Document/ExhibitDescriptionPagesSize 1: 10-Q Quarterly Report HTML 1.93M
2: EX-31.1 Certification of Chief Executive Officer HTML 28K
3: EX-31.2 Certification of Chief Financial Officer HTML 28K
4: EX-32 Written Statement of the CEO and CFO HTML 24K
10: R1 Cover Page HTML 81K
11: R2 Condensed Consolidated Statements of Operations HTML 96K
12: R3 Condensed Consolidated Statements of Comprehensive HTML 63K
Income (Loss)
13: R4 Condensed Consolidated Balance Sheets HTML 145K
14: R5 Condensed Consolidated Balance Sheets HTML 25K
(Parenthetical)
15: R6 Condensed Consolidated Statements of Cash Flows HTML 104K
16: R7 Condensed Consolidated Statements of Shareholders' HTML 106K
Equity
17: R8 Basis of Presentation HTML 28K
18: R9 Revenue Recognition HTML 92K
19: R10 Restructuring, Impairment and Transaction-Related HTML 79K
Charges
20: R11 Receivables HTML 31K
21: R12 Inventories HTML 30K
22: R13 Commitments and Contingencies HTML 27K
23: R14 Debt HTML 30K
24: R15 Income Taxes HTML 29K
25: R16 Financial Instruments and Fair Value Measurements HTML 80K
26: R17 Employee Retirement Plans HTML 47K
27: R18 Earning (Loss) Per Share HTML 48K
28: R19 Equity Incentive Programs HTML 62K
29: R20 Shareholders' Equity HTML 56K
30: R21 Accumulated Other Comprehensive Loss HTML 84K
31: R22 Segment Information HTML 99K
32: R23 Basis of Presentation (Policies) HTML 30K
33: R24 Revenue Recognition (Tables) HTML 88K
34: R25 Restructuring, Impairment and Transaction-Related HTML 76K
Charges (Tables)
35: R26 Receivables (Tables) HTML 28K
36: R27 Inventories (Tables) HTML 31K
37: R28 Financial Instruments and Fair Value Measurements HTML 71K
(Tables)
38: R29 Employee Retirement Plans (Tables) HTML 40K
39: R30 Earning (Loss) Per Share (Tables) HTML 46K
40: R31 Equity Incentive Programs (Tables) HTML 63K
41: R32 Shareholders' Equity (Tables) HTML 57K
42: R33 Accumulated Other Comprehensive Loss (Tables) HTML 84K
43: R34 Segment Information (Tables) HTML 94K
44: R35 Revenue Recognition - Disaggregation of Revenue HTML 68K
(Details)
45: R36 Revenue Recognition - Costs to Obtain Contracts HTML 28K
(Details)
46: R37 Restructuring, Impairment and Transaction-Related HTML 36K
Charges - Schedule of Restructuring, Impairment
and Transaction-Related Charges (Details)
47: R38 Restructuring, Impairment and Transaction-Related HTML 37K
Charges - Schedule of Other Restructuring (Income)
Charges (Details)
48: R39 Restructuring, Impairment and Transaction-Related HTML 48K
Charges - Narrative (Details)
49: R40 Restructuring, Impairment and Transaction-Related HTML 48K
Charges - Schedule of Restructuring Reserves
(Details)
50: R41 Receivables - Narrative (Details) HTML 25K
51: R42 Receivables - Rollforward (Details) HTML 31K
52: R43 Inventories (Details) HTML 32K
53: R44 Debt (Details) HTML 32K
54: R45 Income Taxes (Details) HTML 29K
55: R46 Financial Instruments and Fair Value Measurements HTML 43K
- Narrative (Details)
56: R47 Financial Instruments and Fair Value Measurements HTML 61K
- Interest Rate Swaps (Details)
57: R48 Financial Instruments and Fair Value Measurements HTML 28K
- Foreign Exchange Contracts (Details)
58: R49 Financial Instruments and Fair Value Measurements HTML 63K
- Interest Rate Collars (Details)
59: R50 Financial Instruments and Fair Value Measurements HTML 25K
- Debt (Details)
60: R51 Employee Retirement Plans - Defined Contribution HTML 24K
Plans (Details)
61: R52 Employee Retirement Plans - Pension Plans HTML 50K
(Details)
62: R53 Employee Retirement Plans - Multiemployer Pension HTML 33K
Plans (Details)
63: R54 Earning (Loss) Per Share - Narrative (Details) HTML 27K
64: R55 Earning (Loss) Per Share - Schedule of Calculation HTML 62K
of Numerator and Denominator in Earning (Loss) Per
Share (Details)
65: R56 Equity Incentive Programs - Equity Incentive HTML 46K
Compensation Expense (Details)
66: R57 Equity Incentive Programs - Schedule of Restricted HTML 60K
Stock and Restricted Stock Unit Award Activity
(Details)
67: R58 Equity Incentive Programs - Deferred Stock Unit HTML 41K
Activity (Details)
68: R59 Shareholders' Equity - Schedule of Stock by Class HTML 41K
(Details)
69: R60 Shareholders' Equity - Narrative (Details) HTML 43K
70: R61 Shareholders' Equity - Schedule of Share HTML 32K
Repurchases (Details)
71: R62 Accumulated Other Comprehensive Loss - By HTML 54K
Component (Details)
72: R63 Accumulated Other Comprehensive Loss - HTML 60K
Reclassifications (Details)
73: R64 Segment Information - Summary of Segment HTML 67K
Information (Details)
74: R65 Segment Information - Reconciliation of Operating HTML 37K
Profit from Segment to Consolidated (Details)
77: XML IDEA XML File -- Filing Summary XML 143K
75: XML XBRL Instance -- quad-20230930_htm XML 2.01M
76: EXCEL IDEA Workbook of Financial Report Info XLSX 129K
6: EX-101.CAL XBRL Calculations -- quad-20230930_cal XML 160K
7: EX-101.DEF XBRL Definitions -- quad-20230930_def XML 578K
8: EX-101.LAB XBRL Labels -- quad-20230930_lab XML 1.28M
9: EX-101.PRE XBRL Presentations -- quad-20230930_pre XML 808K
5: EX-101.SCH XBRL Schema -- quad-20230930 XSD 132K
78: JSON XBRL Instance as JSON Data -- MetaLinks 415± 619K
79: ZIP XBRL Zipped Folder -- 0001481792-23-000056-xbrl Zip 353K
(Address
of principal executive offices) (Zip Code)
(i414) i566-6000
(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
iClass A Common Stock, par value $0.025 per share
iQUAD
iThe
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYes☒ 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). iYes☒ 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
☐
iAccelerated
filer
☒
Non-accelerated filer
☐
Smaller reporting company
i☒
Emerging growth company
i☐
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 i☐ No ☒
Indicate
the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.
(In
millions, except share and per share data and unless otherwise indicated)
Note 1. iBasis 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, 2022, and notes thereto included in the Company’s latest Annual Report on Form 10-K filed with the SEC
on February 27, 2023.
The Company is subject to seasonality in its quarterly results as net sales and operating income are higher in the second half of the calendar year as compared to the first half of the calendar year. 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 catalogs and retail inserts primarily due to back-to-school and holiday-related advertising and promotions. The Company expects seasonality impacts to continue in future years.
The
financial information contained herein reflects all adjustments, in the opinion of management, necessary for a fair presentation of the Company’s results of operations for the three and nine months ended September 30, 2023 and 2022. 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.
Economic Impacts and Response - Macroeconomic conditions
have weakened demand for the Company’s products and services, disrupted the Company’s supply chain and resulted in rising inflationary cost and labor pressures, distribution challenges and recessionary concerns. The Company continues to evaluate the current economic environment and may implement additional cost reduction measures as necessary.
(In millions, except share and per share data and unless otherwise indicated)
Note 2. iRevenue Recognition
Revenue
Disaggregation
i
The following tables provide information about disaggregated revenue by the Company’s operating segments and major products and services offerings for the three and nine months endedSeptember 30, 2023 and 2022:
Catalog, publications, retail inserts and directories
$
i1,049.0
$
i205.5
$
i1,254.5
Direct
mail and other printed products
i467.6
i96.7
i564.3
Other
i7.3
i0.7
i8.0
Total
products
i1,523.9
i302.9
i1,826.8
Logistics
services
i224.2
i14.7
i238.9
Marketing
services and medical services
i265.5
i0.6
i266.1
Total
services
i489.7
i15.3
i505.0
Total
net sales
$
i2,013.6
$
i318.2
$
i2,331.8
Nature
of Products and Services
The Company recognizes its products and services revenue based on when the transfer of control passes to the client or when the service is completed and accepted by the client.
The products offering is predominantly comprised of the Company’s print operations which includes retail inserts, publications, catalogs, special interest publications, journals, direct mail, directories, in-store marketing and promotion, packaging, newspapers, custom print products, other commercial and specialty printed products and global paper procurement.
The
Company considers its logistic operations as services, which include the delivery of printed material. The services offering also includes revenues related to the Company’s marketing services operations, which include data and analytics, technology solutions, media services, creative and content solutions, managed services and execution in non-print channels (e.g., digital and broadcast), as well as medical services.
In accordance with Accounting Standards Codification 606 — Revenue from Contracts with Customers, the Company capitalizes certain sales incentives of the sales compensation
packages for costs that are directly attributed to being awarded a client contract or renewal and would not have been incurred had the contract not been obtained. The Company also defers certain contract acquisition costs paid to the client at contract inception. Costs to obtain contracts with a duration of less than one year are expensed as incurred. For all contract
costs with contracts over one year, the Company amortizes the costs to obtain contracts on a straight-line basis over the estimated life of the contract and reviews quarterly for impairment. iActivity impacting costs to obtain contracts
for the nine months ended September 30, 2023, was as follows:
Note 3. iRestructuring,
Impairment and Transaction-Related Charges
i
The Company recorded restructuring, impairment and transaction-related charges for the three and nine months ended September 30, 2023 and 2022, as follows:
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 15, “Segment Information,” for restructuring, impairment and transaction-related charges by segment.
Restructuring Charges
The Company has a restructuring program related to eliminating excess manufacturing capacity and properly aligning its cost structure. The Company classifies the following charges as restructuring:
•Employee termination charges
are incurred when the Company reduces its workforce through facility consolidations and separation programs.
•Integration costs are incurred primarily for the integration of acquired companies.
Vacant facility carrying costs and lease exit charges
$
i3.8
$
i2.0
$
i11.2
$
i4.1
Equipment
and infrastructure removal costs
i0.1
i0.1
i0.6
i0.1
Other
restructuring activities
i—
i1.1
i0.5
i3.6
Other
restructuring charges
$
i3.9
$
i3.2
$
i12.3
$
i7.8
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 $i5.2
million and $i15.8 million during the three and nine months ended September 30, 2023, which consisted of $ii4.4/
million for software licensing and related implementation costs from a terminated project, $i0.6 million and $i1.6 million, respectively, for property, and $i0.2 million
and $i9.8 million, respectively, for machinery and equipment no longer being utilized in production as a result of facility consolidations, as well as other capacity reduction activities.
The Company recognized impairment charges of $i0.5
million and $i0.6 million during the three and nine months ended September 30, 2022, which consisted primarily of machinery and equipment no longer being utilized in production as a result of facility consolidations.
The fair values of the impaired assets were determined by the Company to be Level 3 under the fair value hierarchy (see Note 9, “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 $i0.5 million
and $i1.1 million were recorded during the three and nine months ended September 30, 2023, respectively, and $i0.3 million and $i0.8 million
were recorded during the three and nine months ended September 30, 2022, respectively.
The
Company’s restructuring reserves at September 30, 2023, included a short-term and a long-term component. The short-term portion included $i3.4 million in other current liabilities and $i1.2 million in accounts
payable in the condensed consolidated balance sheets as the Company expects these reserves to be settled within the next twelve months. The long-term portion of $i3.8 million is included in other long-term liabilities in the condensed consolidated balance sheets.
Note 4. iReceivables
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 $i0.6
million and $i2.1 million during the three and nine months ended September 30, 2023, respectively, and $i0.8 million and $i2.3
million during the three and nine months ended September 30, 2022, respectively, which is included in selling, general and administrative expenses in the condensed consolidated statements of operations.
iActivity impacting the allowance for credit losses for the nine months ended September 30, 2023, was as follows:
The Company is named as a defendant in various lawsuits in which claims are asserted against the Company in the normal course of business. The liabilities, if any, which ultimately result from such lawsuits are not expected by management to have a material impact on the condensed consolidated financial statements of the Company.
Environmental Reserves
The
Company is subject to various laws, regulations and government policies relating to health and safety, to the generation, storage, transportation, and disposal of hazardous substances, and to environmental protection in general. The Company provides for expenses associated with environmental remediation obligations when such amounts are probable and can be reasonably estimated. Such reserves are adjusted as new information develops or as circumstances change. The environmental reserves are not discounted. The Company believes it is in compliance with such laws, regulations and government policies in all material respects. Furthermore, the Company does not anticipate that maintaining compliance with such
environmental statutes will have a material impact upon the Company’s condensed consolidated financial position.
Note 7. iDebt
Senior Secured Credit Facility
The Company completed
the seventh amendment to the Senior Secured Credit Facility on January 24, 2023, which transitioned the Company’s reference rate from London Interbank Offered Rate (“LIBOR”) to Secured Overnight Financing Rate (“SOFR”) effective February 1, 2023. The Company elected the practical expedient outlined in Accounting Standards Update (“ASU”) 2020-04 and ASU 2021-01 which allowed the Company to prospectively adjust the effective interest rate after the reference rate change. The transition from LIBOR to SOFR did not have a material impact on the condensed consolidated financial statements.
Senior
Unsecured Notes
During the first quarter of 2022, the Company repurchased $i2.4 million of its outstanding unsecured i7.0%
senior notes due May 1, 2022 (the “Senior Unsecured Notes”) in the open market. All repurchased Senior Unsecured Notes were canceled. The Company used cash flows from operating activities to fund the repurchases. These repurchases were completed primarily to reduce interest expense.
On May 2, 2022, the Company used liquidity available under its revolving credit facility and available cash on hand to fund the repayment on maturity of all $i209.1
million aggregate principal amount of its Senior Unsecured Notes.
(In
millions, except share and per share data and unless otherwise indicated)
Note 8. iIncome Taxes
The Company records income tax expense on an interim basis. For the nine months ended September 30, 2023, the Company’s income tax expense was recorded using an actual effective income tax rate for the year-to-date period. Based on
the Company’s current operating results, the Company believes the actual effective tax rate for the year-to-date period is the best estimate of the annual effective tax rate. The actual effective income tax rate differs from the statutory tax rate primarily due to non-deductible expenses and net increases in valuation allowance reserves. The effective income tax rate for the current interim period differs further from the statutory tax rate due to items discrete to the interim period primarily related to an increase in income tax payable for an anticipated audit settlement and additional increases to valuation allowance reserves from change in judgement on realizability of certain foreign deferred tax assets.
For
the nine months ended September 30, 2022, the Company used an estimated annual effective income tax rate to record its income tax expense. The estimated annual effective income tax rate differs from the statutory tax rate primarily from decreases in valuation allowance reserves.
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, 2023, 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, 2023 was $i11.5 million, an increase of $i0.4 million
from $i11.1 million as of December 31, 2022. The Company anticipates a $i4.3 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.
Note 9. iFinancial Instruments and Fair Value Measurements
i
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 iino/
Level 3 recurring measurements of assets or liabilities as of September 30, 2023.
(In millions, except share and per share data and unless otherwise indicated)
Interest Rate Swap
The Company currently holdsione interest rate swap contract. The
purpose of entering into the contract was to reduce the variability of cash flows from interest payments related to a portion of Quad’s variable-rate debt. The interest rate swap was previously designated as a cash flow hedge as it 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 i0.75%
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 had elected to de-designate the swap as a cash flow hedge, 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 swap as of June 30, 2020 was then amortized to interest expense on a straight-line basis over the remaining life of the swap contract. The Company expects to reclassify $i1.3 million
of this balance to interest expense over the next six months. Due to the Company’s transition from LIBOR to SOFR during the first quarter of 2023, the interest rate swap’s fixed swap rate was amended to be based on one-month term SOFR.
iThe key terms of the interest rate swap is as follows:
The
Company classifies interest rate swaps as Level 2 because the inputs into the valuation model are observable or can be derived or corroborated utilizing observable market data at commonly quoted intervals. The fair value of the interest rate swap classified as Level 2 as of September 30, 2023, and December 31, 2022, were as follows:
Prior
to the Company’s de-designation of the interest rate swap as a cash flow hedge, the interest rate swap was considered highly effective, with ino amount of ineffectiveness recorded into earnings. The change in the fair value of the interest rate swap is recorded as an adjustment to interest expense in the condensed consolidated statements of operations. iThe
cash flows associated with the interest rate swap have been recognized as an adjustment to interest expense in the condensed consolidated statements of operations:
(In millions, except share and per share data and unless otherwise indicated)
Interest Rate Collars
The Company has entered into itwo
interest rate collar contracts, both effective February 1, 2023. The purpose of entering into the contracts is to reduce the variability of cash flows from interest payments related to a portion of Quad’s variable-rate debt. The interest rate collars have been designated as cash flow hedges as they effectively convert the notional value of the Company’s variable rate debt based on one-month term SOFR to a fixed rate if that month’s interest rate is outside of the collars’ floor and ceiling rates, including a spread on underlying debt, and a monthly reset in the variable interest rate.
The
key terms of the interest rate collars are as follows:
The Company classifies interest
rate collars 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 collars classified as Level 2 as of September 30, 2023, and December 31, 2022, were as follows:
The
interest rate collars were highly effective as of September 30, 2023. No amount of ineffectiveness has been recorded into earnings related to these cash flow hedges. The cash flows associated with the interest rate collars have been recognized as an adjustment to interest expense in the condensed consolidated statements of operations, and the changes in the fair value of the interest rate collars have been included in other comprehensive income (loss) in the condensed consolidated statements of comprehensive income (loss):
The Company has operations in countries that have transactions outside their functional currencies and periodically enters into foreign exchange contracts. These contracts are used to hedge the net exposures of changes in foreign currency exchange rates and are designated as either cash flow hedges or fair value hedges. Gains or losses on net foreign currency hedges are intended to offset losses or gains on the underlying net exposures in an effort to reduce the earnings volatility resulting from fluctuating foreign currency
exchange rates. As of September 30, 2023, there were itwo open foreign currency exchange contracts designated as cash flow hedges, with a total notional value of $i0.7
million.
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 nine months ended September 30, 2023 and 2022,
as the Company takes delivery in the normal course of business.
(In millions, except share and per share data
and unless otherwise indicated)
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. 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 $ii0.6/
billion at September 30, 2023 and December 31, 2022.
Nonrecurring Fair Value Measurements
In addition to assets and liabilities that are recorded at fair value on a recurring basis, the Company is required to record certain assets and liabilities at fair value on a nonrecurring basis, generally as a result of acquisitions or the remeasurement of assets resulting in impairment charges, which are categorized as Level 3. See Note 3, “Restructuring, Impairment and Transaction-Related Charges” 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, 2023, and December 31, 2022.
Note 10. iEmployee
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 iino/
profit sharing contributions during the nine months ended September 30, 2023 and 2022.
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.
iThe components of net pension income for the three and nine months ended September 30, 2023 and 2022, were as follows:
The
Company made $i0.6 million in benefit payments to its non-qualified defined benefit pension plans and made ino contributions to its qualified defined benefit pension plans during the nine months
ended September 30, 2023.
(In millions, except share and per share data and unless otherwise indicated)
Multiemployer
Pension Plans (“MEPPs”)
The Company has withdrawn from all significant MEPPs and replaced these union sponsored “promise to pay in the future” defined benefit plans with a Company sponsored “pay as you go” defined contribution plan. The itwo MEPPs, the Graphic Communications International Union – Employer Retirement Fund (“GCIU”) and the Graphic Communications Conference of the International Brotherhood
of Teamsters National Pension Fund (“GCC”), are significantly underfunded, and require the Company to pay a withdrawal liability to fund its pro rata share of the underfunding as of the plan year the full withdrawal was completed. As a result of the decision to withdraw, the Company accrued a withdrawal liability based on information provided by each plan’s trustee. The Company has reserved $i25.1 million
for the total MEPPs withdrawal liability as of September 30, 2023, of which $i22.1 million was recorded in other long-term liabilities and $i3.0 million was recorded
in other current liabilities in the condensed consolidated balance sheets. The Company is scheduled to make payments to the GCIU and GCC until April 2032 and February 2024, respectively. The Company made payments totaling $ii4.6/ million
for the nine months ended September 30, 2023 and 2022.
Note 11. iEarnings (Loss) Per Share
Basic earnings (loss) per share is computed as net earnings (loss) divided by the basic weighted average common shares outstanding. iThe
calculation of diluted earnings (loss) per share includes the effect of any dilutive equity incentive instruments. The Company uses the treasury stock method to calculate the effect of outstanding dilutive equity incentive instruments, which requires the Company to compute total proceeds as the sum of the amount the employee must pay upon exercise of the award and the amount of unearned stock-based compensation costs attributable to future services.
Equity incentive instruments for which the total employee proceeds from exercise exceed the average fair value of the same equity incentive instrument over the period have an anti-dilutive effect on earnings per share during periods with net earnings, and accordingly,
the Company excludes them from the calculation. Due to the net loss incurred during the three and nine months ended September 30, 2023, the assumed exercise of all equity incentive instruments was anti-dilutive and therefore, not included in the diluted loss per share calculation. Anti-dilutive equity instruments excluded from the computation of diluted net earnings per share were i0.3
million for the nine months ended September 30, 2022. There were ino anti-dilutive equity instruments excluded from the computation of diluted net earnings per share for the three months ended September 30, 2022.
iReconciliations
of the numerator and the denominator of the basic and diluted per share computations for the Company’s common stock for the three and nine months ended September 30, 2023 and 2022, are summarized as follows:
(In millions, except share and per share data and unless otherwise indicated)
Note 12. iEquity Incentive
Programs
Equity Incentive Compensation Expense
Equity incentive compensation expense was recorded primarily in selling, general and administrative expenses in the condensed consolidated statements of operations and includes expense recognized for liability awards that are remeasured on a quarterly basis. iThe total compensation expense recognized related to all equity incentive
programs for the three and nine months ended September 30, 2023 and 2022, was as follows:
Restricted
Stock (“RS”) and Restricted Stock Units (“RSU”) equity awards expense
$
i1.3
$
i1.1
$
i3.4
$
i4.0
RSU
liability awards expense
i—
i—
i—
i0.2
Deferred
Stock Units (“DSU”) awards expense
i—
i—
i1.2
i0.7
Total
equity incentive compensation expense
$
i1.3
$
i1.1
$
i4.6
$
i4.9
Total
future compensation expense related to all equity incentive programs granted as of September 30, 2023, was estimated to be $i8.1 million, which consists entirely of expense for RS and RSU awards. Estimated future compensation expense is $i1.3 million
for the remainder of 2023, $i4.1 million for 2024, $i2.4 million
for 2025 and $i0.3 million for 2026.
Restricted Stock and Restricted Stock Units
iThe
following table is a summary of RS and RSU award activity for the nine months ended September 30, 2023:
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 Unit
Weighted- Average Remaining Contractual Term (years)
In
accordance with the Articles of Incorporation, each class A common share has ione vote per share and each class B and class C common share has iiten/
votes per share on all matters voted upon by the Company’s shareholders. Liquidation rights are the same for all ithree classes of common stock.
The Company also has ii0.5/ million
shares of $ii0.01/ par value preferred stock authorized, of which iinone/
were issued at September 30, 2023, and December 31, 2022. The Company has no present plans to issue any preferred stock.
On July 30, 2018, the Company’s Board of Directors authorized a share repurchase program of up to $i100.0 million
of the Company’s outstanding class A common stock. As of September 30, 2023, there were $i79.8 million of authorized repurchases remaining under the program. iThe
following repurchases occurred during the three and nine months ended September 30, 2023 and 2022:
In
accordance with the Articles of Incorporation, dividends are paid equally for all ithree classes of common shares. The Company’s Board of Directors suspended the Company’s quarterly dividends beginning in the second quarter of 2020.
(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, 2023 and 2022, were as follows:
Details
of Accumulated Other Comprehensive Loss Components
Three Months Ended September 30,
Nine Months Ended September 30,
Condensed Consolidated Statements of Operations Presentation
2023
2022
2023
2022
Amortization of amounts accumulated for interest rate swaps de-designated as a cash flow hedge
$
i0.6
$
i0.7
$
i2.0
$
i2.8
Interest
expense
Impact of income taxes
(i0.2)
(i0.1)
(i0.7)
(i0.5)
Income
tax expense
Amortization of amounts accumulated for interest rate swaps de-designated as a cash flow hedge, net of tax
$
i0.4
$
i0.6
$
i1.3
$
i2.3
Amortization
of pension and other postretirement benefit plan adjustments
$
i0.2
$
i—
$
i0.4
$
i—
Net
pension income
Impact of income taxes
(i0.1)
i—
(i0.1)
i—
Income
tax expense
Amortization of pension and other postretirement benefit plan adjustments, net of tax
$
i0.1
$
i—
$
i0.3
$
i—
Total
reclassifications for the period
$
i0.8
$
i0.7
$
i2.4
$
i2.8
Impact
of income taxes
(i0.3)
(i0.1)
(i0.8)
(i0.5)
Total
reclassifications for the period, net of tax
$
i0.5
$
i0.6
$
i1.6
$
i2.3
Note 15. iSegment
Information
Quad is a global marketing experience company that gives brands a more streamlined, impactful, flexible and frictionless way to go to market and reach consumers. The Company leverages its three key competitive advantages - integrated marketing platform excellence, ongoing innovation, and culture and social purpose - to create a better way for its clients, employees and communities. The Company’s operating and reportable segments are aligned with how the chief operating decision maker of the Company currently manages the business. The Company’s
operating and reportable segments, including their product and service offerings, and a “Corporate” category are as follows:
•United States Print and Related Services
•International
•Corporate
United States Print and Related Services
The United States Print and Related Services segment is predominantly comprised of the Company’s United States printing operations and is managed as one integrated platform. This includes print execution and logistics for retail inserts, catalogs, long-run
publications, special interest publications, journals, direct mail, directories, in-store marketing and promotion, packaging, newspapers, custom print products, as well as other commercial and specialty printed products, along with global paper procurement, and marketing and other complementary services, such as data and analytics, technology solutions, media services, creative and content solutions, managed services and execution in non-print channels (e.g. digital and broadcast). This segment also includes the manufacture of ink.
(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, Colombia, Mexico and Peru, as well as investments in printing operations in India. The International segment included printing operations in Argentina until the business was sold in December 2022. This segment provides printed products
and marketing and other complementary services consistent with the United States Print and Related Services segment.
Corporate
Corporate consists of unallocated general and administrative activities and associated expenses including, in part, executive, legal and finance, as well as certain expenses and income from frozen employee retirement plans, such as pension benefit plans.
iThe following is a summary of segment information
for the three and nine months ended September 30, 2023 and 2022:
Net Sales
Operating Income (Loss)
Restructuring,
Impairment and Transaction- Related Charges
(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, 2023 and 2022, are further described in Note 3, “Restructuring, Impairment and Transaction-Related Charges,” and are included in the operating income (loss) results by segment above.
i
A
reconciliation of operating income to earnings (loss) before income taxes as reported in the condensed consolidated statements of operations for the three and nine months ended September 30, 2023 and 2022, was as follows:
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, 2023 and 2022, 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, 2022, and notes thereto included in the
Company’s Annual Report on Form 10-K, filed with the SEC on February 27, 2023.
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:
•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, 2023, to the three months ended September 30, 2022; and (2) the nine months ended September 30, 2023, to the nine months ended September 30, 2022. 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, non-GAAP financial measures that the Company uses to assess the
performance of its business.
•Liquidity and Capital Resources. This section provides an analysis of the Company’s capitalization, cash flows and a discussion and table of outstanding debt and commitments. Forward-looking statements important to understanding the Company’s financial condition are included in this section. This section also provides a discussion of Free Cash Flow and Debt Leverage Ratio, non-GAAP financial measures that the Company uses to assess liquidity and capital allocation and deployment.
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 2022 Annual Report
on Form 10-K, filed with the SEC on February 27, 2023, as such may be amended or supplemented in Part II, Item 1A, “Risk Factors,” of the Company’s subsequently filed Quarterly Reports on Form 10-Q (including this report), and the following:
•The impact of 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 fluctuations in costs (including labor and labor-related costs, energy costs, freight rates and raw materials, including paper and the materials to manufacture ink)
and the impact of fluctuations in the availability of raw materials, including paper, parts for equipment and the materials to manufacture ink;
•The impact of macroeconomic conditions, including inflation, rising interest rates and recessionary concerns, as well as ongoing supply chain challenges, labor availability and cost pressures, distribution challenges and the COVID-19 pandemic, have had, and may continue to have, on the Company’s business, financial condition, cash flows and results of operations (including future uncertain impacts);
•The impact of increased business complexity as a result of the
Company’s transformation to a marketing experience company;
•The inability of the Company to reduce costs and improve operating efficiency rapidly enough to meet market conditions;
•The impact of changes in postal rates, service levels or regulations, including delivery delays;
•The failure to attract and retain qualified talent across the enterprise;
•The impact of a data-breach of sensitive information, ransomware attack or other cyber incident on
the Company;
•The fragility and decline in overall distribution channels;
•The impact of digital media and similar technological changes, including digital substitution by consumers;
•The impact negative publicity could have on our business and brand reputation;
•The failure of clients to perform under contracts or to renew contracts
with clients on favorable terms or at all;
•The impact of risks associated with the operations outside of the United States (“U.S.”), including trade restrictions, currency fluctuations, the global economy, costs incurred or reputational damage suffered due to improper conduct of its employees, contractors or agents, and geopolitical events like war and terrorism;
•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;
•Significant investments may be needed to maintain the Company’s platforms, processes, systems, client and product technology, marketing and talent, and to remain technologically and economically competitive;
•The impact of the various restrictive covenants in the Company’s debt facilities on the Company’s ability to operate its business, as well as the uncertain negative impacts macroeconomic conditions may have on the Company’s
ability to continue to be in compliance with these restrictive covenants;
•The impact of an other than temporary decline in operating results and enterprise value that could lead to non-cash impairment charges due to the impairment of property, plant and equipment and other intangible assets;
•The impact of regulatory matters and legislative developments or changes in laws, including changes in cyber-security, privacy and environmental laws; and
•The impact on the holders of Quad’s class A common stock of a limited active market for such shares and the inability to independently elect directors or control decisions due to the voting power of the
class B common stock.
Quad cautions that the foregoing list of risks, uncertainties and other factors is not exhaustive, and you should carefully consider the other factors detailed from time to time in Quad’s filings with the SEC and other uncertainties and potential events when reviewing the Company’s forward-looking statements.
Because forward-looking statements are subject to assumptions and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. You are cautioned not to place undue reliance on such statements, which speak only as of the date of this Quarterly Report on Form 10-Q. Except to the extent required by the federal securities laws, Quad
undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Quad
is a global marketing experience company that gives brands a more streamlined, impactful, flexible and frictionless way to reach their target audience via a uniquely integrated marketing platform. Quad connects every facet of the marketing journey efficiently and at scale through its innovative, data-driven offerings – from strategy and consulting to data and analytics, technology solutions, media services, creative and content solutions, and managed services. Quad provides a better marketing experience for its clients, so they can focus on delivering the best customer experience. Quad employs approximately 15,000 people in 14 countries worldwide and serves more than 2,900 clients across the retail, publishing, consumer packaged goods, financial services, healthcare, insurance and direct-to-consumer industries.
Quad delivers its overarching business strategy and singular vision as
a marketing experience company by executing the Company’s five consistent strategic priorities, as outlined here:
Walk in the Shoes of Clients
Quad 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, and doing what they can to make it easy to work with Quad at every touchpoint. Quad focuses on solving problems, and removing pain points and sources of friction wherever a client experiences it in the marketing process. Quad seeks to become an invaluable strategic marketing partner by helping its clients successfully navigate today’s constantly evolving media landscape through innovative, data-driven solutions that are
produced and deployed efficiently and at scale, across offline and online 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 broader environmental, social and governance objectives. The Company also delivers proactive thought leadership about key issues facing its clients — including data-driven marketing, mar-tech and postal reform — to help foster loyalty to the Quad brand.
Grow the Business Profitably
This strategic priority
centers on profitably growing Quad as a marketing experience company. Key components of this priority are:
•Acquire new and expand existing account relationships by introducing clients to the Company’s holistic, multichannel, through-the-line marketing solutions – encompassing strategy and consulting, data and analytics, technology solutions, media services, creative and content solutions, and managed services – to help them market more efficiently and effectively across offline and online media channels. To this end, Quad is focused on ensuring it has the right talent in the right positions to facilitate strategic marketing conversations and tailored solutions based on a deeper understanding of its clients’ needs.
•Expand
in key vertical industries with growth opportunities, such as consumer packaged goods, financial services, healthcare, insurance and direct-to-consumer, while continuing to capitalize on the Company’s established expertise in retail and publishing. Through existing and new products and services, Quad delivers solutions that solve client marketing challenges and drive success for their business.
•Make disciplined and compelling investments that take many different forms. The Company intends to continue to pursue growth investments that help expand and strengthen its integrated marketing platform. In addition, the
Company intends to continue making long-term investments in its talent, such as hiring business professionals with client-side marketing and consulting expertise, to enhance its position as a marketing experience company, as well as investments to attract new employees, and increase existing employee engagement, retention and productivity.
The
Company operates what it believes to be a truly differentiated integrated marketing platform, intentionally built to remove friction from the marketing process and maximize marketing effectiveness by reducing complexity and increasing efficiency. Through this unique and scalable platform, the Company offers holistic, multichannel, through-the-line marketing solutions. Quad’s solutions include strategy and consulting, data and analytics, technology solutions, media services, creative and content solutions, and managed services, which the Company deploys efficiently across multiple offline and online media channels including digital, direct marketing, in-store, packaging and print. With expertise and resources in planning, creating, deploying, measuring and optimizing marketing efforts, Quad
guides brands through every effort intended to drive an action, from consumer awareness and trust, to brand preference and purchase. Quad uses a disciplined return on capital framework to make regular, strategic investments in its marketing platform, resulting in what it believes is the most integrated, automated, efficient, innovative and advanced platform of its kind. The Company believes its long-standing culture of universal Continuous Improvement and commitment to Lean Enterprise methodologies, combined with ongoing, strategic investments in talent, technology, products and services, will continue to accelerate its position as a marketing experience company and drive growth.
To strengthen its solutions offering, the Company
continually seeks to enhance its product and services portfolio, especially in the data collection and deployment, direct marketing, in-store and packaging spaces, with innovations that support its clients’ ability to stand out in a consumer’s mailbox or front doorstep, or on the store shelf. These innovations include proprietary solutions unavailable anywhere else in the advertising and marketing services or printing industries.
Additionally, as Quad accelerated its transformation as a marketing experience company over the last several years, it chose to strategically divest of those businesses that could not be easily leveraged as part of its greater integrated marketing platform. Through these types of optimization efforts, Quad has been able to maintain a superior, unparalleled marketing platform that delivers value to clients and, ultimately, their customers.
Empower
Employees
Quad views its corporate culture as a strategic competitive advantage. The Company’s priority to empower employees throughout their career journey builds on a foundation of Quad’s enduring Values, which are centered on trust, innovation, growth, believing in people and doing the right thing. The Company understands that its employees perform better at work when they can simply be themselves – confident in their abilities; comfortable sharing their ideas, opinions and beliefs; and able to bring their truest and best selves to the workplace – all of which leads to a more inclusive environment and better engagement, decision-making and business outcomes.
The
Company embraces forward-thinking workplace practices, such as flexible work models; implements innovative talent acquisition strategies to meet its labor and business needs; and provides training and reward programs to engage, develop and retain its employees. Employees are encouraged to take advantage of the Company’s focus on employee growth and development, 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 every employee distinguishes it from other employers. With
the Company’s encouragement to do things differently, be something greater and 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 fosters corporate pride and employee engagement by supporting community activities, initiatives and organizations that improve the quality of life of residents 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. This strategy is centered on the Company’s ability to drive profitable growth, and maximize net earnings, Free Cash Flow and operating margins; maintain consistent financial policies to ensure a strong balance sheet, liquidity level and access to capital; and retain the financial flexibility needed to strategically allocate and deploy capital as circumstances change. The priorities for capital allocation and deployment are balanced according to prevailing circumstances and what the Company
thinks is best for shareholder value creation at any particular point in time. Those priorities currently include using its Free Cash Flow to continue reducing debt while investing in scaling the business as a marketing experience company to fuel net sales growth; driving profitability through sales growth; and pursuing opportunities to return capital to shareholders through share repurchases or dividends over the long term.
To provide ongoing improvement in productivity and, ultimately, maximize operating margins, the Company applies holistic Continuous Improvement and Lean Enterprise methodologies to simplify and streamline processes. These same methodologies are applied to its selling, general and administrative functions to create a truly Lean Enterprise. The
Company continually works to lower its cost structure by consolidating its manufacturing operations into its most efficient facilities, as well as realizing purchasing, mailing and logistics synergies by centralizing and consolidating print manufacturing volumes, and eliminating redundancies in its administrative and corporate operations. Quad believes that its focused efforts to be a high-quality, low-cost producer generates increased Free Cash Flow and allows the Company to maintain a strong balance sheet through debt reduction. The Company’s disciplined financial approach also allows it to maintain sufficient liquidity and to reduce refinancing risk, with the nearest significant debt maturity of $87.7 million occurring in January 2024, and $229.8 million of debt maturities not due until
November 2026. The Company had total liquidity of $357.9 million as of September 30, 2023, which consisted of up to $346.9 million of unused capacity under its revolving credit arrangement, which was net of $31.1 million of issued letters of credit, and cash and cash equivalents of $11.0 million. Quad is proud of its strong and trusted banking relationships, which provide the Company with increased financial flexibility to make strategic investments to accelerate its growth and drive profitability as a marketing experience company.
Segments
The
Company’s operating and reportable segments are aligned with how the chief operating decision-maker of the Company currently manages the business. The Company’s operating and reportable segments, including its product and service offerings, and a “Corporate” category, are summarized below.
•The United States Print and Related Services segment is predominantly comprised of the Company’s United States printing operations and is managed as one integrated platform. This includes print execution and logistics for retail inserts, catalogs, long-run publications, special interest publications,
journals, direct mail, directories, in-store marketing and promotion, packaging, newspapers, custom print products, as well as other commercial and specialty printed products, along with global paper procurement, and marketing and other complementary services, such as data and analytics, technology solutions, media services, creative and content solutions, managed services and execution in non-print channels (e.g., digital and broadcast). This segment also includes the manufacture of ink. The United States Print and Related Services segment accounted for approximately 87% and 85% of the Company’s consolidated net sales during the three and nine months ended September 30, 2023, respectively.
•The International segment
consists of the Company’s printing operations in Europe and Latin America, including operations in England, France, Germany, Poland, Colombia, Mexico and Peru, as well as investments in printing operations in India. The International segment included printing operations in Argentina until the business was sold in December 2022. This segment provides printed products and marketing and other complementary services consistent with the United States Print and Related Services segment. The International segment accounted for approximately 13% and 15% of the Company’s consolidated net sales during the three and nine months ended September 30, 2023, 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.
The
Company’s management believes the ability to generate net sales growth, profit increases and positive cash flow, while maintaining the appropriate level of debt, are key indicators of the successful execution of the Company’s business strategy and will increase shareholder value. The Company uses period-over-period net sales growth, EBITDA, EBITDA margin, net cash provided by (used in) operating activities, Free Cash Flow and Debt Leverage Ratio as metrics to measure operating performance, financial condition and liquidity. EBITDA, EBITDA margin, Free Cash Flow and Debt Leverage Ratio are non-GAAP financial measures (see the definitions of EBITDA, EBITDA margin and the reconciliation of net earnings (loss) to EBITDA in the “Results of Operations” section below, and see the definitions
of Free Cash Flow and Debt Leverage Ratio, the reconciliation of net cash provided by (used in) operating activities to Free Cash Flow, and the calculation of Debt Leverage Ratio in the “Liquidity and Capital Resources” section below).
Net sales growth. The Company uses period-over-period net sales growth as a key performance metric. The Company’s management assesses net sales growth based on the ability to generate increased net sales through increased sales to existing clients, sales to new clients, sales of new or expanded solutions to existing and new clients and opportunities to expand sales through strategic investments, including acquisitions.
EBITDA
and EBITDA margin. The Company uses EBITDA and EBITDA margin as metrics to assess operating performance. The Company’s management assesses EBITDA and EBITDA margin based on the ability to increase revenues while controlling variable expense growth.
Net cash provided by (used in) operating activities. The Company uses net cash provided by (used in) operating activities as a metric to assess liquidity. The Company’s management assesses net cash provided by (used in) operating activities based
on the ability to meet recurring cash obligations while increasing available cash to fund debt service requirements, capital expenditures, cash restructuring requirements related to cost reduction activities, World Color Press single employer pension plan contributions, World Color Press MEPPs withdrawal liabilities, acquisitions and other investments in future growth, shareholder dividends and share repurchases. Net cash provided by (used in) operating activities can be significantly impacted by the timing of non-recurring or infrequent receipts or expenditures.
Free Cash Flow.The Company uses Free Cash Flow as a metric to assess liquidity and capital deployment. The Company’s management
assesses Free Cash Flow as a measure to quantify cash available for strengthening the balance sheet (debt and pension liability reduction), for strategic capital allocation and deployment through investments in the business (acquisitions and strategic investments) and for returning capital to the shareholders (dividends and share repurchases). The Company’s priorities for capital allocation and deployment will change as circumstances dictate for the business, and Free Cash Flow can be significantly impacted by the Company’s restructuring activities and other unusual items.
Debt Leverage Ratio.The Company
uses the Debt Leverage Ratio as a metric to assess liquidity and the flexibility of its balance sheet. Consistent with other liquidity metrics, the Company monitors the Debt Leverage Ratio as a measure to determine the appropriate level of debt the Company believes is optimal to operate its business, and accordingly, to quantify debt capacity available for strengthening the balance sheet (debt and pension liability reduction), for strategic capital allocation and deployment through investments in the business (capital expenditures, acquisitions and strategic investments), and for returning capital to the shareholders (dividends and share repurchases). The Company’s priorities for capital allocation and deployment
will change as circumstances dictate for the business, and the Debt Leverage Ratio can be significantly impacted by the amount and timing of large expenditures requiring debt financing, as well as changes in profitability.
The Company remains disciplined with its debt leverage. The Company’s consolidated debt and finance lease obligations increased by $24.5 million during the nine months ended September 30, 2023, primarily due to $59.5 million in purchases of property, plant and equipment and $10.2 million in purchases of treasury stock, partially offset by $41.1 million in cash provided by operating activities.
As consumer media consumption habits change, advertising and marketing services providers face increased demand to offer end-to-end marketing services, from strategy and creative through execution. As new marketing channels emerge, these providers must expand their services beyond traditional channels, such as for television, newspapers, print publications and radio, to digital channels, such as mobile, internet search, internet display and video, to create effective multichannel campaigns for their clients. This trend greatly influences Quad’s ongoing efforts to help brands reduce the complexities of working with multiple agency partners and vendors, increase marketing process efficiency and maximize marketing effectiveness.
The
Company leverages its data-driven print expertise as part of an integrated marketing platform that helps its clients not only plan and produce marketing programs, but also deploy, manage and measure them across all media channels. Competition in the commercial printing industry remains highly fragmented and intense, and the Company believes that there are indicators of heightened competitive pressures. The commercial printing industry has moved toward a demand for shorter print runs, faster product turnaround and increased production efficiencies of products with lower page counts and increased complexity. This — combined with increases in postage expenses and marketers’ increasing use of online marketing and communication channels (exacerbated by the COVID-19 pandemic, as well as the current macroeconomic conditions) — has led to excess manufacturing capacity.
The
Company believes that a disciplined approach for capital management and a strong balance sheet are critical to be able to invest in profitable growth opportunities and technological advances, thereby providing the highest return for shareholders. Management balances the use of cash between deleveraging the Company’s balance sheet (through reduction in debt and pension obligations), compelling investment opportunities (through capital expenditures, acquisitions and strategic investments) and returns to shareholders (through dividends and share repurchases).
The Company continues to make progress on integrating and streamlining all aspects of its business, thereby lowering its cost structure by consolidating its
manufacturing platform into its most efficient facilities, as well as realizing purchasing, mailing and logistics efficiencies by centralizing and consolidating print manufacturing volumes and eliminating redundancies in its administrative and corporate operations. The Company has continued to evolve its manufacturing platform, equipping facilities to be product-line agnostic, which enables the Company to maximize equipment utilization. Quad believes that the large plant size of its key printing facilities allows the Company to drive savings in certain product lines (such as publications and catalogs) due to economies of scale and from investments in automation and technology. The
Company continues to focus on proactively aligning its cost structure to the realities of the top-line pressures it faces in the printing industry through Lean Manufacturing and sustainable continuous improvement programs.
The Company believes it will continue to drive productivity improvements and sustainable cost reduction initiatives into the future through an engaged workforce and ongoing adoption of the latest manufacturing automation and technology. Through this strategy, the Company believes it can maintain the strongest, most efficient print manufacturing platform to remain a high-quality, low-cost producer.
Integrated distribution
with the United States Postal Service (“USPS”) is an important component of the Company’s business. Any material change in the current service levels provided by the postal service could impact the demand that clients have for print services. The USPS continues to experience financial problems. The passing of the Postal Service Reform Act of 2022, signed in April 2022, gave the USPS considerable financial relief as well as significant relief over the next ten years. While the legislative postal reform helps considerably, without decreased operational cost structures, increased efficiencies or increased volumes and revenues, these losses will potentially continue into the future. As a result of these financial difficulties, the USPS has continued to adjust its postal rates and service levels. Additional price increases may result in clients reducing mail volumes and exploring
the use of alternative methods for delivering a larger portion of their products, such as continued diversion to the internet and other alternative media channels, in order to ensure that they stay within their expected postage budgets.
Federal statute requires the Postal Regulatory Commission (“PRC”) to conduct reviews of the overall rate-making structure for the USPS to ensure funding stability. As a result of those reviews, the PRC authorized a five year rate-making structure that provides the USPS with additional pricing flexibility over
the Consumer Price Index cap, which may result in a substantially altered rate structure for mailers. The revised rate authority that is effective as a result of the rules issued by the PRC includes a higher overall rate cap on the USPS’ ability to increase rates from year to year. The USPS is expected to use these additional rate authorities to implement twice a year increases in the future. This has led to price spikes for mailers and may also reduce the incentive for the USPS to continue to take out costs and instead continue to rely on postage to cover the costs of an outdated postal service that does not reflect the industry’s ability or willingness to pay. The uncertainty as to how much of the authority the USPS will use on any specific rate increase also creates potential volume declines as rate predictability with respect to cost is no longer known for mailers. The result may be reduced demand for printed products as clients may move more aggressively into
other delivery methods, such as the many digital and mobile options now available to consumers.
The Company has invested significantly in its mail preparation and distribution capabilities to mitigate the impact of increases in postage costs, and to help clients successfully navigate the ever-changing postal environment. Through its data analytics, unique software to merge mail streams on a large scale, advanced finishing capabilities and technology, and in-house transportation and logistics operations, the Company manages the mail preparation and distribution of most of its clients’ products to maximize efficiency, to enable on-time and consistent delivery and to partially reduce these costs; however, the net impact
of increasing postal costs may create a decrease in client demand for print and mail products.
Macroeconomic conditions have weakened demand for the Company’s products and services, disrupted the Company’s supply chain and resulted in rising inflationary cost and labor pressures, distribution challenges and recessionary concerns. The Company continues to evaluate the current economic environment and may implement additional cost reduction measures as necessary.
Additionally, rising interest rates, and the increasing cost and availability of raw
materials, such as paper, ink, supplies, distribution and labor, have been and are expected to continue to adversely impact the Company’s results of operation. The Company is dependent on its production personnel to print the Company’s products in a cost-effective and efficient manner that allows the Company to obtain new clients and to drive sales from existing clients. The nationwide shortage of available production personnel may put a strain on the Company’s ability to accept new work from client requests, including during the
Company’s seasonally higher second half of the calendar year.
The Company has also experienced and anticipates it will continue to experience certain distribution challenges, including, but not limited to, delivery delays at the USPS and recent volume restrictions at the United Parcel Service, Federal Express and certain local couriers. As the supply chain and distribution challenges continue to evolve, the Company is unable to predict the duration of the shortages and challenges and the extent of the impact on the Company’s business, financial condition, cash flows and results of operations. As a result of the rising inflationary
cost pressures within its raw materials, distribution and labor, the Company has and will continue to pass along price increases to its clients. The Company expects inflationary cost pressures and certain supply chain shortages to continue through fiscal year 2023. The Company is unable to predict the future impact of the labor and supply chain shortages as well as cost inflation, and the resulting impact on the Company’s business, financial condition, cash flows and results of operations.
The Company’s operating income, operating margin, net earnings (loss) (computed using a 25% normalized tax rate for all items subject to tax) and diluted earnings (loss) per share for the three months ended September 30, 2023, changed from the three months ended September 30,
2022, as follows (dollars in millions, except margin and per share data):
(1)Restructuring, impairment and transaction-related charges increased $5.6 million ($4.2 million, net of tax), to $11.2 million during the three months ended September 30,
2023, and included the following:
a.A $0.4 million increase in employee termination charges from $1.2 million during the three months ended September 30, 2022, to $1.6 million during the three months ended September 30, 2023;
b.A $4.7 million increase in impairment charges from $0.5 million during the three months ended September 30, 2022, to $5.2 million during the three months ended September 30, 2023;
c.A $0.2 million increase in transaction-related
charges from $0.3 million during the three months ended September 30, 2022, to $0.5 million during the three months ended September 30, 2023;
d.A $0.4 million decrease in integration costs from $0.4 million during the three months ended September 30, 2022, to zero during the three months ended September 30, 2023;
e.A $0.7 million increase in various other restructuring charges from $3.2 million during the three months ended September 30, 2022, to $3.9 million during the three months ended September 30,
2023.
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.
(2)Other operating income elements decreased $5.9 million ($4.4 million, net of tax) primarily due to the impact from the decrease in print product volume, partially offset by the following: (1) an $8.3 million decrease in selling, general and administrative expenses; (2) a $2.8 million decrease
in depreciation and amortization expense; (3) impacts from improved manufacturing productivity; and (4) savings from other cost reduction initiatives.
(3)Interest expense increased $5.6 million ($4.2 million, net of tax) during the three months ended September 30, 2023, to $17.7 million. This change was due to a higher weighted average interest rate and a $1.9 million increase in interest expense related to the interest rate swap, partially offset by lower average debt levels in the three months ended September 30, 2023, as compared to the three months ended September 30, 2022.
(4)Net pension income decreased $2.7 million ($2.0 million, net of tax) during the three months ended September 30, 2023, to $0.5 million. This was due to the following: (1) a $2.0 million increase from interest cost on pension plan liabilities; (2) a $0.6 million decrease from the expected long-term return on pension plan assets; and (3) amortization of actuarial loss of $0.1 million during the three months ended September 30, 2023 that did not occur during the three months ended September 30, 2022.
(5)The $1.6 million increase in income tax expense as calculated in the following table is primarily due to a $3.6 million increase from
valuation allowance reserves, partially offset by a $1.9 million decrease from the impact of non-deductible expenses.
Income
tax expense (benefit) at normalized tax rate
(0.9)
4.1
(5.0)
Income tax expense (benefit) from the condensed consolidated statements of operations
(0.8)
2.6
(3.4)
Impact
of income taxes
$
0.1
$
(1.5)
$
1.6
Operating Results
The following table sets forth certain information from the Company’s condensed consolidated statements of operations on an absolute dollar basis and as a relative
percentage of total net sales for each noted period, together with the relative percentage change in such information between the periods set forth below:
Restructuring, impairment and transaction-related charges
11.2
1.6
%
5.6
0.7
%
5.6
100.0
%
Total
operating expenses
686.5
98.0
%
804.7
97.0
%
(118.2)
(14.7)
%
Operating income
$
13.7
2.0
%
$
25.2
3.0
%
$
(11.5)
(45.6)
%
Net
Sales
Product sales decreased $105.0 million, or 16.1%, for the three months ended September 30, 2023, compared to the three months ended September 30, 2022, primarily due to the following: (1) a $58.8 million decrease in sales in the Company’s print product lines, mainly due to decreased print volumes; (2) a $44.9 million decrease from paper sales; and (3) a $7.4 million decrease in net sales (which includes $2.4 million in paper sales) due to the divestiture of the Company’s print operations in Argentina, partially offset by $6.1 million in favorable foreign exchange impacts.
Service sales, which primarily consist of logistics, distribution, marketing services, imaging and medical services, decreased $24.7 million, or 13.9%, for the three months ended September 30, 2023, compared to the three months ended September 30, 2022, primarily due to an $18.0 million decrease in logistics sales from lower print volumes and a $6.7 million decrease in marketing services and medical services.
Cost of Sales
Cost of product sales decreased $91.8 million, or 16.5%, for the three months ended September 30, 2023, compared to the three months ended September 30,
2022, primarily due to the following: (1) the impact from lower print volumes; (2) a decrease in paper costs; (3) the impact from the divestiture of the Company’s print operations in Argentina; (4) impacts from improved manufacturing productivity; and (5) other cost reduction initiatives.
Cost of service sales decreased $20.9 million, or 17.9%, for the three months ended September 30, 2023, compared to the three months ended September 30, 2022, primarily due to decreased freight volumes and other cost reduction initiatives.
Selling, General and Administrative Expenses
Selling,
general and administrative expenses decreased $8.3 million, or 9.1%, for the three months ended September 30, 2023, compared to the three months ended September 30, 2022, primarily due to a $5.7 million decrease in employee-related costs and $2.1 million in favorable foreign exchange impacts. Selling, general and administrative expenses as a percentage of net sales increased to 11.8% for the three months ended September 30, 2023, compared to 10.9% for the three months ended September 30, 2022.
Depreciation and Amortization
Depreciation and amortization decreased $2.8 million, or 8.0%, for the three months
ended September 30, 2023, compared to the three months ended September 30, 2022, due to a $1.8 million decrease in depreciation expense, primarily related to property, plant and equipment becoming fully depreciated over the past year, and a $1.0 million decrease in amortization expense.
Restructuring, Impairment and Transaction-Related Charges
Restructuring, impairment and transaction-related charges increased $5.6 million, or 100.0%, for the three months ended September 30, 2023, compared to the three months ended September 30, 2022, primarily due to the following:
Vacant facility carrying costs and lease exit charges
3.8
2.0
1.8
Equipment
and infrastructure removal costs
0.1
0.1
—
Other restructuring activities (b)
—
1.1
(1.1)
Other
restructuring charges
3.9
3.2
0.7
Total restructuring, impairment and transaction-related charges
$
11.2
$
5.6
$
5.6
______________________________
(a)Includes
$5.2 million and $0.5 million of impairment charges during the three months ended September 30, 2023 and 2022, respectively, which consisted of $4.4 million for software licensing and related implementation costs from a terminated project, $0.6 million for property, and $0.2 million and $0.5 million, respectively, for machinery and equipment no longer being utilized in production as a result of facility consolidations, as well as other capacity reduction activities.
(b)Includes
$0.6 million in charges from foreign currency losses as a result of the economy in Argentina being classified as highly inflationary during the three months ended September 30, 2022. The Company considered the economy in Argentina to be highly inflationary since June 30, 2018.
EBITDA and EBITDA Margin—Consolidated
EBITDA is defined as net earnings (loss), 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 (used in) operating activities as a measure of liquidity. Quad’s calculation of EBITDA and EBITDA margin may be different from the calculations used by other companies, and therefore, comparability may be limited.
EBITDA
decreased $17.0 million for the three months ended September 30, 2023, compared to the three months ended September 30, 2022, primarily due to $5.6 million of increased restructuring, impairment and transaction-related charges and impacts from lower logistics and print volumes, partially offset by impacts from improved manufacturing productivity and savings from other cost reduction initiatives.
A reconciliation of EBITDA to net earnings (loss) for the three months ended September 30, 2023 and 2022, was as follows:
a.Restructuring, impairment and transaction-related charges of $11.2 million and $5.6 million for the three months ended September 30, 2023 and 2022, respectively.
The
following table summarizes net sales, operating income, operating margin and certain items impacting comparability within the United States Print and Related Services segment:
Operating
income (including restructuring, impairment and transaction-related charges)
18.9
33.3
(14.4)
(43.2)
%
Operating margin
3.1
%
4.7
%
N/A
N/A
Restructuring, impairment
and transaction-related charges
$
10.7
$
3.8
$
6.9
181.6
%
Net Sales
Product sales for the United States Print and Related Services segment decreased $80.5 million, or 14.9%, for the three months ended September 30, 2023, compared to the three
months ended September 30, 2022, primarily due to a $53.6 million decrease in sales in the Company’s print product lines, due to decreased print volumes, and a $26.9 million decrease from paper sales.
Service sales for the United States Print and Related Services segment decreased $24.6 million, or 14.2%, for the three months ended September 30, 2023, compared to the three months ended September 30, 2022, primarily due to a $17.2 million decrease in logistics sales and a $7.4 million decrease in marketing services and medical services.
Operating Income
Operating
income for the United States Print and Related Services segment decreased $14.4 million, or 43.2%, for the three months ended September 30, 2023, compared to the three months ended September 30, 2022, primarily due to the impact from a decrease in print volumes and a $6.9 million increase in restructuring, impairment and transaction-related charges, partially offset by the following: (1) a $2.5 million decrease in depreciation and amortization expense; (2) impacts from improved manufacturing productivity; and (3) savings from other cost reduction initiatives.
Operating margin for the United States Print and Related Services segment decreased to 3.1% for the three months ended September 30, 2023, from 4.7% for the three months ended September 30,
2022, primarily due to the reasons provided above.
Restructuring, Impairment and Transaction-Related Charges
Restructuring, impairment and transaction-related charges for the United States Print and Related Services segment increased $6.9 million, or 181.6%, for the three months ended September 30, 2023, compared to the three months ended September 30, 2022,
primarily due to the following:
Total restructuring, impairment and transaction-related charges
$
10.7
$
3.8
$
6.9
______________________________
(a)Includes
$5.2 million and $0.5 million of impairment charges during the three months ended September 30, 2023 and 2022, respectively, which consisted of $4.4 million for software licensing and related implementation costs from a terminated project, $0.6 million for property, and $0.2 million and $0.5 million, respectively, for machinery and equipment no longer being utilized in production as a result of facility consolidations, as well as other capacity reduction activities.
International
The following table summarizes net sales, operating income, operating margin, certain items impacting comparability
within the International segment:
Operating
income (including restructuring, impairment and transaction-related charges)
4.2
5.6
(1.4)
(25.0)
%
Operating margin
4.6
%
4.8
%
N/A
N/A
Restructuring, impairment
and transaction-related charges
$
0.6
$
1.6
$
(1.0)
(62.5)
%
Net Sales
Product
sales for the International segment decreased $24.5 million, or 21.9%, for the three months ended September 30, 2023, compared to the three months ended September 30, 2022, primarily due to the following: (1) an $18.0 million decrease in paper sales; (2) a $7.4 million decrease in net sales (which includes $2.4 million in paper sales) due to the divestiture of the Company’s print operations in Argentina; and (3) a $5.2 million decrease in print product volume and pricing, mainly in Mexico and Europe, partially offset by $6.1 million in favorable foreign exchange impacts, primarily in Mexico and Europe.
Service sales for the International segment decreased $0.1 million, or 2.1%, for the three months ended
September 30, 2023, compared to the three months ended September 30, 2022, primarily due to an $0.8 million decrease in logistics sales, partially offset by a $0.7 million increase in marketing services sales.
Operating Income
Operating income for the International segment decreased $1.4 million, or 25.0%, for the three months ended September 30, 2023, compared to the three months ended September 30, 2022, primarily due to a $2.4 million decrease in operating income, mainly in Mexico and Europe, partially offset by a $1.0 million decrease in restructuring, impairment and transaction-related charges.
Restructuring, Impairment and Transaction-Related Charges
Restructuring, impairment and transaction-related charges for the International segment decreased $1.0 million, or 62.5%, for the three months ended September 30, 2023, compared to the three months ended September 30, 2022, primarily due to the following:
Total restructuring, impairment and transaction-related charges
$
0.6
$
1.6
$
(1.0)
______________________________
(a)Includes
$0.6 million in charges from foreign currency losses as a result of the economy in Argentina being classified as highly inflationary during the three months ended September 30, 2022. The Company considered the economy in Argentina to be highly inflationary since June 30, 2018.
Corporate
The following table summarizes unallocated operating expenses presented as Corporate:
Operating expenses (including restructuring, impairment and transaction-related charges)
$
9.4
$
13.7
$
(4.3)
(31.4)
%
Restructuring, impairment
and transaction-related charges (income)
(0.1)
0.2
(0.3)
nm
Operating Expenses
Corporate operating expenses decreased $4.3 million, or 31.4%, for the three months ended September 30, 2023, compared to the three months ended September 30, 2022, primarily due to a $5.0 million decrease in employee-related costs and a $0.3 million decrease
in restructuring, impairment and transaction-related charges, partially offset by a $0.4 million increase in professional fees.
Restructuring, Impairment and Transaction-Related Charges (Income)
Corporate restructuring, impairment and transaction-related income was $0.1 million during the three months ended September 30, 2023 as compared to $0.2 million of charges during the three months ended September 30, 2022.
The Company’s operating income, operating margin, net earnings (loss) (computed using a 25% normalized tax rate for all items subject to tax) and diluted earnings (loss) per share for the nine months ended September 30, 2023, changed from the nine months ended September 30,
2022, as follows (dollars in millions, except margin and per share data):
(1)Restructuring, impairment and transaction-related charges increased $34.4 million ($25.8 million, net of tax), to $46.8 million during the nine months ended September 30,
2023, and included the following:
a.A $13.8 million increase in employee termination charges from $2.8 million during the nine months ended September 30, 2022, to $16.6 million during the nine months ended September 30, 2023;
b.A $15.2 million increase in impairment charges from $0.6 million during the nine months ended September 30, 2022, to $15.8 million during the nine months ended September 30, 2023;
c.A $0.3 million increase in transaction-related
charges from $0.8 million during the nine months ended September 30, 2022, to $1.1 million during the nine months ended September 30, 2023;
d.A $0.6 million increase in integration costs from $0.4 million during the nine months ended September 30, 2022, to $1.0 million during the nine months ended September 30, 2023;
e.A $4.5 million increase in various other restructuring charges from $7.8 million during the nine months ended September 30, 2022, to $12.3 million during the nine months ended September 30,
2023.
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.
(2)Other operating income elements increased $11.8 million ($8.8 million, net of tax impact) during the nine months ended September 30, 2023, primarily due to the following: (1) the impact from print product pricing; (2) an $8.9 million decrease
in depreciation and amortization expense; (3) a $1.8 million decrease in selling, general and administrative expenses; (4) impacts from improved manufacturing productivity; and (5) savings from other cost reduction initiatives, partially offset by print volume decreases.
(3)Interest expense increased $18.7 million ($14.0 million, net of tax) during the nine months ended September 30, 2023, to $51.0 million. This was primarily due to higher weighted average interest rates on borrowings and a $5.4 million increase in interest expense related to the interest rate swap, partially offset by lower average debt levels in the nine months ended September 30, 2023, as compared to the nine months ended September 30, 2022.
(4)Net
pension income decreased $8.2 million ($6.1 million, net of tax) during the nine months ended September 30, 2023, to $1.3 million. This was due to the following: (1) a $6.0 million increase from interest cost on pension plan liabilities; (2) a $1.7 million decrease from the expected long-term return on pension plan assets; and (3) amortization of actuarial loss of $0.5 million during the nine months ended September 30, 2023 that did not occur in 2022.
(5)The
$14.3 million increase in income tax expense as calculated in the following table is primarily due to a $12.7 million increase from valuation allowance reserves and a $1.2 million increase in the Company’s liability for audit assessments and unrecognized tax benefits.
Income
tax expense (benefit) at normalized tax rate
(6.9)
5.5
(12.4)
Income tax expense from the condensed
consolidated statements of operations
5.9
4.0
1.9
Impact of income taxes
$
12.8
$
(1.5)
$
14.3
Operating
Results
The following table sets forth certain information from the Company’s condensed consolidated statements of operations on an absolute dollar basis and as a relative percentage of total net sales for each noted period, together with the relative percentage change in such information between the periods set forth below:
Restructuring, impairment and transaction-related charges
46.8
2.2
%
12.4
0.6
%
34.4
nm
Total
operating expenses
2,147.6
99.0
%
2,287.0
98.1
%
(139.4)
(6.1)
%
Operating income
$
22.2
1.0
%
$
44.8
1.9
%
$
(22.6)
(50.4)
%
Net
Sales
Product sales decreased $112.0 million, or 6.1%, for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, primarily due to the following: (1) a $59.9 million decrease from paper sales; (2) a $42.9 million decrease in sales in the Company’s print product lines, mainly due to decreased print volumes; and (3) a $20.1 million decrease in net sales (which includes $6.4 million in paper sales) due to the divestiture of the Company’s print operations in Argentina, partially offset by $10.9 million in favorable foreign exchange impacts.
Service
sales, which primarily consist of logistics, distribution, marketing services, imaging and medical services, decreased $50.0 million, or 9.9%, for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, primarily due to a $43.0 million decrease in logistics sales from lower print volumes and a $7.0 million decrease in marketing services and medical services.
Cost
of product sales decreased $106.0 million, or 6.8%, for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, primarily due to the following: (1) a decrease in paper costs; (2) the impact from lower print volumes; (3) the impact from the divestiture of the Company’s print operations in Argentina; (4) impacts from improved manufacturing productivity; and (5) other cost reduction initiatives.
Cost of service sales decreased $57.1 million, or 16.4%, for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, primarily due to
decreased freight volumes and other cost reduction initiatives.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased $1.8 million, or 0.7%, for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, primarily due to $4.7 million in favorable foreign exchange impacts, partially offset by a $3.1 million increase in employee-related costs. Selling, general and administrative expenses as a percentage of net sales increased to 11.8% for the nine months ended September 30, 2023, compared to 11.0% for the nine months ended September 30,
2022.
Depreciation and Amortization
Depreciation and amortization decreased $8.9 million, or 8.3%, for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, due to a $6.9 million decrease in depreciation expense, primarily from property, plant and equipment becoming fully depreciated over the past year, and a $2.0 million decrease in amortization expense.
Restructuring, Impairment and Transaction-Related Charges
Restructuring, impairment and transaction-related charges increased $34.4 million
for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, primarily due to the following:
Vacant facility carrying costs and lease exit charges
11.2
4.1
7.1
Equipment and infrastructure removal costs
0.6
0.1
0.5
Other
restructuring activities (b)
0.5
3.6
(3.1)
Other restructuring charges
12.3
7.8
4.5
Total
restructuring, impairment and transaction-related charges
$
46.8
$
12.4
$
34.4
______________________________
(a)Includes $15.8 million and $0.6 million of impairment charges during the nine months ended September 30, 2023 and 2022, respectively, which consisted
of $4.4 million for software licensing and related implementation costs from a terminated project, $1.6 million for property, and $9.8 million and $0.6 million, respectively, for machinery and equipment no longer being utilized in production as a result of facility consolidations, as well as other capacity reduction activities.
(b)Includes $2.3 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, 2022. The Company considered the economy in Argentina to be highly inflationary since June 30, 2018.
EBITDA is defined as net earnings (loss), 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 provide by (used in) operating activities as a measure of liquidity. Quad’s calculation of EBITDA and EBITDA margin may be different from the calculations used by other companies, and
therefore, comparability may be limited.
EBITDA
decreased $39.7 million for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, primarily due to $34.4 million of increased restructuring, impairment and transaction-related charges and the impacts from lower logistics and print volumes, partially offset by the following: (1) an increase in print product pricing; (2) impacts from improved manufacturing productivity; and (3) savings from other cost reduction initiatives.
A reconciliation of EBITDA to net earnings (loss) for the nine months ended September 30, 2023 and 2022, was as follows:
a.Restructuring, impairment and transaction-related charges of $46.8 million and $12.4 million for the nine months ended September 30, 2023 and 2022, respectively.
The
following table summarizes net sales, operating income, operating margin and certain items impacting comparability within the United States Print and Related Services segment:
Operating
income (including restructuring, impairment and transaction-related charges)
38.0
65.0
(27.0)
(41.5)
%
Operating margin
2.0
%
3.2
%
N/A
N/A
Restructuring, impairment
and transaction-related charges
$
41.8
$
7.1
$
34.7
nm
Net Sales
Product sales for the United States Print and Related Services segment decreased $110.6 million, or 7.3%, for the nine months ended September 30, 2023, compared to the nine months ended September 30,
2022, primarily due to a $63.5 million decrease in sales in the Company’s print product lines, due to decreased print volumes, and a $47.1 million decrease in paper sales.
Service sales for the United States Print and Related Services segment decreased $48.9 million, or 10.0%, for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, primarily due to a $40.6 million decrease in logistics sales from lower print volumes and an $8.3 million decrease in marketing services and medical services.
Operating Income
Operating
income for the United States Print and Related Services segment decreased $27.0 million, or 41.5%, for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, primarily due to a $34.7 million increase in restructuring, impairment and transaction-related charges and the impact from decreased print volumes, partially offset by the following: (1) the impact from an increase in print product pricing; (2) a $7.9 million decrease in depreciation and amortization expense; (3) impacts from improved manufacturing productivity; and (4) savings from other cost reduction initiatives.
The operating margin for the United States Print and Related Services segment decreased to 2.0% for the nine months ended September 30,
2023, compared to 3.2% for the nine months ended September 30, 2022, primarily due to the reasons provided above.
Restructuring, Impairment and Transaction-Related Charges
Restructuring, impairment and transaction-related charges for the United States Print and Related Services segment increased $34.7 million for the nine months ended September 30,
2023, compared to the nine months ended September 30, 2022, primarily due to the following:
Total restructuring, impairment and transaction-related charges
$
41.8
$
7.1
$
34.7
______________________________
(a)Includes
$13.8 million and $0.6 million of impairment charges during the nine months ended September 30, 2023 and 2022, respectively, which consisted of $4.4 million for software licensing and related implementation costs from a terminated project, $1.6 million for property, and $7.8 million and $0.6 million, respectively, for machinery and equipment no longer being utilized in production as a result of facility consolidations, as well as other capacity reduction activities.
International
The following table summarizes net sales, operating income, operating margin, and certain items impacting comparability
within the International segment:
Operating
income (including restructuring, impairment and transaction-related charges)
20.2
15.5
4.7
30.3
%
Operating margin
6.4
%
4.9
%
N/A
N/A
Restructuring, impairment
and transaction-related charges
$
4.2
$
4.5
$
(0.3)
(6.7)
%
Net Sales
Product
sales for the International segment decreased $1.4 million, or 0.5%, for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, due to a $20.1 million decrease in net sales (which includes $6.4 million of paper sales) due to the divestiture of the Company’s print operations in Argentina and a $12.8 million decrease in paper sales, partially offset by $20.6 million increase in print volume, primarily in Mexico and Peru, and $10.9 million in favorable foreign exchange impacts, primarily in Mexico.
Service sales for the International segment decreased $1.1 million, or 7.2%, for the nine months ended September 30, 2023,
when compared to the nine months ended September 30, 2022, primarily due to a $2.4 million decrease in logistics sales, partially offset by a $1.3 million increase in marketing services sales.
Operating Income
Operating income for the International segment increased $4.7 million, or 30.3%, for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, primarily due to the following: (1) a $4.4 million increase in operating income from increased print product volume and pricing, primarily in Mexico; (2) cost saving initiatives; and (3) a $0.3 million decrease in restructuring, impairment and transaction-related charges.
Restructuring, Impairment and Transaction-Related Charges
Restructuring, impairment and transaction-related charges for the International segment decreased $0.3 million, or 6.7%, for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, primarily due to the following:
Total restructuring, impairment and transaction-related charges
$
4.2
$
4.5
$
(0.3)
______________________________
(a)Includes
$2.0 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 activities, during the nine months ended September 30, 2023. There were no impairment charges during nine months ended September 30, 2022.
(b)Includes $2.3 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, 2022. The Company considered the economy in Argentina to be highly inflationary since June 30, 2018.
Corporate
The
following table summarizes unallocated operating expenses presented as Corporate:
Operating expenses (including restructuring, impairment and transaction-related charges)
$
36.0
$
35.7
$
0.3
0.8
%
Restructuring, impairment and transaction-related
charges
0.8
0.8
—
—
%
Operating Expenses
Corporate operating expenses increased $0.3 million, or 0.8%, for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022.
Restructuring,
Impairment and Transaction-Related Charges
Corporate restructuring, impairment and transaction-related charges were $0.8 million for the nine months ended September 30, 2023 and 2022:
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 $357.9 million as of September 30, 2023, which consisted of up to $346.9 million of unused capacity under its revolving credit agreement, which was net of $31.1 million of issued letters of credit, and $11.0 million in cash and cash equivalents. Total liquidity is reduced to $342.2 million under the Company’s most restrictive
debt covenants, and consists of $331.2 million available under its revolving credit arrangement and $11.0 million in cash and cash equivalents. There were $54.5 million of borrowings under the $432.5 million revolving credit facility as of September 30, 2023.
The Company believes its expected future cash flows from operating activities and its current liquidity and capital resources, are sufficient to fund ongoing operating requirements and service debt and pension requirements for both the next 12 months and beyond.
Net Cash Provided by (Used in) Operating
Activities
Net cash provided by operating activities increased $71.4 million, from $30.3 million used in operating activities for the nine months ended September 30, 2022, to $41.1 million provided by operating activities for the nine months ended September 30, 2023. This increase was due to a $119.0 million increase in cash flows provided by changes in operating assets and liabilities, partially offset by a $47.6 million decrease in cash from earnings.
Net cash used in investing activities increased $10.8 million, from $46.6 million for the nine months ended September 30, 2022, to $57.4 million for the nine months ended September 30, 2023. The increase was primarily due to a $10.0 million increase in purchases of property, plant and equipment, a $6.3 million increase in cash used in other investing activities and a $0.6 million loan to an unconsolidated entity during the nine months ended September 30,
2023. These increases were partially offset by a $3.9 million increase in proceeds from the sale of property, plant, and equipment and a $2.2 million decrease in cost investment in unconsolidated entities.
Net Cash Provided by (Used in) Financing Activities
Net cash provided by financing activities increased $90.7 million, from $88.6 million used in financing activities for the nine months ended September 30,
2022, to $2.1 million provided by financing activities for the nine months ended September 30, 2023. The increase was primarily due to the following: (1) an $88.8 million increase in net borrowings of debt and lease obligations; (2) a $1.3 million decrease in the payment of accrued dividends from vested equity awards; and (3) a $0.8 million decrease in equity awards redeemed to pay employees’ tax obligations.
Free Cash Flow
Free Cash Flow is defined as net cash provided by (used in) 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 (used in) 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.
Net cash provided by (used in) operating activities
$
41.1
$
(30.3)
Less: purchases of property, plant and equipment
59.5
49.5
Free
Cash Flow (non-GAAP)
$
(18.4)
$
(79.8)
Free Cash Flow increased $61.4 million for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, primarily due to a $71.4 million increase in net cash provided by operating activities, partially offset by a $10.0 million increase in capital expenditures. See the “Net Cash Provided by (Used in) Operating Activities” section above for further explanations of the change in operating cash flows and the “Net Cash Used in Investing Activities” section
above for further explanations of the changes in purchases of property, plant and equipment.
Debt Leverage Ratio
The Debt Leverage Ratio is defined as total debt and finance lease obligations less cash and cash equivalents (Net Debt) divided by the trailing twelve months Adjusted EBITDA, comprised of the sum of the last twelve months of EBITDA (see the definition of EBITDA and the reconciliation of net earnings (loss) to EBITDA in the “Results of Operations” section above) and restructuring, impairment and transaction-related charges.
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 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 (used in) operating activities as a measure of liquidity. Quad’s calculation of the Debt Leverage Ratio may be different from similar calculations used by other companies and, therefore, comparability may be limited.
The Debt Leverage Ratio calculated below differs from the Total Leverage Ratio, the Total Net Leverage Ratio and Senior Secured Leverage Ratio included in the Company’s debt covenant calculations (see “Covenants and Compliance” section below for further information on debt covenants). The Total Leverage Ratio included in the
Company’s debt covenants includes interest rate derivative liabilities and letters of credit as debt and excludes non-cash stock-based compensation expense from EBITDA. The Total Net Leverage Ratio includes and excludes the same adjustments as the Total Leverage Ratio, in addition to netting domestic unrestricted cash with debt. Similarly, the Senior Secured Leverage Ratio includes and excludes the same adjustments as the Total Leverage Ratio, in addition to the exclusion of the outstanding balance of the surety bonds from debt and netting domestic unrestricted cash with debt.
The Debt Leverage Ratio at September 30, 2023, increased 0.20x, compared to December 31, 2022, primarily due to a $38.7 million increase in Net Debt and a $5.3 million reduction in trailing twelve months Adjusted EBITDA. The Debt Leverage Ratio at September 30, 2023, is within management’s desired target Debt Leverage Ratio range of 2.0x to 2.5x; however, the Company will operate at times above the Debt Leverage Ratio target range depending on the timing of compelling strategic investment opportunities, as well as seasonal working capital needs.
Debt
Obligations
As of September 30, 2023, the Company utilized a combination of debt instruments to fund cash requirements, including the following:
•Senior Secured Credit Facility:
◦Revolving credit facility ($54.5 million outstanding as of September 30, 2023); and
The Company’s various lending arrangements include certain financial covenants (all financial terms, numbers
and ratios are as defined in the Company’s debt agreements). Among these covenants, the Company was required to maintain the following as of September 30, 2023:
•Total Leverage Ratio. On a rolling twelve-month basis, the Total Leverage Ratio, defined as consolidated total indebtedness to consolidated EBITDA, shall not exceed 3.75 to 1.00 (for the twelve months ended September 30, 2023, the Company’s Total Leverage Ratio was 2.35 to 1.00).
•Liquidity,
defined as unrestricted cash and permitted investments of the Company and its subsidiaries (subject to certain conditions) plus the aggregate amount of the unused revolving credit facility commitments, shall not be less than $181.6 million at any time during the period commencing December 15, 2023 and ending when all obligations owed under the Senior Secured Credit Facility to lenders that are not extending lenders are paid in full.
•If there is any amount outstanding on the Revolving Credit Facility or Term Loan A, or if any lender has any revolving credit exposure or Term Loan A credit exposure, the
Company is required to maintain the following:
◦Senior Secured Leverage Ratio. On a rolling four-quarter basis, the Senior Secured Leverage Ratio, defined as the ratio of consolidated senior secured net indebtedness to consolidated EBITDA, shall not exceed (a) 3.50 to 1.00 for any fiscal quarter ending prior to December 31, 2023, and (b) 3.25 to 1.00 for any fiscal quarter ending on or after December 31, 2023 (other than, in the case of this clause (b), any fiscal quarter ending September 30 of any year, each of which shall be subject to a maximum Senior Secured Leverage Ratio not to exceed 3.50 to 1.00) (for the twelve months ended September 30, 2023, the
Company’s Senior Secured Leverage Ratio was 2.34 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, 2023, the Company’s Interest Coverage Ratio was 4.54 to 1.00).
The Company was in compliance with all financial covenants in its debt agreements as of September 30, 2023. While the
Company currently expects to be in compliance in future periods with all of the financial covenants, there can be no assurance that these covenants will continue to be met. The Company’s failure to maintain compliance with the covenants could prevent the Company from borrowing additional amounts and could result in a default under any of the debt agreements. Such default could cause the outstanding indebtedness to become immediately due and payable, by virtue of cross-acceleration or cross-default provisions.
In addition to those covenants, the Senior Secured Credit Facility also includes certain limitations on acquisitions, indebtedness, liens, dividends and repurchases of capital stock.
•If
the Company’s Total Leverage Ratio is greater than 2.75 to 1.00, the Company is prohibited from making greater than $60.0 million of dividend payments, capital stock repurchases and certain other payments, over the course of the agreement. If the Company’s Total Leverage Ratio is above 2.50 to 1.00 but below 2.75 to 1.00, the Company is prohibited from making greater than $100.0 million of dividend payments, capital stock repurchases and certain other payments, over the course of the agreement. If the Total Leverage Ratio is less than 2.50 to 1.00, there are no such restrictions. As the
Company’s Total Leverage Ratio as of September 30, 2023, was 2.35 to 1.00, the limitations described above are not currently applicable.
•If the Company’s Senior Secured Leverage Ratio is greater than 3.00 to 1.00 or the Company’s Total Net Leverage Ratio which, on a rolling twelve-month basis, is defined as consolidated net indebtedness to consolidated EBITDA, is greater than 3.50 to 1.00, the Company is prohibited from voluntarily prepaying any unsecured or subordinated indebtedness, with certain exceptions (including any mandatory prepayments on any
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 not currently applicable, as the Company’s Senior Secured Leverage Ratio was 2.34 to 1.00 and the Total Net Leverage Ratio was 2.34 to 1.00, as of September 30, 2023.
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.
As of September 30, 2023, there were $79.8 million of authorized repurchases remaining under the program. The following repurchases occurred during the three and nine months ended September 30, 2023 and 2022:
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
As of September 30, 2023, the Company’s contractual obligations 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 27, 2023.
New Accounting Pronouncements
As of September 30, 2023, there have been no new accounting pronouncements requiring disclosure within the condensed consolidated financial statements of this Quarterly Report on Form 10-Q.
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.
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, 2023, was primarily comprised of $524.0 million outstanding on the Term Loan A. As of September 30, 2023, there was also $54.5 million outstanding on the revolving credit facility. 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 $130.0 million interest rate swap in March 2019, and two $75.0 million interest rate collars in February 2023, and has classified $280.0 million of the Company’s variable rate debt as fixed rate debt. Including the impact of the
$280.0 million interest rate hedges of variable rate to fixed rate debt, Quad had variable rate debt outstanding of $299.9 million at a current weighted average interest rate of 7.7% and fixed rate debt and finance leases outstanding of $294.8 million at a current weighted average interest rate of 6.4% as of September 30, 2023. 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. In addition, a hypothetical 10% change in market interest rates would change the fair value of fixed rate debt at September 30, 2023, by approximately $0.1 million.
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 U.S. dollars in preparing the Company’s condensed consolidated balance sheets. As of September 30, 2023, the Company’s foreign subsidiaries
had net current assets (defined as current assets less current liabilities) subject to foreign currency translation risk of $88.6 million. The potential decrease in net current assets as of September 30, 2023, from a hypothetical 10% adverse change in quoted foreign currency exchange rates, would be approximately $8.9 million. This sensitivity analysis assumes a parallel shift in all major foreign currency exchange rates versus the U.S. dollar. Exchange rates rarely move in the same direction relative to the U.S. 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.
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 $27.2 million as of September 30, 2023, and $26.4 million as of December 31, 2022.
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, 2023, 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 could result in significant future charges.
Commodity Risk
The primary raw materials that the Company 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 price of such raw materials has fluctuated over time and has caused fluctuations in the Company’s net sales and cost of sales. This volatility may continue and the Company may experience increases in the costs of its raw materials in the future as prices in the overall paper, ink and energy markets are expected to remain beyond its control. The price and availability of paper may also be adversely affected by paper mills’ permanent or temporary closures, and mills’ access to raw materials, conversion to produce other types of paper, and ability to transport paper produced.
Approximately
half of the paper used by the Company is supplied directly by its 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 price and availability of ink and ink components may be adversely affected by the availability of component raw materials, labor and transportation.
The
Company may not be able to fully 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 logistics 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, 2023, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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, 2022, which was filed with the SEC on February 27, 2023.
ITEM
2. Unregistered Sales of Equity Securities and Use of Proceeds
(a)None.
(b)Not applicable.
(c)Information about the Company’s repurchases of its class A common stock in the quarter ended September 30, 2023, was as follows:
Issuer
Purchases of Equity Securities
Period
Total Number of Shares Purchased(1)
Average Price Paid Per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1)
Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs(2)
(1)Represents
shares of the Company’s class A common stock.
(2)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. There were 952,057 and 2,360,105 shares repurchased during the three and nine months ended September 30, 2023, respectively. As of September 30, 2023, there were $79.8 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.
Financial
statements from the Quarterly Report on Form 10-Q of Quad/Graphics, Inc. for the quarter ended September 30, 2023 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).
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.
