, videography, photography, digital execution, print execution and logistics. This segment also includes the manufacture of ink. The United States Print and Related Services segment accounted for approximately 88% and 89% of the Company’s consolidated net sales during the three and nine months ended September 30, 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 Brazil and 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 12% and 11% of the Company’s consolidated net sales during the three and nine months ended September 30, 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 (loss) attributable to Quad common shareholders 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.
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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 cash restructuring requirements related to cost reduction activities, as well as to fund capital expenditures, debt service requirements, 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 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 $102 million during the nine months ended September 30, 2021, primarily due to the use of cash proceeds from the sale of property, plant and equipment, the sale of the Company’s third-party logistics business and cash provided by operating activities to reduce debt obligations. Since the Company completed the World Color Press acquisition in July 2010, the Company has reduced debt and finance lease obligations by $913 million and has reduced the obligations for pension, postretirement and MEPPs by $486 million, for a total obligation reduction since July of 2010 of $1.4 billion.
The Company is subject to seasonality in its quarterly results as net sales and operating income are higher in the third and fourth quarters of the calendar year as compared to the first and second quarters. The fourth quarter is typically the highest seasonal quarter for cash flows from operating activities and Free Cash Flow due to the reduction of working capital requirements that reach peak levels during the third quarter. Seasonality is driven by increased retail inserts and catalogs primarily due to back-to-school and holiday-related advertising and promotions. The Company expects this seasonality impact to continue in future years. Due to the continued uncertainty surrounding the COVID-19 pandemic, the Company anticipates this seasonality will be further impacted in 2021 and in future periods, as the Company is heavily dependent on consumer demand.
Overview of Trends Affecting Quad
As consumer media consumption habits change, marketing services providers face increased demand to offer end-to-end marketing services, from strategy and creative through execution, across all channels, traditional and digital. As new marketing and advertising channels emerge, marketing services providers must expand their services beyond traditional channels, such as for television, newspapers, print publications and radio, to digital channels, such as mobile, internet search, internet display and video, to create effective multichannel campaigns for their clients. This trend greatly influences Quad’s ongoing efforts to redefine the future of integrated marketing and create greater value for its clients who are looking for less complexity, greater transparency and accountability from their business partners.
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The Company leverages its data-driven print expertise as part of an integrated marketing platform that helps its clients not only plan and produce marketing programs, but also deploy, manage and measure them across all media channels. Competition in the printing industry remains highly fragmented and intense, and the Company believes that there are indicators of heightened competitive pressures. The industry has excess manufacturing capacity created by continued declines in industry volumes. The Company faces competition due to the increased accessibility and quality of digital alternatives to traditional delivery of printed documents through the online distribution and hosting of media content, and the digital distribution of documents and data. The Company faces competition from print management and marketing consulting firms that look to streamline processes and reduce the overall print spend of the Company’s clients.
The Company believes that a disciplined approach for capital management and a strong balance sheet are critical to be able to invest in profitable growth opportunities and technological advances, thereby providing the highest return for shareholders. Management balances the use of cash between deleveraging the Company’s balance sheet (through reduction in debt and pension obligations), compelling investment opportunities (through capital expenditures, acquisitions and strategic investments) and returns to shareholders (through quarterly dividends and share repurchases).
The Company continues to make progress on integrating and streamlining all aspects of its business, thereby lowering its cost structure by consolidating its manufacturing platform into its most efficient facilities, as well as realizing purchasing, mailing and logistics efficiencies by centralizing and consolidating print manufacturing volumes and eliminating redundancies in its administrative and corporate operations. The Company has continued to evolve its manufacturing platform, equipping facilities to be product line agnostic, which enables the Company to maximize equipment utilization. Quad believes that the large plant size of certain of its key printing facilities allows the Company to drive savings in certain product lines (such as publications and catalogs) due to economies of scale and from investments in automation and technology. The Company continues to focus on proactively aligning its cost structure to the realities of the top-line pressures it faces in the printing industry through Lean Manufacturing and sustainable continuous improvement programs. Restructuring actions initiated by the Company beginning in 2010 have resulted in the announcement of 50 plant closures through September 30, 2021.
The Company believes it will continue to drive productivity improvements and sustainable cost reduction initiatives into the future through an engaged workforce and ongoing adoption of the latest manufacturing automation and technology. Through this strategy, the Company believes it can maintain the strongest, most efficient print manufacturing platform to remain a high-quality, low-cost producer.
Integrated distribution with the United States Postal Service (“USPS”) is an important component of the Company’s business. Any material change in the current service levels provided by the postal service could impact the demand that clients have for print services. The USPS continues to experience financial problems. Without decreased operational cost structures, increased efficiencies, increased revenues or action by Congress to reform the USPS’ cost structure, these losses will continue into the future. As a result of these financial difficulties, the USPS has come under increased pressure 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. There are also delivery delays due to ongoing COVID-19 impacts on daily operational staffing at the USPS.
Federal statute requires the Postal Regulatory Commission (“PRC”) to conduct reviews of the rates and services of the USPS, and ensure the Postal Service meets all of its legal requirements. As a result of those reviews, the PRC has authorized a new five year rate-authority structure that would provide the USPS with additional pricing flexibility over the current Consumer Price Index cap, which may result in a substantially altered rate structure for mailers. The newly revised rate authority that is effective as a result of new rules issued by the PRC includes a higher overall rate cap on the USPS’ ability to increase rates from year to year. This may lead 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 the actual rate increases due to competing lawsuits from both industry and the USPS, as well as how much of the authority the USPS will use, also creates potential volume declines as rate predictability with respect to cost and timing 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.
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The Company has invested significantly in its mail preparation and distribution capabilities to mitigate the impact of increases in postage costs, and to help clients successfully navigate the ever-changing postal environment. Through its data analytics, unique software to merge mail streams on a large scale, advanced finishing capabilities and technology, and in-house transportation and logistics operations, the Company manages the mail preparation and distribution of most of its clients’ products to maximize efficiency, to enable on-time and consistent delivery and to partially reduce these costs; however, the net impact of increasing postal costs may create a decrease in client demand for print and mail products.
The Company’s results of operations have been adversely impacted as a result of the COVID-19 pandemic and the emergence of new variants. Through the Company’s Crisis Management Team, including executive and operations leadership, the Company has been executing business continuity plans focused on protecting the health and well-being of our employees, while also continuing to service clients, and protect the long-term financial health of the Company as the COVID-19 pandemic continues. The Company amended its Senior Secured Credit Facility during the second quarter of 2020 to provide for certain financial covenant relief through the fiscal quarter ended September 30, 2021. During the third quarter of 2021, with ongoing advancements against the COVID-19 pandemic, the effects on the Company have lessened from previous periods, particularly from the heavily impacted second and third quarters of 2020. The Company is continuing to evaluate the impact and may implement additional cost reduction measures as necessary. The ultimate impact of COVID-19 on the Company’s business, financial condition, cash flows, results of operations and supply chain will depend on future developments, including the duration of the pandemic and the related length of its impact on the global economy, all of which are still highly uncertain.
Additionally, the increasing cost and availability of raw materials, such as paper, ink, supplies, distribution and labor, have been and are expected to continue to adversely impact the Company’s results of operation. The Company is dependent on its production personnel to print the Company’s products in a cost-effective and efficient manner that allows the Company to obtain new clients and to drive sales from existing clients. The nationwide shortage of available production personnel may put a strain on the Company’s ability to accept new work from client requests, including the Company’s seasonally higher third and fourth quarters. The ongoing labor shortage is also placing upward price pressure on freight, as the number of available drivers have been reduced, and may have an adverse effect on our operations. Due to the reduced number of freight drivers available, the Company may not be able to meet rising customer demand and could fail to meet our clients’ expectations.
The Company has also experienced and anticipates it will continue to experience certain distribution challenges, including, but not limited to, the above-noted delivery delays at the USPS and recent volume restrictions at the United Parcel Service, Federal Express and certain local couriers. As the labor shortages, supply chain and distribution challenges continue to evolve, the Company is unable to predict the duration of the shortages and challenges and the extent of the impact on the Company’s business, financial condition, cash flows and results of operations. As a result of the rising inflationary cost pressures within our raw materials, distribution and labor, the Company has and will continue to pass along price increases to our clients. The Company expects inflationary cost pressures and supply chain shortages to continue at least through the end of fiscal year 2021 and potentially through fiscal year 2022. The Company is unable to predict the future impact of the labor and supply chain shortages and inflation, and the resulting impact on the Company’s business, financial condition, cash flows and results of operations.
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Results of Operations for the Three Months Ended September 30, 2021, Compared to the Three Months Ended September 30, 2020
Summary Results
The Company’s operating income from continuing operations, operating margin, net earnings (loss) attributable to Quad common shareholders (computed using a 25% normalized tax rate for all items subject to tax) and diluted earnings per share attributable to Quad common shareholders for the three months ended September 30, 2021, changed from the three months ended September 30, 2020, as follows (dollars in millions, except margin and per share data):
| Operating Income from Continuing Operations | Operating Margin | Net Earnings Attributable to Quad Common Shareholders | Diluted Earnings Per Share Attributable to Quad Common Shareholders | ||||||||||||||||||||
| For the Three Months Ended September 30, 2020 | $ | 6.3 | 0.9 | % | $ | 1.6 | $ | 0.03 | |||||||||||||||
Gain from sale and leaseback (1) | 10.8 | 1.5 | % | 8.1 | 0.15 | ||||||||||||||||||
Restructuring, impairment and transaction-related charges (2) | 2.4 | 0.3 | % | 1.8 | 0.04 | ||||||||||||||||||
Interest expense (3) | N/A | N/A | 2.2 | 0.04 | |||||||||||||||||||
Net pension income (4) | N/A | N/A | 0.5 | 0.01 | |||||||||||||||||||
Income taxes (5) | N/A | N/A | (8.0) | (0.15) | |||||||||||||||||||
Loss from discontinued operations, net of tax (6) | N/A | N/A | 1.1 | 0.02 | |||||||||||||||||||
Investments in unconsolidated entity and noncontrolling interests, net of tax (7) | N/A | N/A | 0.6 | 0.01 | |||||||||||||||||||
Operating income from continuing operations (8) | 8.5 | 1.3 | % | 6.4 | 0.12 | ||||||||||||||||||
| For the Three Months Ended September 30, 2021 | $ | 28.0 | 4.0 | % | $ | 14.3 | $ | 0.27 | |||||||||||||||
______________________________
(1)The Company executed a sale and leaseback of its West Allis, Wisconsin facility resulting in a $10.8 million ($8.1 million, net of tax) gain during the three months ended September 30, 2021.
(2)Restructuring, impairment and transaction-related charges decreased $2.4 million ($1.8 million, net of tax), to $7.4 million during the three months ended September 30, 2021, and included the following:
a.A $2.3 million decrease in employee termination charges from $3.3 million during the three months ended September 30, 2020, to $1.0 million during the three months ended September 30, 2021;
b.A $0.3 million increase in impairment charges from zero during the three months ended September 30, 2020, to $0.3 million during the three months ended September 30, 2021;
c.A $0.9 million decrease in transaction-related charges from $0.9 million during the three months ended September 30, 2020, to zero during the three months ended September 30, 2021;
d.A $0.2 million decrease in integration costs from $0.2 million during the three months ended September 30, 2020, to zero for the three months ended September 30, 2021; and
e.A $0.7 million increase in various other restructuring charges from $5.4 million during the three months ended September 30, 2020, to $6.1 million during the three months ended September 30, 2021.
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)Interest expense decreased $2.9 million ($2.2 million, net of tax) during the three months ended September 30, 2021, to $15.0 million. This change was due to lower average debt levels, lower weighted average interest rate on borrowings and a $0.4 million decrease in interest expense related to the interest rate swaps in the three months ended September 30, 2021, as compared to the three months ended September 30, 2020.
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(4)Net pension income increased $0.7 million ($0.5 million, net of tax) during the three months ended September 30, 2021, to $3.4 million. This was due to a $1.1 million decrease from interest cost on pension plan liabilities, partially offset by $0.2 million decrease from the expected long-term return on pension plan assets and a non-cash settlement charge of $0.2 million.
(5)The $8.0 million decrease in income tax benefit on continuing operations as calculated in the following table is primarily due to a $9.5 million income tax benefit related to the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) net operating loss carry back provision in 2020 that did not repeat in 2021 and a $1.7 million decrease from a reduction in the Company’s liability for unrecognized tax benefits in 2020 in excess of 2021, partially offset by a $3.0 million decrease in income tax expense from a lower effective income tax rate applied to 2021.
| Three Months Ended September 30, | |||||||||||||||||
| 2021 | 2020 | $ Change | |||||||||||||||
| Earnings (loss) from continuing operations before income taxes and equity in (earnings) loss of unconsolidated entity | $ | 16.4 | $ | (8.9) | $ | 25.3 | |||||||||||
| Normalized tax rate | 25.0 | % | 25.0 | % | |||||||||||||
| Income tax expense (benefit) at normalized tax rate | 4.1 | (2.2) | 6.3 | ||||||||||||||
| Income tax expense (benefit) from the condensed consolidated statements of operations | 2.3 | (12.0) | 14.3 | ||||||||||||||
| Impact of income taxes | $ | 1.8 | $ | 9.8 | $ | (8.0) | |||||||||||
(6)The loss from discontinued operations, net of tax, of $1.1 million was recognized during the three months ended September 30, 2020. The Company completed the sale of the Book business in 2020.
(7)The increase from investments in unconsolidated entity and noncontrolling interests, net of tax, of $0.6 million during the three months ended September 30, 2021, was primarily related to a $0.6 million increase in earnings at the Company’s investment in Plural Industria Gráfica Ltda. (“Plural”), the Company’s Brazilian joint venture.
(8)Operating income from continuing operations, excluding the gain from sale and leaseback and restructuring, impairment and transaction-related charges, increased $8.5 million ($6.4 million, net of tax) primarily due to the following: (1) an increase in print volume net sales; (2) a $9.1 million net benefit in 2021 of gains from property insurance claims; (3) a $6.6 million increase in paper byproduct recoveries; (4) a $6.1 million decrease in depreciation and amortization expense; and (5) savings from other cost reduction initiatives. These increases were partially offset by net cost increases from labor, freight and materials inflationary cost impacts and $8.5 million in COVID-related temporary cost reductions from temporary salary reductions and furloughs in 2020.
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Operating Results from Continuing Operations
The following table sets forth certain information from the Company’s condensed consolidated statements of operations on an absolute dollar basis and as a relative percentage of total net sales for each noted period, together with the relative percentage change in such information between the periods set forth below:
| Three Months Ended September 30, | |||||||||||||||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||||||||||||||
| Amount | % of Sales | Amount | % of Sales | $ Change | % Change | ||||||||||||||||||||||||||||||
| Net sales: | |||||||||||||||||||||||||||||||||||
| Products | $ | 540.6 | 76.6 | % | $ | 493.5 | 72.6 | % | $ | 47.1 | 9.5 | % | |||||||||||||||||||||||
| Services | 165.5 | 23.4 | % | 185.8 | 27.4 | % | (20.3) | (10.9) | % | ||||||||||||||||||||||||||
| Total net sales | 706.1 | 100.0 | % | 679.3 | 100.0 | % | 26.8 | 3.9 | % | ||||||||||||||||||||||||||
| Cost of sales: | |||||||||||||||||||||||||||||||||||
| Products | 453.3 | 64.2 | % | 410.1 | 60.4 | % | 43.2 | 10.5 | % | ||||||||||||||||||||||||||
| Services | 120.8 | 17.1 | % | 133.2 | 19.6 | % | (12.4) | (9.3) | % | ||||||||||||||||||||||||||
| Total cost of sales | 574.1 | 81.3 | % | 543.3 | 80.0 | % | 30.8 | 5.7 | % | ||||||||||||||||||||||||||
| Selling, general & administrative expenses | 68.7 | 9.7 | % | 75.1 | 11.1 | % | (6.4) | (8.5) | % | ||||||||||||||||||||||||||
| Gain from sale and leaseback | (10.8) | (1.5) | % | — | — | % | (10.8) | (100.0) | % | ||||||||||||||||||||||||||
| Depreciation and amortization | 38.7 | 5.5 | % | 44.8 | 6.6 | % | (6.1) | (13.6) | % | ||||||||||||||||||||||||||
| Restructuring, impairment and transaction-related charges | 7.4 | 1.0 | % | 9.8 | 1.4 | % | (2.4) | (24.5) | % | ||||||||||||||||||||||||||
| Total operating expenses | 678.1 | 96.0 | % | 673.0 | 99.1 | % | 5.1 | 0.8 | % | ||||||||||||||||||||||||||
| Operating income from continuing operations | $ | 28.0 | 4.0 | % | $ | 6.3 | 0.9 | % | $ | 21.7 | N/A | ||||||||||||||||||||||||
Net Sales
Product sales increased $47.1 million, or 9.5%, for the three months ended September 30, 2021, compared to the three months ended September 30, 2020, primarily due to a $31.2 million increase in sales in the Company’s print product lines, mainly due to increased print volume, compared to the COVID-19 pandemic impacted three months ended September 30, 2020 and a $15.9 million increase from pass-through paper sales.
Service sales, which primarily consist of logistics, distribution, marketing services, imaging and medical services, decreased $20.3 million, or 10.9%, for the three months ended September 30, 2021, compared to the three months ended September 30, 2020, primarily due to a $23.7 million decrease in sales due to the divestiture of the Company’s third-party logistics business and a $2.1 million decrease in logistics sales, partially offset by a $5.6 million increase in print imaging services and sales of marketing services.
Cost of Sales
Cost of product sales increased $43.2 million, or 10.5%, for the three months ended September 30, 2021, compared to the three months ended September 30, 2020, primarily due to the following: (1) higher print volume; (2) an increase in pass-through paper costs; and (3) the impact from the rising costs of labor, materials and other costs of production. These increases were partially offset by a $6.6 million increase in paper byproduct recoveries and other cost reduction initiatives.
Cost of service sales decreased $12.4 million, or 9.3%, for the three months ended September 30, 2021, compared to the three months ended September 30, 2020, primarily due to the impact from the divestiture of the Company’s third-party logistics business, partially offset by increased freight costs.
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Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased $6.4 million, or 8.5%, for the three months ended September 30, 2021, compared to the three months ended September 30, 2020, primarily due to a $9.1 million net benefit in 2021 of gains from property insurance claims, partially offset by a $1.1 million increase in credit loss expense and the receipt of a $0.6 million COVID-19 government subsidy in Poland in 2020 that did not repeat in 2021. Selling, general and administrative expenses as a percentage of net sales decreased to 9.7% for the three months ended September 30, 2021, compared to 11.1% for the three months ended September 30, 2020.
Gain from sale and leaseback
The Company executed a sale and leaseback of its West Allis, Wisconsin facility resulting in a $10.8 million ($8.1 million, net of tax) gain during the three months ended September 30, 2021.
Depreciation and Amortization
Depreciation and amortization decreased $6.1 million, or 13.6%, for the three months ended September 30, 2021, compared to the three months ended September 30, 2020, due to a $4.0 million decrease in depreciation expense, primarily related to property, plant and equipment becoming fully depreciated over the past year, a decrease in purchases in property, plant and equipment and a $2.1 million decrease in amortization expense.
Restructuring, Impairment and Transaction-Related Charges
Restructuring, impairment and transaction-related charges decreased $2.4 million for the three months ended September 30, 2021, compared to the three months ended September 30, 2020, primarily due to the following:
| Three Months Ended September 30, | |||||||||||||||||||||||||||||
| 2021 | 2020 | $ Change | |||||||||||||||||||||||||||
| Employee termination charges | $ | 1.0 | $ | 3.3 | $ | (2.3) | |||||||||||||||||||||||
Impairment charges (a) | 0.3 | — | 0.3 | ||||||||||||||||||||||||||
| Transaction-related charges | — | 0.9 | (0.9) | ||||||||||||||||||||||||||
| Integration costs | — | 0.2 | (0.2) | ||||||||||||||||||||||||||
| Other restructuring charges (income) | |||||||||||||||||||||||||||||
| Vacant facility carrying costs and lease exit charges | 4.9 | 2.5 | 2.4 | ||||||||||||||||||||||||||
| Equipment and infrastructure removal costs | 0.5 | 0.1 | 0.4 | ||||||||||||||||||||||||||
| Gains on the sale of facilities | — | (0.8) | 0.8 | ||||||||||||||||||||||||||
| Other restructuring activities | 0.7 | 3.6 | (2.9) | ||||||||||||||||||||||||||
| Other restructuring charges (income) | 6.1 | 5.4 | 0.7 | ||||||||||||||||||||||||||
| Total restructuring, impairment and transaction-related charges | $ | 7.4 | $ | 9.8 | $ | (2.4) | |||||||||||||||||||||||
______________________________
(a)Includes $0.3 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 restructuring activities during the three months ended September 30, 2021. There were no impairment charges recognized during the three months ended September 30, 2020.
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EBITDA and EBITDA Margin—Consolidated
EBITDA and EBITDA margin for the three months ended September 30, 2021, compared to the three months ended September 30, 2020, were as follows:
| Three Months Ended September 30, | |||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||
| Amount | % of Net Sales | Amount | % of Net Sales | ||||||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||
| EBITDA and EBITDA margin (non-GAAP) | $ | 70.3 | 10.0 | % | $ | 52.3 | 7.7 | % | |||||||||||||||
EBITDA increased $18.0 million for the three months ended September 30, 2021, compared to the three months ended September 30, 2020, primarily due to the following: (1) higher print volume sales; (2) a $10.8 million gain from sale and leaseback; (3) a $9.1 million net benefit in 2021 of gains from property insurance claims, (4) a $6.6 million increase in paper byproduct recoveries; (5) $2.4 million of decreased restructuring, impairment and transaction-related charges; (6) a $1.1 million decrease in loss from discontinued operations, net of tax; and (7) savings from other cost reduction initiatives. The increases were partially offset by net inflationary cost increases in labor, freight and material costs and $8.5 million in COVID-related temporary cost reductions from temporary salary reductions and furloughs in 2020.
EBITDA is defined as net earnings (loss) attributable to Quad common shareholders, excluding (1) interest expense, (2) income tax expense (benefit), 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 (loss) 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.
A reconciliation of EBITDA to net earnings attributable to Quad common shareholders for the three months ended September 30, 2021 and 2020, was as follows:
| Three Months Ended September 30, | |||||||||||
| 2021 | 2020 | ||||||||||
| (dollars in millions) | |||||||||||
Net earnings attributable to Quad common shareholders (1) | $ | 14.3 | $ | 1.6 | |||||||
| Interest expense | 15.0 | 17.9 | |||||||||
| Income tax expense (benefit) | 2.3 | (12.0) | |||||||||
| Depreciation and amortization | 38.7 | 44.8 | |||||||||
| EBITDA (non-GAAP) | $ | 70.3 | $ | 52.3 | |||||||
______________________________
(1)Net earnings attributable to Quad common shareholders included the following:
a.Restructuring, impairment and transaction-related charges of $7.4 million and $9.8 million for the three months ended September 30, 2021 and 2020, respectively;
b.Gain from sale and leaseback of $10.8 million for the three months ended September 30, 2021;
c.Net pension income of $3.4 million and $2.7 million for the three months ended September 30, 2021 and 2020, respectively;
d.Equity in earnings of unconsolidated entity of $0.2 million and equity in loss of unconsolidated entity of $0.4 million for the three months ended September 30, 2021 and 2020, respectively; and
e.Loss from discontinued operations, net of tax, of $1.1 million for the three months ended September 30, 2020.
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United States Print and Related Services
The following table summarizes net sales, operating income from continuing operations, operating margin and certain items impacting comparability within the United States Print and Related Services segment:
| Three Months Ended September 30, | |||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||
| Amount | Amount | $ Change | % Change | ||||||||||||||||||||
| Net sales: | |||||||||||||||||||||||
| Products | $ | 463.9 | $ | 425.6 | $ | 38.3 | 9.0 | % | |||||||||||||||
| Services | 160.4 | 181.6 | (21.2) | (11.7) | % | ||||||||||||||||||
| Operating income from continuing operations (including restructuring, impairment and transaction-related charges) | 36.1 | 20.0 | 16.1 | 80.5 | % | ||||||||||||||||||
| Operating margin | 5.8 | % | 3.3 | % | N/A | N/A | |||||||||||||||||
| Restructuring, impairment and transaction-related charges | $ | 7.3 | $ | 3.8 | $ | 3.5 | 92.1 | % | |||||||||||||||
Net Sales
Product sales for the United States Print and Related Services segment increased $38.3 million, or 9.0%, for the three months ended September 30, 2021, compared to the three months ended September 30, 2020, primarily due to a $26.8 million increase in sales in the Company’s print product lines due to increased print volume, compared to the COVID-19 pandemic impacted three months ended September 30, 2020 and a $11.5 million increase from pass-through paper sales.
Service sales for the United States Print and Related Services segment decreased $21.2 million, or 11.7%, for the three months ended September 30, 2021, compared to the three months ended September 30, 2020, primarily due to $23.7 million decrease in sales due to the divestiture of the Company’s third-party logistics business and a $2.8 million decrease in logistics sales, partially offset by a $5.4 million increase in print imaging services and sales of marketing services.
Operating Income from Continuing Operations
Operating income from continuing operations for the United States Print and Related Services segment increased $16.1 million, or 80.5%, for the three months ended September 30, 2021, compared to the three months ended September 30, 2020, primarily due to the following: (1) an increase in print volume net sales; (2) a $10.8 million gain from sale and leaseback; (3) a $9.1 million net benefit in 2021 of gains from property insurance claims; (4) a $5.5 million decrease in depreciation and amortization expense; (5) a $6.6 million increase in paper byproduct recoveries; and (6) savings from other cost reduction initiatives. The increases were partially offset by the following: (1) net inflationary cost increases in labor, freight and material costs; (2) $8.5 million in COVID-related temporary cost reductions from temporary salary reductions and furloughs in 2020; and (3) a $3.5 million increase in restructuring, impairment and transaction-related charges.
Operating margin for the United States Print and Related Services segment increased to 5.8% for the three months ended September 30, 2021, from 3.3% for the three months ended September 30, 2020, primarily due to the reasons provided above.
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Restructuring, Impairment and Transaction-Related Charges
Restructuring, impairment and transaction-related charges for the United States Print and Related Services segment increased $3.5 million for the three months ended September 30, 2021, compared to the three months ended September 30, 2020, primarily due to the following:
| Three Months Ended September 30, | |||||||||||||||||||||||||||||
| 2021 | 2020 | $ Change | |||||||||||||||||||||||||||
| Employee termination charges | $ | 0.5 | $ | 1.5 | $ | (1.0) | |||||||||||||||||||||||
Impairment charges (a) | 0.3 | — | 0.3 | ||||||||||||||||||||||||||
| Transaction-related charges | — | 0.1 | (0.1) | ||||||||||||||||||||||||||
| Integration costs | — | 0.2 | (0.2) | ||||||||||||||||||||||||||
| Other restructuring charges (income) | 6.5 | 2.0 | 4.5 | ||||||||||||||||||||||||||
| Total restructuring, impairment and transaction-related charges | $ | 7.3 | $ | 3.8 | $ | 3.5 | |||||||||||||||||||||||
______________________________
(a)Includes $0.3 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 restructuring activities during the three months ended September 30, 2021. There were no impairment charges recognized during the three months ended September 30, 2020.
International
The following table summarizes net sales, operating income (loss) from continuing operations, operating margin, certain items impacting comparability and equity in (earnings) loss of unconsolidated entity within the International segment:
| Three Months Ended September 30, | |||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||
| Amount | Amount | $ Change | % Change | ||||||||||||||||||||
| Net sales: | |||||||||||||||||||||||
| Products | $ | 76.7 | $ | 67.9 | $ | 8.8 | 13.0 | % | |||||||||||||||
| Services | 5.1 | 4.2 | 0.9 | 21.4 | % | ||||||||||||||||||
| Operating income (loss) from continuing operations (including restructuring, impairment and transaction-related charges) | 3.6 | (1.7) | 5.3 | nm | |||||||||||||||||||
| Operating margin | 4.4 | % | (2.4) | % | N/A | N/A | |||||||||||||||||
| Restructuring, impairment and transaction-related charges | $ | 0.1 | $ | 5.2 | $ | (5.1) | (98.1) | % | |||||||||||||||
| Equity in (earnings) loss of unconsolidated entity | (0.2) | 0.4 | (0.6) | (150.0) | % | ||||||||||||||||||
Net Sales
Product sales for the International segment increased $8.8 million, or 13.0%, for the three months ended September 30, 2021, compared to the three months ended September 30, 2020, primarily due to a $4.4 million increase in print volume, mainly in Mexico, Europe and Peru, and a $4.4 million increase in pass-through paper sales.
Service sales for the International segment increased $0.9 million, or 21.4%, for the three months ended September 30, 2021, compared to the three months ended September 30, 2020, primarily due to an increase in logistics sales and imaging services in Europe.
53
Operating Income (Loss) from Continuing Operations
Operating income from continuing operations for the International segment increased $5.3 million for the three months ended September 30, 2021, compared to the three months ended September 30, 2020, primarily due to a $5.1 million decrease in restructuring, impairment and transaction-related charges and a $0.8 million increase in operating income, mainly in Europe, partially offset by the receipt of a $0.6 million COVID-19 related government subsidy in Poland in 2020 that did not repeat in 2021.
Restructuring, Impairment and Transaction-Related Charges
Restructuring, impairment and transaction-related charges for the International segment decreased $5.1 million, or 98.1%, for the three months ended September 30, 2021, compared to the three months ended September 30, 2020, primarily due to the following:
| Three Months Ended September 30, | |||||||||||||||||||||||||||||
| 2021 | 2020 | $ Change | |||||||||||||||||||||||||||
| Employee termination charges | $ | 0.5 | $ | 1.8 | $ | (1.3) | |||||||||||||||||||||||
Other restructuring charges (income) (a) | (0.4) | 3.4 | (3.8) | ||||||||||||||||||||||||||
| Total restructuring, impairment and transaction-related charges | $ | 0.1 | $ | 5.2 | $ | (5.1) | |||||||||||||||||||||||
______________________________
(a)Includes $0.1 million of income and $3.0 million in charges from foreign currency impacts as a result of the economy in Argentina being classified as highly inflationary during the three months ended September 30, 2021 and 2020, respectively. The Company has considered the economy in Argentina to be highly inflationary since June 30, 2018.
Equity in (Earnings) Loss of Unconsolidated Entity
Investments in entities where Quad has the ability to exert significant influence, but not control, are accounted for using the equity method of accounting. The Company holds a 49% ownership interest in Plural, a commercial printer based in São Paulo, Brazil. The equity in (earnings) loss of unconsolidated entity in the International segment increased $0.6 million for the three months ended September 30, 2021, compared to the three months ended September 30, 2020, due to an increase in earnings at the Company’s investment in Plural.
Unrestricted Subsidiaries
As of September 30, 2021, the Company has no unrestricted subsidiaries as defined in the Senior Unsecured Notes indenture.
Corporate
The following table summarizes unallocated operating expenses presented as Corporate:
| Three Months Ended September 30, | |||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||
| Amount | Amount | $ Change | % Change | ||||||||||||||||||||
| Operating expenses (including restructuring, impairment and transaction-related charges) | $ | 11.7 | $ | 12.0 | $ | (0.3) | (2.5) | % | |||||||||||||||
| Restructuring, impairment and transaction-related charges | — | 0.8 | (0.8) | (100.0) | % | ||||||||||||||||||
Operating Expenses
Corporate operating expenses decreased $0.3 million, or 2.5%, for the three months ended September 30, 2021, compared to the three months ended September 30, 2020.
54
Restructuring, Impairment and Transaction-Related Charges
Corporate restructuring, impairment and transaction-related charges were $0.8 million for the three months ended September 30, 2020. There were no Corporate restructuring, impairment or transaction-related charges recognized during the three months ended September 30, 2021.
55
Results of Operations for the Nine Months Ended September 30, 2021, Compared to the Nine Months Ended September 30, 2020
Summary Results
The Company’s operating income from continuing operations, operating margin, net earnings (loss) attributable to Quad common shareholders (computed using a 25% normalized tax rate for all items subject to tax) and diluted earnings (loss) per share attributable to Quad common shareholders for the nine months ended September 30, 2021, changed from the nine months ended September 30, 2020, as follows (dollars in millions, except margin and per share data):
| Operating Income from Continuing Operations | Operating Margin | Net Earnings (Loss) Attributable to Quad Common Shareholders | Diluted Earnings (Loss) Per Share Attributable to Quad Common Shareholders | ||||||||||||||||||||
| For the nine months ended September 30, 2020 | $ | 8.5 | 0.4 | % | $ | (34.3) | $ | (0.68) | |||||||||||||||
Gains from sale and leaseback (1) | 24.5 | 1.2 | % | 18.4 | 0.35 | ||||||||||||||||||
Restructuring, impairment and transaction-related charges (2) | 52.4 | 2.5 | % | 39.3 | 0.78 | ||||||||||||||||||
Interest expense (3) | N/A | N/A | 5.3 | 0.13 | |||||||||||||||||||
Net pension income (4) | N/A | N/A | 2.2 | 0.04 | |||||||||||||||||||
2020 loss on debt extinguishment (5) | N/A | N/A | 1.4 | 0.02 | |||||||||||||||||||
Income taxes (6) | N/A | N/A | 3.5 | 0.07 | |||||||||||||||||||
Loss from discontinued operations, net of tax (7) | N/A | N/A | 13.6 | 0.27 | |||||||||||||||||||
Investments in unconsolidated entity and noncontrolling interests, net of tax (8) | N/A | N/A | 0.8 | 0.01 | |||||||||||||||||||
Operating income from continuing operations (9) | 11.6 | 0.5 | % | 8.7 | 0.13 | ||||||||||||||||||
| For the nine months ended September 30, 2021 | $ | 97.0 | 4.6 | % | $ | 58.9 | $ | 1.12 | |||||||||||||||
______________________________
(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 nine months ended September 30, 2021.
(2)Restructuring, impairment and transaction-related charges decreased $52.4 million ($39.3 million, net of tax), to $(3.4) million during the nine months ended September 30, 2021, and included the following:
a.A $16.9 million decrease in employee termination charges from $25.4 million during the nine months ended September 30, 2020, to $8.5 million during the nine months ended September 30, 2021;
b.A $2.2 million decrease in impairment charges from $4.2 million during the nine months ended September 30, 2020, to $2.0 million during the nine months ended September 30, 2021;
c.A $1.3 million decrease in transaction-related charges from $1.7 million during the nine months ended September 30, 2020, to $0.4 million during the nine months ended September 30, 2021;
d.A $1.3 million decrease in integration costs from $1.3 million during the nine months ended September 30, 2020, to zero for the nine months ended September 30, 2021; and
e.A $30.7 million decrease in various other restructuring charges from $16.4 million of expense during the nine months ended September 30, 2020, to $14.3 million of income during the nine months ended September 30, 2021.
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)Interest expense decreased $7.1 million ($5.3 million, net of tax) during the nine months ended September 30, 2021, to $45.1 million. This change was due to lower average debt levels and a lower weighted average interest rate on borrowings, partially offset by a $0.5 million increase in interest expense related to the interest rate swaps in the nine months ended September 30, 2021, as compared to the nine months ended September 30, 2020.
56
(4)Net pension income increased $3.0 million ($2.2 million, net of tax) during the nine months ended September 30, 2021, to $11.0 million. This was due to a $3.7 million decrease from interest cost on pension plan liabilities and a $0.1 million increase from the expected long-term return on pension plan assets, partially offset by a non-cash settlement charge of $0.8 million.
(5)A $1.8 million loss on debt extinguishment ($1.4 million, net of tax) was recognized during the nine months ended September 30, 2020, primarily relating to $2.4 million loss on debt extinguishment from the fourth amendment to the Company’s April 28, 2014 Senior Secured Credit Facility, completed on June 29, 2020, partially offset by a $0.6 million gain on debt extinguishment recorded during the first quarter of 2020, primarily related to the repurchase of the Company’s unsecured 7.0% senior notes due May 1, 2022.
(6)The $3.5 million increase in income tax benefit on continuing operations as calculated in the following table is primarily due to a $15.5 million increase from decreased valuation allowance reserve and a $1.7 million increase from equity award activity, partially offset by a $14.7 million income tax benefit related to the CARES Act net operating loss carry back provisions in 2020 that did not repeat in 2021.
| Nine Months Ended September 30, | |||||||||||||||||
| 2021 | 2020 | $ Change | |||||||||||||||
| Earnings (loss) from continuing operations before income taxes and equity in earnings of unconsolidated entity | $ | 62.9 | $ | (37.5) | $ | 100.4 | |||||||||||
| Normalized tax rate | 25.0 | % | 25.0 | % | |||||||||||||
| Income tax expense (benefit) at normalized tax rate | 15.7 | (9.4) | 25.1 | ||||||||||||||
| Income tax expense (benefit) from the condensed consolidated statements of operations | 4.1 | (17.5) | 21.6 | ||||||||||||||
| Impact of income taxes | $ | 11.6 | $ | 8.1 | $ | 3.5 | |||||||||||
(7)The loss from discontinued operations, net of tax, of $13.6 million was recognized during the nine months ended September 30, 2020. The Company completed the sale of the Book business in 2020.
(8)The increase in investments in unconsolidated entity and noncontrolling interests, net of tax, of $0.8 million during the nine months ended September 30, 2021, was due to a $1.0 million increase in earnings at the Company’s investment in Plural Industria Grafica Ltda., the Company’s Brazilian joint venture, partially offset by a $0.2 million decrease in the loss attributed to noncontrolling interests in the Company’s condensed consolidated statements of operations related to the Company’s majority ownership of Rise.
(9)Operating income from continuing operations, excluding the gains from sale and leaseback and restructuring, impairment and transaction-related charges, increased $11.6 million ($8.7 million, net of tax impact) during the nine months ended September 30, 2021, primarily due to the following: (1) a $19.6 million decrease in depreciation and amortization expense; (2) a $12.7 million increase in paper byproduct recoveries; (3) a $9.1 million net benefit in 2021 of gains from property insurance claims; and (4) savings from other cost reduction initiatives. These cost decreases were partially offset by the following: (1) $38.5 million in COVID-related temporary cost reductions from temporary salary reductions and furloughs in 2020; (2) net cost increases from labor, freight and materials inflationary cost impacts; and (3) a $12.0 million benefit in 2020 from a change in the hourly production employee vacation policy.
57
Operating Results from Continuing Operations
The following table sets forth certain information from the Company’s condensed consolidated statements of operations on an absolute dollar basis and as a relative percentage of total net sales for each noted period, together with the relative percentage change in such information between the periods set forth below:
| Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||||||||||||||
| Amount | % of Sales | Amount | % of Sales | $ Change | % Change | ||||||||||||||||||||||||||||||
| Net sales: | |||||||||||||||||||||||||||||||||||
| Products | $ | 1,578.2 | 74.9 | % | $ | 1,586.2 | 76.0 | % | $ | (8.0) | (0.5) | % | |||||||||||||||||||||||
| Services | 527.6 | 25.1 | % | 500.1 | 24.0 | % | 27.5 | 5.5 | % | ||||||||||||||||||||||||||
| Total net sales | 2,105.8 | 100.0 | % | 2,086.3 | 100.0 | % | 19.5 | 0.9 | % | ||||||||||||||||||||||||||
| Cost of sales: | |||||||||||||||||||||||||||||||||||
| Products | 1,295.3 | 61.5 | % | 1,296.7 | 62.2 | % | (1.4) | (0.1) | % | ||||||||||||||||||||||||||
| Services | 392.8 | 18.7 | % | 355.2 | 17.0 | % | 37.6 | 10.6 | % | ||||||||||||||||||||||||||
| Total cost of sales | 1,688.1 | 80.2 | % | 1,651.9 | 79.2 | % | 36.2 | 2.2 | % | ||||||||||||||||||||||||||
| Selling, general & administrative expenses | 229.3 | 10.9 | % | 238.0 | 11.4 | % | (8.7) | (3.7) | % | ||||||||||||||||||||||||||
| Gains from sale and leaseback | (24.5) | (1.2) | % | — | — | % | (24.5) | (100.0) | % | ||||||||||||||||||||||||||
| Depreciation and amortization | 119.3 | 5.7 | % | 138.9 | 6.7 | % | (19.6) | (14.1) | % | ||||||||||||||||||||||||||
| Restructuring, impairment and transaction-related charges | (3.4) | (0.2) | % | 49.0 | 2.3 | % | (52.4) | (106.9) | % | ||||||||||||||||||||||||||
| Total operating expenses | 2,008.8 | 95.4 | % | 2,077.8 | 99.6 | % | (69.0) | (3.3) | % | ||||||||||||||||||||||||||
| Operating income from continuing operations | $ | 97.0 | 4.6 | % | $ | 8.5 | 0.4 | % | $ | 88.5 | N/A | ||||||||||||||||||||||||
Net Sales
Product sales decreased $8.0 million, or 0.5%, for the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020, primarily due to a $19.4 million decrease from pass-through paper sales and a $7.5 million decrease in sales due to the divestiture of the Company’s Omaha packaging plant. These decreases were partially offset by a $16.2 million increase in sales in the Company’s print product lines, primarily due to increased print volume, compared to the COVID-19 pandemic impacted second and third quarters of 2020 and $2.7 million in favorable foreign exchange impacts.
Service sales, which primarily consist of logistics, distribution, marketing services, imaging and medical services, increased $27.5 million, or 5.5%, for the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020, primarily due to a $34.1 million increase in logistics sales and a $17.7 million increase in print imaging services and sales of marketing services, partially offset by a $23.7 million decrease in sales due to the divestiture of the Company’s third-party logistics business.
Cost of Sales
Cost of product sales decreased $1.4 million, or 0.1%, for the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020, primarily due to the following: (1) a decrease in pass-through paper costs; (2) a $12.7 million increase in paper byproduct recoveries; (3) the impact from the divestiture of the Omaha packaging plant; and (4) other cost reduction initiatives. These decreases were partially offset by (1) a $12.0 million benefit in 2020 from a change in the hourly production employee vacation policy; (2) higher print volume compared to the COVID-19 pandemic impacted second and third quarters of 2020; (3) the impacts from rising costs of labor, materials and other costs of production; and (4) a $3.1 million net benefit in 2020 in the cost of worker’s compensation claims from improved production safety procedures.
Cost of service sales increased $37.6 million, or 10.6%, for the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020, primarily due to increased freight costs, partially offset by the impact from the divestiture of the Company’s third-party logistics business.
58
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased $8.7 million, or 3.7%, for the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020, primarily due to a $9.1 million net benefit in 2021 of gains from property insurance claims, a $4.1 million decrease in credit loss expense mainly due to specific client credit reviews, and a $3.1 million decrease from foreign translations impacts, partially offset by a $3.7 million increase in employee-related costs. Selling, general and administrative expenses as a percentage of net sales decreased to 10.9% for the nine months ended September 30, 2021, compared to 11.4% for the three months ended September 30, 2020.
Gains from sale and leaseback
The Company executed sale and leaseback transactions of its Chalfont, Pennsylvania and West Allis, WI facilities resulting in $24.5 million ($18.4 million, net of tax) in gains during the nine months ended September 30, 2021.
Depreciation and Amortization
Depreciation and amortization decreased $19.6 million, or 14.1%, for the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020, due to a $14.3 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 $5.3 million decrease in amortization expense.
Restructuring, Impairment and Transaction-Related Charges
Restructuring, impairment and transaction-related charges decreased $52.4 million, for the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020, primarily due to the following:
| Nine Months Ended September 30, | |||||||||||||||||||||||||||||
| 2021 | 2020 | $ Change | |||||||||||||||||||||||||||
| Employee termination charges | $ | 8.5 | $ | 25.4 | $ | (16.9) | |||||||||||||||||||||||
Impairment charges (a) | 2.0 | 4.2 | (2.2) | ||||||||||||||||||||||||||
| Transaction-related charges | 0.4 | 1.7 | (1.3) | ||||||||||||||||||||||||||
| Integration costs | — | 1.3 | (1.3) | ||||||||||||||||||||||||||
| Other restructuring charges (income) | |||||||||||||||||||||||||||||
| Vacant facility carrying costs and lease exit charges | 15.1 | 7.6 | 7.5 | ||||||||||||||||||||||||||
| Equipment and infrastructure removal costs | 1.5 | 1.1 | 0.4 | ||||||||||||||||||||||||||
Gains on the sale of facilities (b) | (10.1) | (1.6) | (8.5) | ||||||||||||||||||||||||||
Other restructuring activities (c) | (20.8) | 9.3 | (30.1) | ||||||||||||||||||||||||||
| Other restructuring charges (income) | (14.3) | 16.4 | (30.7) | ||||||||||||||||||||||||||
| Total restructuring, impairment and transaction-related charges | $ | (3.4) | $ | 49.0 | $ | (52.4) | |||||||||||||||||||||||
______________________________
(a)Includes $2.0 million and $4.2 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 restructuring activities, during the nine months ended September 30, 2021 and 2020, respectively.
(b)Includes $9.7 million of gains on the sale of the Riverside, California and other facilities during the nine months ended September 30, 2021; and includes a $0.8 million gain on the sale of the Shakopee, Minnesota facility during the nine months ended September 30, 2020.
(c)Includes a $20.9 million gain on the sale of a business and $2.9 million loss on the sale of a business during the nine months ended September 30, 2021 and 2020, respectively.
59
EBITDA and EBITDA Margin—Consolidated
EBITDA and EBITDA margin for the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020, were as follows:
| Nine Months Ended September 30, | |||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||
| Amount | % of Net Sales | Amount | % of Net Sales | ||||||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||
| EBITDA and EBITDA margin (non-GAAP) | $ | 227.4 | 10.8 | % | $ | 139.3 | 6.7 | % | |||||||||||||||
EBITDA increased $88.1 million for the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020, primarily due to the following: (1) $52.4 million of decreased restructuring, impairment and transaction-related charges; (2) $24.5 million in gains from sale and leaseback transactions; (3) a $13.6 million decrease in loss from discontinued operations, net of tax; (4) a $12.7 million increase in paper byproduct recoveries; (5) a $9.1 million net benefit in 2021 of gains from property insurance claims; and (6) savings from other cost reduction initiatives. These increases were partially offset by the following: (1) $38.5 million in COVID-related temporary cost reductions primarily from temporary salary reduction and furloughs in 2020; (2) net cost increases from labor, freight and materials inflationary cost impacts; and (3) a $12.0 million net benefit in 2020 from a change in the hourly production employee vacation policy.
EBITDA is defined as net earnings (loss) attributable to Quad common shareholders, excluding (1) interest expense, (2) income tax expense (benefit) 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 (loss) 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.
A reconciliation of EBITDA to net earnings (loss) attributable to Quad common shareholders for the nine months ended September 30, 2021 and 2020, was as follows:
| Nine Months Ended September 30, | |||||||||||
| 2021 | 2020 | ||||||||||
| (dollars in millions) | |||||||||||
Net earnings (loss) attributable to Quad common shareholders (1) | $ | 58.9 | $ | (34.3) | |||||||
| Interest expense | 45.1 | 52.2 | |||||||||
| Income tax expense (benefit) | 4.1 | (17.5) | |||||||||
| Depreciation and amortization | 119.3 | 138.9 | |||||||||
| EBITDA (non-GAAP) | $ | 227.4 | $ | 139.3 | |||||||
______________________________
(1)Net earnings (loss) attributable to Quad common shareholders included the following:
a.Restructuring, impairment and transaction-related income of $3.4 million and charges of $49.0 million for the nine months ended September 30, 2021 and 2020, respectively;
b.Gains from sale and leaseback of $24.5 million for the nine months ended September 30, 2021;
c.Net pension income of $11.0 million and $8.0 million for the nine months ended September 30, 2021 and 2020, respectively;
d.Loss on debt extinguishment of $1.8 million for the nine months ended September 30, 2020;
e.Equity in earnings of unconsolidated entity of $0.1 million and equity in loss of unconsolidated entity of $0.9 million for the nine months ended September 30, 2021 and 2020, respectively; and
f.Loss from discontinued operations, net of tax, of $13.6 million for the nine months ended September 30, 2020.
60
United States Print and Related Services
The following table summarizes net sales, operating income from continuing operations, operating margin and certain items impacting comparability within the United States Print and Related Services segment:
| Nine Months Ended September 30, | |||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||
| Amount | Amount | $ Change | % Change | ||||||||||||||||||||
| Net sales: | |||||||||||||||||||||||
| Products | $ | 1,357.1 | $ | 1,382.2 | $ | (25.1) | (1.8) | % | |||||||||||||||
| Services | 512.7 | 488.1 | 24.6 | 5.0 | % | ||||||||||||||||||
| Operating income from continuing operations (including restructuring, impairment and transaction-related charges) | 124.4 | 44.6 | 79.8 | 178.9 | % | ||||||||||||||||||
| Operating margin | 6.7 | % | 2.4 | % | N/A | N/A | |||||||||||||||||
| Restructuring, impairment and transaction-related charges | $ | (6.1) | $ | 38.0 | $ | (44.1) | (116.1) | % | |||||||||||||||
Net Sales
Product sales for the United States Print and Related Services segment decreased $25.1 million, or 1.8%, for the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020, primarily due to a $28.0 million decrease from pass-through paper sales and a $7.5 million decrease in sales due to the divestiture of the Company’s Omaha packaging plant, partially offset by a $10.4 million increase in sales in the Company’s print product lines, primarily due to increased print volume, compared to the COVID-19 pandemic impacted second and third quarters of 2020.
Service sales for the United States Print and Related Services segment increased $24.6 million, or 5.0%, for the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020, primarily due to a $31.7 million increase in logistics sales and a $17.2 million increase in print imaging services and sales of marketing services, partially offset by a $23.7 million decrease in sales due to the divestiture of the Company’s third-party logistics business.
Operating Income from Continuing Operations
Operating income from continuing operations for the United States Print and Related Services segment increased $79.8 million, or 178.9%, for the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020, primarily due to the following: (1) a $44.1 million decrease in restructuring, impairment and transaction-related charges; (2) $24.5 million in gains from sale and leaseback transactions; (3) an $18.3 million decrease in depreciation and amortization expense; (4) a $12.7 million increase in paper byproduct recoveries; (5) a $9.1 million net benefit in 2021 of gains from property insurance claims; (6) an increase in print volumes net sales; and (7) savings from other cost reduction initiatives. These increases were partially offset by the following: (1) $38.5 million in COVID-related temporary cost reductions primarily from temporary salary reduction and furloughs in 2020; (2) net inflationary cost increases in labor, freight and material costs; (3) a $12.0 million net benefit in 2020 from a change in the hourly production employee vacation policy; and (4) a $3.1 million net benefit in 2020 in the cost of worker’s compensation claims from improved production safety procedures.
Operating margin for the United States Print and Related Services segment increased to 6.7% for the nine months ended September 30, 2021, compared to 2.4% for the nine months ended September 30, 2020, primarily due to the reasons provided above.
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Restructuring, Impairment and Transaction-Related Charges
Restructuring, impairment and transaction-related charges for the United States Print and Related Services segment decreased $44.1 million for the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020, primarily due to the following:
| Nine Months Ended September 30, | |||||||||||||||||||||||||||||
| 2021 | 2020 | $ Change | |||||||||||||||||||||||||||
| Employee termination charges | $ | 7.1 | $ | 21.9 | $ | (14.8) | |||||||||||||||||||||||
Impairment charges (a) | 2.0 | 4.2 | (2.2) | ||||||||||||||||||||||||||
| Transaction-related charges | — | 0.2 | (0.2) | ||||||||||||||||||||||||||
| Integration costs | — | 1.3 | (1.3) | ||||||||||||||||||||||||||
Other restructuring charges (income) (b) | (15.2) | 10.4 | (25.6) | ||||||||||||||||||||||||||
| Total restructuring, impairment and transaction-related charges | $ | (6.1) | $ | 38.0 | $ | (44.1) | |||||||||||||||||||||||
______________________________
(a)Includes $2.0 million and $4.2 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 restructuring activities, during the nine months ended September 30, 2021 and 2020, respectively.
(b)Includes a $20.9 million gain on the sale of a business and $9.7 million of gains on the sale of Riverside, California and other facilities during the nine months ended September 30, 2021; and includes a $2.9 million loss on the sale of a business, net of a $0.8 million gain on the sale of the Shakopee, Minnesota facility during the nine months ended September 30, 2020.
International
The following table summarizes net sales, operating income (loss) from continuing operations, operating margin, certain items impacting comparability and equity in (earnings) loss of unconsolidated entity within the International segment:
| Nine Months Ended September 30, | |||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||
| Amount | Amount | $ Change | % Change | ||||||||||||||||||||
| Net sales: | |||||||||||||||||||||||
| Products | $ | 221.1 | $ | 204.0 | $ | 17.1 | 8.4 | % | |||||||||||||||
| Services | 14.9 | 12.0 | 2.9 | 24.2 | % | ||||||||||||||||||
| Operating income from continuing operations (including restructuring, impairment and transaction-related charges) | 8.1 | (2.1) | 10.2 | nm | |||||||||||||||||||
| Operating margin | 3.4 | % | (1.0) | % | N/A | N/A | |||||||||||||||||
| Restructuring, impairment and transaction-related charges | $ | 1.8 | $ | 9.3 | $ | (7.5) | (80.6) | % | |||||||||||||||
| Equity in (earnings) loss of unconsolidated entity | (0.1) | 0.9 | 1.0 | 111.1 | % | ||||||||||||||||||
Net Sales
Product sales for the International segment increased $17.1 million, or 8.4%, for the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020, due to the following; (1) a $8.6 million increase in pass-through paper sales; (2) a $5.8 million increase in print volume, primarily in Mexico and Europe; and (3) $2.7 million in favorable foreign exchange impacts, primarily in Europe and Mexico.
Service sales for the International segment increased $2.9 million, or 24.2%, for the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020, primarily due to an increase in logistics sales and imaging services in Europe.
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Operating Income from Continuing Operations
Operating income from continuing operations for the International segment increased $10.2 million, for the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020, primarily due to a $7.5 million decrease in restructuring, impairment and transaction-related charges and a $4.9 million increase in operating income from cost saving initiatives and increased print volume, partially offset by the receipt of a $2.2 million COVID-19 related government subsidy in Poland in 2020 that did not repeat in 2021.
Restructuring, Impairment and Transaction-Related Charges
Restructuring, impairment and transaction-related charges for the International segment decreased $7.5 million, or 80.6%, for the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020, primarily due to the following:
| Nine Months Ended September 30, | |||||||||||||||||||||||||||||
| 2021 | 2020 | $ Change | |||||||||||||||||||||||||||
| Employee termination charges | $ | 0.9 | $ | 3.3 | $ | (2.4) | |||||||||||||||||||||||
Other restructuring charges (a) | 0.9 | 6.0 | (5.1) | ||||||||||||||||||||||||||
| Total restructuring, impairment and transaction-related charges | $ | 1.8 | $ | 9.3 | $ | (7.5) | |||||||||||||||||||||||
______________________________
(a)Includes $0.8 million and $4.3 million in charges from foreign currency losses as a result of the economy in Argentina being classified as highly inflationary during the nine months ended September 30, 2021 and 2020, respectively. The Company has considered the economy in Argentina to be highly inflationary since June 30, 2018.
Equity in (Earnings) Loss of Unconsolidated Entity
Investments in entities where Quad has the ability to exert significant influence, but not control, are accounted for using the equity method of accounting. The Company holds a 49% ownership interest in Plural Industria Gráfica Ltda., a commercial printer based in São Paulo, Brazil. The equity in earnings of unconsolidated entity in the International segment was $0.1 million for the nine months ended September 30, 2021, compared to equity in loss of unconsolidated entity $0.9 million for the nine months ended September 30, 2020.
Unrestricted Subsidiaries
As of September 30, 2021, the Company has no unrestricted subsidiaries as defined in the Senior Unsecured Notes indenture.
Corporate
The following table summarizes unallocated operating expenses presented as Corporate:
| Nine Months Ended September 30, | |||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||
| Amount | Amount | $ Change | % Change | ||||||||||||||||||||
| Operating expenses (including restructuring, impairment and transaction-related charges) | $ | 35.5 | $ | 34.0 | $ | 1.5 | 4.4 | % | |||||||||||||||
| Restructuring, impairment and transaction-related charges | 0.9 | 1.7 | (0.8) | (47.1) | % | ||||||||||||||||||
Operating Expenses
Corporate operating expenses increased $1.5 million, or 4.4%, for the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020, primarily due to a $1.2 million increase in employee-related costs and a $0.7 million increase in professional fees.
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Restructuring, Impairment and Transaction-Related Charges
Corporate restructuring, impairment and transaction-related charges were $0.9 million and $1.7 million for the nine months ended September 30, 2021 and 2020, respectively.
| Nine Months Ended September 30, | |||||||||||||||||||||||||||||
| 2021 | 2020 | $ Change | |||||||||||||||||||||||||||
| Employee termination charges | $ | 0.5 | $ | 0.2 | $ | 0.3 | |||||||||||||||||||||||
| Transaction-related charges | 0.4 | 1.5 | (1.1) | ||||||||||||||||||||||||||
| Other restructuring charges | — | — | — | ||||||||||||||||||||||||||
| Total restructuring, impairment and transaction-related charges | $ | 0.9 | $ | 1.7 | $ | (0.8) | |||||||||||||||||||||||
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 $490.6 million as of September 30, 2021, which consisted of up to $463.2 million of unused capacity under its revolving credit arrangement, net of $36.8 million of issued letters of credit, and cash and cash equivalents of $27.4 million. Total liquidity is reduced to $300.6 million under the Company’s most restrictive debt covenants, and consists of $273.2 million available under its revolving credit arrangement and $27.4 million in cash and cash equivalents. There were no borrowings under the $500.0 million revolving credit facility as of September 30, 2021.
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.
Net Cash Provided by Operating Activities
Nine Months Ended September 30, 2021, Compared to Nine Months Ended September 30, 2020
Net cash provided by operating activities decreased $85.3 million, from $107.4 million for the nine months ended September 30, 2020, to $22.1 million for the nine months ended September 30, 2021. This decrease was due to a $56.9 million decrease in cash flows provided by changes in operating assets and liabilities, primarily due to the strategic decision to carry higher inventory levels to serve clients during our peak busy season, and a $28.4 million decrease in cash from earnings.
Net Cash Provided by Investing Activities
Nine Months Ended September 30, 2021, Compared to Nine Months Ended September 30, 2020
Net cash provided by investing activities increased $60.4 million, from $7.0 million for the nine months ended September 30, 2020, to $67.4 million for the nine months ended September 30, 2021. The increase was primarily due to the following: (1) a $61.1 million increase in proceeds from the sale of property, plant, and equipment; (2) a $9.1 million decrease in purchases of property, plant and equipment; and (3) a $2.0 million decrease in cash used in the acquisition of businesses. These increases were partially offset by: (1) a $8.1 million decrease in proceeds from the sale of businesses; (2) a $2.5 million increase in cash used in other investing activities; (3) a $0.8 million decrease in proceeds from property insurance claims; and (4) a $0.4 million increase in cost investment in unconsolidated entities.
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Net Cash Used in Financing Activities
Nine Months Ended September 30, 2021, Compared to Nine Months Ended September 30, 2020
Net cash used in financing activities increased $17.2 million, from $99.9 million for the nine months ended September 30, 2020, to $117.1 million for the nine months ended September 30, 2021. The increase was primarily due to (1) a $24.2 million increase in net payments of debt and lease obligations in 2021 as compared to 2020; (2) an $8.2 million increase in cash used in other financing activities; and (3) a $0.1 million increase in equity awards redeemed to pay employees’ tax obligations. These increases were partially offset by (1) an $8.1 million decrease in payments of cash dividends; (2) a $4.5 million decrease in changes in ownership of noncontrolling interests; and (3) a $2.7 million decrease in payments of debt issuance costs and financing fees.
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 nine months ended September 30, 2021, compared to the nine months ended September 30, 2020, was as follows:
| Nine Months Ended September 30, | |||||||||||
| 2021 | 2020 | ||||||||||
| (dollars in millions) | |||||||||||
| Net cash provided by operating activities | $ | 22.1 | $ | 107.4 | |||||||
| Less: purchases of property, plant and equipment | (41.6) | (50.7) | |||||||||
| Free Cash Flow (Non-GAAP) | $ | (19.5) | $ | 56.7 | |||||||
Free Cash Flow decreased $76.2 million for the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020, primarily due to a $85.3 million decrease in net cash provided by operating activities, partially offset by a $9.1 million decrease 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 Provided by Investing Activities” section above for further explanations of the changes in purchases of property, plant and equipment. The above calculation of Free Cash Flow includes the cash flows related to the Book business for the nine months ended September 30, 2020.
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 (loss) attributable to Quad common shareholders to EBITDA in the “Results of Operations” section above); (2) restructuring, impairment and transaction-related charges; (3) earnings (loss) from discontinued operations, net of tax; (4) net pension income; (5) gain from sale and leaseback; (6) (gain) loss on debt extinguishment; (7) equity in (earnings) loss of unconsolidated entity; (8) Adjusted EBITDA for unconsolidated equity method investments (calculated in a consistent manner with the calculation for Quad); and (9) net earnings (loss) attributable to noncontrolling interests.
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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 the Senior Secured Leverage Ratio included in the Company’s debt covenant calculations (see Note 11, “Debt,” to the condensed consolidated financial statements in Item 1, “Condensed Consolidated Financial Statements (Unaudited),” of this Quarterly Report on Form 10-Q 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, excludes non-cash stock-based compensation expense from EBITDA and includes net earnings (loss) attributable to noncontrolling interests in 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 Senior Unsecured Notes and surety bonds from debt and netting domestic unrestricted cash with debt.
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The Debt Leverage Ratio at September 30, 2021, and December 31, 2020, was as follows:
| September 30, 2021 | December 31, 2020 | ||||||||||
| (dollars in millions) | |||||||||||
| Total debt and finance lease obligations on the condensed consolidated balance sheets | $ | 826.1 | $ | 928.2 | |||||||
| Less: Cash and cash equivalents | 27.4 | 55.2 | |||||||||
| Net Debt (non-GAAP) | $ | 798.7 | $ | 873.0 | |||||||
| Divided by: Adjusted EBITDA (Non-GAAP) | $ | 254.0 | $ | 260.4 | |||||||
| Debt Leverage Ratio—Debt (Non-GAAP) | 3.14 | x | 3.35 | x | |||||||
The calculation of Adjusted EBITDA for the trailing twelve months ended September 30, 2021, and December 31, 2020, was as follows:
| Add | Subtract | Trailing Twelve Months Ended | |||||||||||||||||||||
| Year Ended | Nine Months Ended | ||||||||||||||||||||||
December 31, 2020 (1) | September 30, 2021 | September 30, 2020 | September 30, 2021 | ||||||||||||||||||||
| Net earnings (loss) attributable to Quad common shareholders | $ | (128.3) | $ | 58.9 | $ | (34.3) | $ | (35.1) | |||||||||||||||
| Interest expense | 68.8 | 45.1 | 52.2 | 61.7 | |||||||||||||||||||
| Income tax expense (benefit) | 0.3 | 4.1 | (17.5) | 21.9 | |||||||||||||||||||
| Depreciation and amortization | 181.6 | 119.3 | 138.9 | 162.0 | |||||||||||||||||||
| EBITDA (Non-GAAP) | $ | 122.4 | $ | 227.4 | $ | 139.3 | $ | 210.5 | |||||||||||||||
| Restructuring, impairment and transaction-related charges | 124.1 | (3.4) | 49.0 | 71.7 | |||||||||||||||||||
| Loss from discontinued operations, net of tax | 21.9 | — | 13.6 | 8.3 | |||||||||||||||||||
| Net pension income | (10.5) | (11.0) | (8.0) | (13.5) | |||||||||||||||||||
| Gains from sale and leaseback | — | (24.5) | — | (24.5) | |||||||||||||||||||
| Loss on debt extinguishment | 1.8 | — | 1.8 | — | |||||||||||||||||||
Other (2) | 0.7 | 1.1 | 0.3 | 1.5 | |||||||||||||||||||
| Adjusted EBITDA (Non-GAAP) | $ | 260.4 | $ | 189.6 | $ | 196.0 | $ | 254.0 | |||||||||||||||
______________________________
(1)Financial information for the year ended December 31, 2020, is included as reported in the Company’s 2020 Annual Report on Form 10-K filed with the SEC on February 24, 2021.
(2)Other is comprised of equity in (earnings) loss of unconsolidated entity, Adjusted EBITDA for unconsolidated equity method investments and net earnings (loss) attributable to noncontrolling interests.
The Debt Leverage Ratio at September 30, 2021, decreased 0.21x, compared to December 31, 2020, primarily due to a $74.3 million decrease in Net Debt, partially offset by a $6.4 million reduction in trailing twelve months Adjusted EBITDA. The Debt Leverage Ratio at September 30, 2021, is above management’s desired target Debt Leverage Ratio range of 2.0x to 2.5x; however, the Company expects to operate above the Debt Leverage Ratio target range due to the impacts from the COVID-19 pandemic. The Company will also 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.
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Debt Obligations
As of September 30, 2021, the Company utilized a combination of debt instruments to fund cash requirements, including the following:
•Senior Secured Credit Facility:
◦Revolving credit facility (none outstanding as of September 30, 2021); and
◦Term Loan A ($559.6 million outstanding as of September 30, 2021);
•Senior Unsecured Notes ($238.7 million outstanding as of September 30, 2021); and
•Master Note and Security Agreement ($8.7 million outstanding as of September 30, 2021).
Covenants and Compliance
The Company’s various lending arrangements include certain financial covenants (all financial terms, numbers and ratios are as defined in the Company’s debt agreements, as amended to date). Among these covenants, the Company was required to maintain the following as of September 30, 2021:
•Maximum Total Net Leverage Ratio. On a rolling twelve-month basis, the Maximum Total Net Leverage Ratio, defined as consolidated total indebtedness, net of no more than $75.0 million of unrestricted cash, to consolidated EBITDA, shall not exceed (i) 4.50 to 1.00 for the quarter ended March 31, 2021, (ii) 4.25 to 1.00 for the quarter ended June 30, 2021, and (iii) 4.125 to 1.00 for the quarter ended September 30, 2021 (for the twelve months ended September 30, 2021, the Company’s Maximum Total Net Leverage Ratio was 3.09 to 1.00). After the Covenant Relief Period, the Company will be required to comply with the Total Leverage Ratio covenant, defined as consolidated total indebtedness to consolidated EBITDA which shall not exceed 3.75 to 1.00.
•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 twelve-month basis, the Senior Secured Leverage Ratio, defined as consolidated senior secured net indebtedness to consolidated EBITDA, shall not exceed 3.50 to 1.00 (for the twelve months ended September 30, 2021, the Company’s Senior Secured Leverage Ratio was 2.18 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 September 30, 2021, the Company’s Interest Coverage Ratio was 5.31 to 1.00).
The indenture underlying the Senior Unsecured Notes contains various covenants, including, but not limited to, covenants that, subject to certain exceptions, limit the Company’s and its restricted subsidiaries’ ability to incur and/or guarantee additional debt; pay dividends, repurchase stock or make certain other restricted payments; enter into agreements limiting dividends and certain other restricted payments; prepay, redeem or repurchase subordinated debt; grant liens on assets; enter into sale and leaseback transactions; merge, consolidate, transfer or dispose of substantially all of the Company’s consolidated assets; sell, transfer or otherwise dispose of property and assets; and engage in transactions with affiliates.
The Company was in compliance with all financial covenants in its debt agreements as of September 30, 2021. 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.
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In addition to those covenants, the Senior Secured Credit Facility also includes certain limitations on acquisitions, indebtedness, liens, dividends and repurchases of capital stock. The following limitations utilize a Total Net Leverage Ratio calculation, which, on a rolling twelve-month basis, is defined as consolidated net indebtedness to consolidated EBITDA (for the twelve months ended September 30, 2021, the Company’s Total Net Leverage Ratio was 3.10 to 1.00).
•If the Company’s Total Net Leverage Ratio is greater than 2.75 to 1.00, the Company is prohibited from making greater than $60.0 million of annual dividend payments, capital stock repurchases and certain other payments. If the Total Net Leverage Ratio is less than 2.75 to 1.00, there are no such restrictions, provided, however, that no such restricted payments shall be made during the Covenant Relief Period. As the Company’s Total Net Leverage Ratio as of September 30, 2021, was 3.10 to 1.00, and we were in the Covenant Relief Period, the limitations described above are currently applicable.
•If the Company’s Senior Secured Leverage Ratio is greater than 3.00 to 1.00 or the Company’s Total Net Leverage Ratio is greater than 3.50 to 1.00, the Company is prohibited from voluntarily prepaying any of the Senior Unsecured Notes and from voluntarily prepaying any other unsecured or subordinated indebtedness, with certain exceptions (including any mandatory prepayments on the Senior Unsecured Notes or any other unsecured or subordinated debt). If the Senior Secured Leverage Ratio is less than 3.00 to 1.00 and the Total Net Leverage Ratio is less than 3.50 to 1.00, there are no such restrictions. The limitations described above are currently not applicable, as the Company’s Senior Secured Leverage Ratio was 2.18 to 1.00 and Total Net Leverage Ratio was 3.10 to 1.00, as of September 30, 2021.
Risk Management
For a discussion of the Company’s exposure to market risks and management of those market risks, see Item 3, “Quantitative and Qualitative Disclosures About Market Risk,” of this Quarterly Report on Form 10-Q.
Contractual Obligations and Off-Balance Sheet Arrangements
As of September 30, 2021, the Company’s contractual obligations and off-balance sheet arrangements have not changed materially from that listed in the “Contractual Obligations and Other Commitments” table and related notes to the table listed in the Company’s Annual Report on Form 10-K filed on February 24, 2021.
New Accounting Pronouncements
See Note 21, “New Accounting Pronouncements,” to the condensed consolidated financial statements in Item 1, “Condensed Consolidated Financial Statements (Unaudited),” of this Quarterly Report on Form 10-Q.
Summarized Financial Information of Subsidiary Guarantors Indebtedness
On April 28, 2014, Quad completed an offering of the Senior Unsecured Notes (see Note 11, “Debt,” for further details on the Senior Unsecured Notes). Each of the Company’s existing and future domestic subsidiaries that is a borrower or guarantees indebtedness under the Company’s Senior Secured Credit Facility or that guarantees certain of the Company’s other indebtedness or indebtedness of the Company’s restricted subsidiaries (other than intercompany indebtedness) fully and unconditionally guarantee or, in the case of future subsidiaries, will guarantee, on a joint and several basis, the Senior Unsecured Notes (the “Guarantor Subsidiaries”). All of the current Guarantor Subsidiaries are 100% owned by the Company. Guarantor Subsidiaries will be automatically released from these guarantees upon the occurrence of certain events, including the following:
•the designation of any of the Guarantor Subsidiaries as an unrestricted subsidiary;
•the release or discharge of any guarantee or indebtedness that resulted in the creation of the guarantee of the Senior Unsecured Notes by any of the Guarantor Subsidiaries; or
•the sale or disposition, including the sale of substantially all the assets, of any of the Guarantor Subsidiaries.
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The following tables present summarized financial information for Quad and the Guarantor Subsidiaries on a combined basis after intercompany transactions have been eliminated, including adjustments to remove the equity in earnings from the Non-Guarantor Subsidiaries.
| Nine Months Ended | Year Ended | ||||||||||
| Statement of Operations Financial Information | September 30, 2021 | December 31, 2020 | |||||||||
| Net sales | $ | 1,900.6 | $ | 2,660.6 | |||||||
| Cost of sales | 1,521.9 | 2,114.4 | |||||||||
| Gross Profit | 378.7 | 546.2 | |||||||||
| Net earnings (loss) from continuing operations | 49.7 | (106.5) | |||||||||
| Loss from discontinued operations, net of tax | — | (21.9) | |||||||||
| Net earnings (loss) | 49.7 | (128.4) | |||||||||
| Less: net loss attributable to noncontrolling interests | — | (0.2) | |||||||||
| Net earnings (loss) attributable to Quad common shareholders | $ | 49.7 | $ | (128.2) | |||||||
| Balance Sheet Financial Information | September 30, 2021 | December 31, 2020 | |||||||||
| Total current assets | $ | 641.2 | $ | 580.0 | |||||||
| Total long-term assets | 1,410.3 | 1,555.5 | |||||||||
| Total current liabilities | 785.9 | 598.1 | |||||||||
| Total long-term liabilities | 811.8 | 1,143.3 | |||||||||
| Noncontrolling interests | — | 0.7 | |||||||||
Included in long-term assets in the table above are $0.9 million and $11.6 million of current intercompany loan receivables due to Quad from the Non-Guarantor Subsidiaries as of September 30, 2021, and December 31, 2020, respectively. Also included in long-term assets are $435.1 million and $428.8 million of intercompany investments by Quad and the Guarantor Subsidiaries in the Non-Guarantor Subsidiaries. Included in current liabilities are $4.6 million and $2.9 million of current intercompany payables due to the Non-Guarantor Subsidiaries from Quad and the Guarantor Subsidiaries as of September 30, 2021, and December 31, 2020, respectively.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to a variety of market risks which may adversely impact the Company’s results of operations and financial condition, including changes in interest and foreign currency exchange rates, changes in the economic environment that would impact credit positions and changes in the prices of certain commodities. The Company’s management takes an active role in the risk management process and has developed policies and procedures that require specific administrative and business functions to assist in the identification, assessment and control of various risks. These risk management strategies may not fully insulate the Company from adverse impacts due to market risks.
Interest Rate Risk
The Company is exposed to interest rate risk on variable rate debt obligations and price risk on fixed rate debt and finance leases. The variable rate debt outstanding at September 30, 2021, was primarily comprised of $559.6 million outstanding on the Term Loan A. In order to reduce the variability of cash flows from interest payments related to a portion of Quad’s variable-rate debt, the Company entered into a $250.0 million interest rate swap in February 2017 and a $130.0 million interest rate swap in March 2019, and has classified $380.0 million of the Company’s variable rate debt as fixed rate debt. Including the impact of the $380.0 million interest rate swap of variable rate to fixed rate debt, Quad had variable rate debt outstanding of $188.1 million at a current weighted average interest rate of 3.2% and fixed rate debt and finance leases outstanding of $638.0 million at a current weighted average interest rate of 5.5% as of September 30, 2021. A hypothetical 10% increase in the market interest rates impacting the Company’s current weighted average interest rate on variable rate debt obligations would not have a material impact on the Company’s interest expense. A hypothetical 10% change in market interest rates would change the fair value of fixed rate debt at September 30, 2021, by approximately $1 million.
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Foreign Currency Risk and Translation Exposure
The Company is exposed to the impact of foreign currency fluctuations in certain countries in which it operates. The exposure to foreign currency movements is limited in most countries because the operating revenues and expenses of its various subsidiaries and business units are substantially in the local currency of the country in which they operate. To the extent revenues and expenses are not in the applicable local currency, the Company may enter into foreign exchange forward contracts to hedge the currency risk.
Although operating in local currencies may limit the impact of currency rate fluctuations on the results of operations of the Company’s non-United States subsidiaries and business units, rate fluctuations may impact the consolidated financial position as the assets and liabilities of its foreign operations are translated into United States dollars in preparing the Company’s condensed consolidated balance sheets. As of September 30, 2021, the Company’s foreign subsidiaries (excluding Argentina due to the economy’s status as highly inflationary) had net current assets (defined as current assets less current liabilities) subject to foreign currency translation risk of $43.5 million. The potential decrease in net current assets as of September 30, 2021, from a hypothetical 10% adverse change in quoted foreign currency exchange rates, would be approximately $4.4 million. This sensitivity analysis assumes a parallel shift in all major foreign currency exchange rates versus the United States dollar. Exchange rates rarely move in the same direction relative to the United States dollar due to positive and negative correlations of the various global currencies. This assumption may overstate or understate the impact of changing exchange rates on individual assets and liabilities denominated in a foreign currency.
The Company’s hedging operations have historically not been material, and gains or losses from these operations have not been material to the Company’s results of operations, financial position or cash flows. The Company does not use derivative financial instruments for trading or speculative purposes.
These international operations are subject to risks typical of international operations, including, but not limited to, differing economic conditions, changes in political climate, potential restrictions on the movement of funds, differing tax structures, and other regulations and restrictions. Accordingly, future results could be adversely impacted by changes in these or other factors.
The Company has considered the economy in Argentina to be highly inflationary, effective June 30, 2018. In accordance with ASC 830 — Foreign Currency Matters, a highly inflationary economy is one that has experienced cumulative inflation of approximately 100 percent or more over a three-year period. An entity is required to apply the revised accounting guidance in the reporting period following when the economy was deemed to be highly inflationary. As a result of this classification, the functional currency of the Company’s Argentina subsidiaries was changed from the local currency to the United States Dollar, beginning July 1, 2018, and impacts from the change in the value of the local currency for monetary assets and liabilities is now reflected in the condensed consolidated statements of operations. The total impact from foreign currency was $0.1 million of income and $0.8 million of losses during the three and nine months ended September 30, 2021, respectively. The Company’s operations in Argentina represented less than 1.0% of total consolidated assets as of September 30, 2021, and less than 1.0% of total consolidated net sales for the three and nine months ended September 30, 2021.
Credit Risk
Credit risk is the possibility of loss from a client’s failure to make payments according to contract terms. Prior to granting credit, each client is evaluated 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. Based on those client account reviews and the continued uncertainty of the global economy, the Company has established an allowance for credit losses of $31.0 million as of September 30, 2021, and $33.8 million as of December 31, 2020.
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The Company has a large, diverse client base and does not have a high degree of concentration with any single client account. During the three and nine months ended September 30, 2021, the Company’s largest client accounted for less than 5% of the Company’s net sales. Even if the Company’s credit review and analysis mechanisms work properly, the Company may experience financial losses in its dealings with clients and other parties. Any increase in nonpayment or nonperformance by clients could adversely impact the Company’s results of operations and financial condition. Economic disruptions, including the impacts from the COVID-19 pandemic, could result in significant future charges. The Company is continuing to actively monitor the situation and related risks around the COVID-19 pandemic.
Commodity Risk
The primary raw materials that Quad uses in its print business are paper, ink and energy. At this time, the Company’s supply of raw materials are available from numerous vendors; however, based on market conditions, the current supply is under pressure due to supply chain shortages and higher than expected inflation. The Company generally buys these raw materials based upon market prices that are established with the vendor as part of the procurement process.
The majority of paper used in the printing process is supplied directly by the Company’s clients. For those clients that do not directly supply their own paper, the Company makes use of its purchasing efficiencies to supply paper by negotiating with leading paper vendors, uses a wide variety of paper grades, weights and sizes, and does not rely on any one vendor. In addition, the Company generally includes price adjustment clauses in sales contracts for paper and other critical raw materials in the printing process. Although these clauses generally mitigate paper price risk, higher paper prices and tight paper supplies, as well as changes in the United States import or trade regulations may have an impact on client demand for printed products. The Company’s working capital requirements, including the impact of seasonality, are partially mitigated through the direct purchasing of paper by its clients.
The Company produces the majority of ink used in its print production, allowing it to control the quality, cost and supply of key inputs. Raw materials for the ink manufacturing process are purchased externally from a variety of vendors.
The Company generally cannot pass on to clients the impact of higher electric and natural gas energy prices on its manufacturing costs, and increases in energy prices result in higher manufacturing costs for certain of its operations. The Company mitigates its risk through natural gas hedges when appropriate. In its logistic operations, however, the Company is able to pass a substantial portion of any increase in fuel prices directly to its clients.
To the extent the cost of other raw materials increase and the Company is not able to increase selling prices of its products, then the Company may experience margin declines.
As a result, management believes a hypothetical 10% change in the price of paper and other raw materials would not have a significant direct impact on the Company’s consolidated annual results of operations or cash flows; however, significant increases in commodity pricing or tight supply could influence future client demand for printed products.
ITEM 4. Controls and Procedures
Disclosure Controls and Procedures
The Company’s management, with the participation of the Company’s principal executive officer and principal financial officer, has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report and has concluded that, as of the end of such period, the Company’s disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting
There were no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) that occurred during the fiscal quarter ended September 30, 2021, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II — OTHER INFORMATION
ITEM 1A. Risk Factors
There have been no material changes to the risk factors previously disclosed in Part I, Item 1A, “Risk Factors,” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, which was filed with the SEC on February 24, 2021.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a)None.
(b)Not applicable.
(c)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. The Company was prohibited from repurchasing capital stock through the Covenant Relief Period, in accordance with the fourth amendment to the April 28, 2014 Senior Secured Credit Facility, completed on June 29, 2020 (see Note 11. “Debt,” to the condensed consolidated financial statements in Item 1, “Condensed Consolidated Financial Statements (Unaudited),” of this Quarterly Report on Form 10-Q for more details on the amendment and timing of the Covenant Relief Period). There were no shares repurchased during the three months ended September 30, 2021. As of September 30, 2021, there were $100.0 million of authorized repurchases remaining under the program.
See Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Covenants and Compliance,” of this Quarterly Report on Form 10-Q, for a discussion of covenants under the Company’s debt agreements that may restrict the Company’s ability to pay dividends.
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ITEM 6. Exhibits
The exhibits listed in the exhibit index below are filed as part of this Quarterly Report on Form 10-Q.
EXHIBIT INDEX
| Exhibit Number | Exhibit Description | |||||||
| (101) | Financial statements from the Quarterly Report on Form 10-Q of Quad/Graphics, Inc. for the quarter ended September 30, 2021 formatted in Inline eXtensible Business Reporting Language (iXBRL): (i) the Condensed Consolidated Statements of Operations (Unaudited), (ii) the Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited), (iii) the Condensed Consolidated Balance Sheets (Unaudited), (iv) the Condensed Consolidated Statements of Cash Flows (Unaudited), (v) the Notes to Condensed Consolidated Financial Statements (Unaudited), and (vi) document and entity information. | |||||||
| (104) | Cover Page Interactive Data File (formatted in iXBRL and contained in Exhibit 101). | |||||||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| QUAD/GRAPHICS, INC. | ||||||||||||||
| Date: | November 3, 2021 | By: | /s/ J. Joel Quadracci | |||||||||||
| J. Joel Quadracci | ||||||||||||||
| Chairman, President and Chief Executive Officer | ||||||||||||||
| (Principal Executive Officer) | ||||||||||||||
| Date: | November 3, 2021 | By: | /s/ David J. Honan | |||||||||||
| David J. Honan | ||||||||||||||
| Executive Vice President and Chief Financial Officer | ||||||||||||||
| (Principal Financial Officer) | ||||||||||||||
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