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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2022
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                    to
Commission File Number 001-34806
quad-20220331_g1.jpg
Quad/Graphics, Inc.
(Exact name of registrant as specified in its charter)
Wisconsin 39-1152983
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
N61 W23044 Harry’s Way, Sussex, Wisconsin 53089-3995
(Address of principal executive offices) (Zip Code)
(414) 566-6000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol(s) Name of each exchange on which registered
Class A Common Stock,
par value $0.025 per share
QUAD The New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   No 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes   No 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes   No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.
Class Outstanding as of April 29, 2022
Class A Common Stock 42,023,525
Class B Common Stock 13,556,858
Class C Common Stock



QUAD/GRAPHICS, INC.
FORM 10-Q INDEX
For the Quarter Ended March 31, 2022
Page No.
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PART I — FINANCIAL INFORMATION

ITEM 1.    Condensed Consolidated Financial Statements (Unaudited)

QUAD/GRAPHICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data)
(UNAUDITED)
Three Months Ended March 31,
2022 2021
Net sales
Products $ 580.9  $ 526.0 
Services 163.3  179.8 
Total net sales 744.2  705.8 
Cost of sales
Products 503.1  428.3 
Services 116.5  131.5 
Total cost of sales 619.6  559.8 
Operating expenses
Selling, general and administrative expenses 79.1  80.5 
Depreciation and amortization 36.5  41.9 
Restructuring, impairment and transaction-related charges 3.6  2.6 
Total operating expenses 738.8  684.8 
Operating income 5.4  21.0 
Interest expense 9.3  14.5 
Net pension income (3.2) (4.1)
Earnings (loss) before income taxes and equity in earnings of unconsolidated entity (0.7) 10.6 
Income tax expense 0.3  0.5 
Earnings (loss) before equity in earnings of unconsolidated entity (1.0) 10.1 
Equity in earnings of unconsolidated entity —  (0.1)
Net earnings (loss) $ (1.0) $ 10.2 
Earnings (loss) per share
Basic $ (0.02) $ 0.20 
Diluted $ (0.02) $ 0.19 
Weighted average number of common shares outstanding
Basic 51.5  51.4 
Diluted 51.5  52.8 

See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).


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QUAD/GRAPHICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
(UNAUDITED)
Three Months Ended March 31,
2022 2021
Net earnings (loss) $ (1.0) $ 10.2 
Other comprehensive income (loss)
Translation adjustments 0.8  (6.0)
Interest rate swap adjustments 1.4  1.8 
Other comprehensive income (loss), before tax 2.2  (4.2)
Income tax impact related to items of other comprehensive income (loss) (0.3) — 
Other comprehensive income (loss), net of tax 1.9  (4.2)
Comprehensive income $ 0.9  $ 6.0 

See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).



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QUAD/GRAPHICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions)
(UNAUDITED)
March 31,
2022
December 31,
2021
ASSETS
Cash and cash equivalents $ 138.3  $ 179.9 
Receivables, less allowance for credit losses of $28.4 million at March 31, 2022, and $28.2 million at December 31, 2021
341.7  362.0 
Inventories 249.1  226.2 
Prepaid expenses and other current assets 45.1  41.0 
Total current assets 774.2  809.1 
Property, plant and equipment—net 716.3  727.0 
Operating lease right-of-use assets—net 119.2  125.7 
Goodwill 86.4  86.4 
Other intangible assets—net 68.2  75.3 
Other long-term assets 73.9  66.5 
Total assets $ 1,838.2  $ 1,890.0 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Accounts payable $ 396.3  $ 367.3 
Other current liabilities 248.2  314.3 
Short-term debt and current portion of long-term debt 251.5  245.6 
Current portion of finance lease obligations 1.4  1.8 
Current portion of operating lease obligations 28.6  28.1 
Total current liabilities 926.0  957.1 
Long-term debt 547.9  554.9 
Finance lease obligations 1.4  1.4 
Operating lease obligations 93.3  99.8 
Deferred income taxes 12.8  11.9 
Other long-term liabilities 119.5  128.1 
Total liabilities 1,700.9  1,753.2 
Commitments and contingencies (Note 8)
Shareholders’ equity
Preferred stock —  — 
Common stock, Class A 1.0  1.0 
Common stock, Class B 0.4  0.4 
Common stock, Class C —  — 
Additional paid-in capital 838.6  839.3 
Treasury stock, at cost (14.6) (14.9)
Accumulated deficit (528.8) (527.8)
Accumulated other comprehensive loss (159.3) (161.2)
Total shareholders’ equity 137.3  136.8 
Total liabilities and shareholders’ equity $ 1,838.2  $ 1,890.0 

See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).


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QUAD/GRAPHICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(UNAUDITED)
Three Months Ended March 31,
2022 2021
OPERATING ACTIVITIES
Net earnings (loss) $ (1.0) $ 10.2 
Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization 36.5  41.9 
Impairment charges 0.1  0.8 
Amortization of debt issuance costs and original issue discount 0.7  0.6 
Stock-based compensation 1.9  3.0 
Gain on the sale or disposal of property, plant and equipment (0.4) (7.0)
Deferred income taxes 0.3  0.1 
Equity in earnings of unconsolidated entity —  (0.1)
Changes in operating assets and liabilities—net of acquisitions and divestitures (55.0) 23.4 
Net cash provided by (used in) operating activities (16.9) 72.9 
INVESTING ACTIVITIES
Purchases of property, plant and equipment (19.1) (16.9)
Cost investment in unconsolidated entities (1.9) (0.3)
Proceeds from the sale of property, plant and equipment 0.5  11.4 
Other investing activities 1.8  (0.2)
Net cash used in investing activities (18.7) (6.0)
FINANCING ACTIVITIES
Payments of long-term debt (3.7) (33.9)
Payments of finance lease obligations (0.8) (0.8)
Borrowings on revolving credit facilities 25.5  4.4 
Payments on revolving credit facilities (23.1) (5.7)
Equity awards redeemed to pay employees’ tax obligations (2.5) (1.1)
Payment of cash dividends (1.4) (1.4)
Other financing activities (0.1) (2.9)
Net cash used in financing activities (6.1) (41.4)
Effect of exchange rates on cash and cash equivalents 0.1  (0.1)
Net increase (decrease) in cash and cash equivalents (41.6) 25.4 
Cash and cash equivalents at beginning of period 179.9  55.2 
Cash and cash equivalents at end of period $ 138.3  $ 80.6 

See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).


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QUAD/GRAPHICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
AND NONCONTROLLING INTERESTS
(in millions)
(UNAUDITED)

Condensed Consolidated Statement of Shareholders’ Equity For the Three Months Ended March 31, 2022
Common Stock Additional
Paid-in
Capital
Treasury Stock Accumulated
Deficit
Accumulated
Other
Comprehensive
Loss
Quad’s
Shareholders’
Equity
Noncontrolling
Interests
Shares Amount Shares Amount
Balance at December 31, 2021 55.7  $ 1.4  $ 839.3  (1.4) $ (14.9) $ (527.8) $ (161.2) $ 136.8  $  
Net earnings —  —  —  —  —  (1.0) —  (1.0) — 
Foreign currency translation adjustments —  —  —  —  —  —  0.8  0.8  — 
Interest rate swap adjustments, net of tax —  —  —  —  —  —  1.1  1.1  — 
Stock-based compensation —  —  1.7  —  —  —  —  1.7  — 
Issuance of share-based awards, net of other activity 0.9  —  (2.4) 0.8  2.8  —  —  0.4  — 
Awards redeemed to pay employees’ tax obligations —  —  —  (0.4) (2.5) —  —  (2.5) — 
Balance at March 31, 2022 56.6  $ 1.4  $ 838.6  (1.0) $ (14.6) $ (528.8) $ (159.3) $ 137.3  $  

Condensed Consolidated Statement of Shareholders’ Equity For the Three Months Ended March 31, 2021
Common Stock Additional
Paid-in
Capital
Treasury Stock Accumulated
Deficit
Accumulated
Other
Comprehensive
Loss
Quad’s
Shareholders’
Equity
Noncontrolling
Interests
Shares Amount Shares Amount
Balance at December 31, 2020 54.4  $ 1.4  $ 833.1  (0.8) $ (13.1) $ (566.0) $ (171.3) $ 84.1  $ 0.7 
Net earnings —  —  —  —  —  10.2  —  10.2  — 
Foreign currency translation adjustments —  —  —  —  —  —  (6.0) (6.0) — 
Interest rate swap adjustments, net of tax —  —  —  —  —  —  1.8  1.8  — 
Stock-based compensation —  —  3.0  —  —  —  —  3.0  — 
Issuance of share-based awards, net of other activity 1.3  —  (0.6) —  1.0  —  —  0.4  — 
Awards redeemed to pay employees’ tax obligations —  —  —  (0.2) (1.1) —  —  (1.1) — 
Balance at March 31, 2021 55.7  $ 1.4  $ 835.5  (1.0) $ (13.2) $ (555.8) $ (175.5) $ 92.4  $ 0.7 

See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).


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QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2022
(In millions, except share and per share data and unless otherwise indicated)

Note 1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements for Quad/Graphics, Inc. and its subsidiaries (the “Company” or “Quad”) have been prepared by the Company pursuant to the rules and regulations for interim financial information of the United States Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted pursuant to such SEC rules and regulations. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated annual financial statements as of and for the year ended December 31, 2021, and notes thereto included in the Company’s latest Annual Report on Form 10-K filed with the SEC on February 23, 2022.

The Company is subject to seasonality in its quarterly results as net sales and operating income are typically higher in the third and fourth quarters of the calendar year as compared to the first and second quarters. The fourth quarter is typically the highest seasonal quarter for cash flows provided by operating activities and Free Cash Flow due to the reduction of working capital requirements that reach peak levels during the third quarter. Seasonality is driven by increased retail inserts and catalogs primarily due to back-to-school and holiday-related advertising and promotions. Due to the impacts from supply chain disruptions in 2022, the Company expects to reach higher than typical levels of working capital requirements during the first and second quarters. The Company expects seasonality impacts to continue in future years.

The financial information contained herein reflects all adjustments, in the opinion of management, necessary for a fair presentation of the Company’s results of operations for the three months ended March 31, 2022 and 2021. All of these adjustments are of a normal recurring nature, except as otherwise noted. All intercompany transactions have been eliminated in consolidation. These unaudited condensed consolidated financial statements include estimates and assumptions of management that affect the amounts reported in the condensed consolidated financial statements. Actual results could differ from these estimates.

COVID-19 Pandemic Impacts and Response - The COVID-19 pandemic has had, and will continue to have, a negative impact on the Company’s business, financial condition, cash flows, results of operations, supply chain and raw materials availability, although the full extent is still uncertain. Throughout the pandemic, the Company implemented cost reduction and cash conservation initiatives in response to the pandemic’s impact on its business. With ongoing advancements against the COVID-19 pandemic, the effects on the Company have lessened from previous periods. The Company continues to evaluate the impact and may implement additional cost reduction measures as necessary. The pandemic has also disrupted the Company’s supply chain and contributed to rising inflationary cost pressures within the Company’s raw materials, distribution and labor. The ultimate impact of COVID-19 on the Company’s business, financial condition, cash flows, results of operations, supply chain and raw materials availability, will depend on future developments, including the continuing duration of the pandemic and the related length of its impact on the global economy, all of which are still uncertain.










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QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2022
(In millions, except share and per share data and unless otherwise indicated)
Note 2. Revenue Recognition

Revenue Disaggregation

The following table provides information about disaggregated revenue by the Company’s operating segments and major products and services offerings for the three months ended March 31, 2022 and 2021:

United States Print
and Related Services
International Total
Three months ended March 31, 2022
Catalog, publications, retail inserts, and directories $ 341.7  $ 60.5  $ 402.2 
Direct mail and other printed products 149.2  26.9  176.1 
Other 2.4  0.2  2.6 
Total products 493.3  87.6  580.9 
Logistics services 71.0  5.3  76.3 
Marketing services and medical services 86.8  0.2  87.0 
Total services 157.8  5.5  163.3 
Total net sales $ 651.1  $ 93.1  $ 744.2 
Three months ended March 31, 2021
Catalog, publications, retail inserts, and directories $ 329.7  $ 49.0  $ 378.7 
Direct mail and other printed products 129.0  16.8  145.8 
Other 1.2  0.3  1.5 
Total products 459.9  66.1  526.0 
Logistics services 92.7  5.1  97.8 
Marketing services and medical services 82.0  —  82.0 
Total services 174.7  5.1  179.8 
Total net sales $ 634.6  $ 71.2  $ 705.8 

Nature of Products and Services

The Company recognizes its products and services revenue based on when the transfer of control passes to the client or when the service is completed and accepted by the client.
The products offering is predominantly comprised of the Company’s print operations which includes retail inserts, publications, catalogs, special interest publications, journals, direct mail, directories, in-store marketing and promotion, packaging, newspapers, custom print products, other commercial and specialty printed products and global paper procurement.
The Company considers its logistic operations as services, which include the delivery of printed material. The services offering also includes revenues related to the Company’s marketing services operations, which include digital content management, photography, color services, page production, marketing strategy, creative solutions, media planning and placement and facilities management, as well as medical services.



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QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2022
(In millions, except share and per share data and unless otherwise indicated)
Costs to Obtain Contracts

In accordance with Accounting Standards Codification 606 — Revenue from Contracts with Customers, the Company capitalizes certain sales incentives of the sales compensation packages for costs that are directly attributed to being awarded a client contract or renewal and would not have been incurred had the contract not been obtained. The Company also defers certain contract acquisition costs paid to the client at contract inception. Costs to obtain contracts with a duration of less than one year are expensed as incurred. For all contract costs with contracts over one year, the Company amortizes the costs to obtain contracts on a straight-line basis over the estimated life of the contract and reviews quarterly for impairment. Activity impacting costs to obtain contracts for the three months ended March 31, 2022, was as follows:
Costs to Obtain Contracts
Balance at December 31, 2021 $ 5.1 
Costs to obtain contracts — 
Amortization of costs to obtain contracts (0.5)
Balance at March 31, 2022 $ 4.6 

Note 3. Restructuring, Impairment and Transaction-Related Charges

The Company recorded restructuring, impairment and transaction-related charges for the three months ended March 31, 2022 and 2021, as follows:
Three Months Ended March 31,
2022 2021
Employee termination charges $ 1.1  $ 4.7 
Impairment charges 0.1  0.8 
Transaction-related charges 0.2  0.2 
Other restructuring charges (income) 2.2  (3.1)
Total $ 3.6  $ 2.6 

The costs related to these activities have been recorded in the condensed consolidated statements of operations as restructuring, impairment and transaction-related charges. See Note 18, “Segment Information,” for restructuring, impairment and transaction-related charges by segment.

Restructuring Charges

The Company has a restructuring program related to eliminating excess manufacturing capacity and properly aligning its cost structure. The Company classifies the following charges as restructuring:

Employee termination charges are incurred when the Company reduces its workforce through facility consolidations and separation programs.

Other restructuring charges (income) are presented net of the gains on the sale of facilities, including a gain on the sale of the Riverside, California facility during the three months ended March 31, 2021. The components of other restructuring charges (income) consisted of the following during the three months ended March 31, 2022 and 2021:


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QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2022
(In millions, except share and per share data and unless otherwise indicated)
Three Months Ended March 31,
2022 2021
Vacant facility carrying costs and lease exit charges $ 1.0  $ 3.9 
Equipment and infrastructure removal costs —  0.8 
Gains on the sale of facilities —  (7.8)
Other restructuring activities 1.2  — 
Other restructuring charges (income) $ 2.2  $ (3.1)

The restructuring charges recorded were based on plans that have been committed to by management and were, in part, based upon management’s best estimates of future events. Changes to the estimates may require future restructuring charges and adjustments to the restructuring liabilities. The Company expects to incur additional restructuring charges related to these and other initiatives.

Impairment Charges

The Company recognized impairment charges of $0.1 million and $0.8 million during the three months ended March 31, 2022 and 2021, respectively. The impairment charges were primarily for machinery and equipment no longer being utilized in production as a result of facility consolidations, as well as other capacity reduction and strategic divestiture activities.

The fair values of the impaired assets were determined by the Company to be Level 3 under the fair value hierarchy (see Note 11, “Financial Instruments and Fair Value Measurements,” for the definition of Level 3 inputs) and were estimated based on broker quotes, internal expertise related to current marketplace conditions and estimated future discounted cash flows. These assets were adjusted to their estimated fair values at the time of impairment. If estimated fair values subsequently decline, the carrying values of the assets are adjusted accordingly.

Transaction-Related Charges

The Company incurs transaction-related charges primarily consisting of professional service fees related to business acquisition and divestiture activities. Transaction-related charges of $0.2 million were recorded during the three months ended March 31, 2022 and 2021.

Restructuring Reserves

Activity impacting the Company’s restructuring reserves for the three months ended March 31, 2022, was as follows:
Employee
Termination
Charges
Impairment
Charges
Transaction-Related
Charges
Other
Restructuring
Charges
Total
Balance at December 31, 2021 $ 4.7  $ —  $ 0.4  $ 50.2  $ 55.3 
Expense, net 1.1  0.1  0.2  2.2  3.6 
Cash payments, net (1.7) —  (0.1) (3.4) (5.2)
Non-cash adjustments/reclassifications and translation (0.2) (0.1) —  0.5  0.2 
Balance at March 31, 2022 $ 3.9  $ —  $ 0.5  $ 49.5  $ 53.9 

The Company’s restructuring reserves at March 31, 2022, included a short-term and a long-term component. The short-term portion included $46.7 million in other current liabilities (see Note 12, “Other Current and Long-Term Liabilities”) and $0.7 million in accounts payable in the condensed consolidated balance sheets as the Company expects these reserves to be settled within the next twelve months. The long-term portion of $6.5 million is included in other long-term liabilities (see Note 12, “Other Current and Long-Term Liabilities”) in the condensed consolidated balance sheets.


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QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2022
(In millions, except share and per share data and unless otherwise indicated)
Note 4. Goodwill and Other Intangible Assets

Goodwill

Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired in a business combination. Goodwill is assigned to specific reporting units and is tested annually for impairment as of October 31, or more frequently if events or changes in circumstances indicate that it is more likely than not that the fair value of a reporting unit is below its carrying value.

No indicators of impairment were identified in any of the Company’s reporting units during the three months ended March 31, 2022.

The accumulated goodwill impairment losses and the carrying value of goodwill at March 31, 2022, and December 31, 2021, were as follows:
United States Print and Related Services International Total
Goodwill $ 864.7  $ 30.0  $ 894.7 
Accumulated goodwill impairment loss (778.3) (30.0) (808.3)
Goodwill, net of accumulated goodwill impairment loss $ 86.4  $ —  $ 86.4 

Other Intangible Assets

The components of finite-lived intangible assets at March 31, 2022, and December 31, 2021, were as follows:
March 31, 2022 December 31, 2021
Weighted
Average
Amortization
Period
(Years)
Gross
Carrying
Amount
Accumulated
Amortization
Net Book
Value
Weighted
Average
Amortization
Period
(Years)
Gross
Carrying
Amount
Accumulated
Amortization
Net Book
Value
Trademarks, patents, licenses and agreements 6 $ 67.7  $ (52.1) $ 15.6  6 $ 68.1  $ (50.7) 17.4 
Capitalized software 5 19.6  (14.9) 4.7  5 19.2  (14.3) 4.9 
Acquired Technology 5 3.6  (1.4) 2.2  5 3.6  (1.2) 2.4 
Customer relationships 6 560.7  (515.0) 45.7  6 560.1  (509.5) 50.6 
Total $ 651.6  $ (583.4) $ 68.2  $ 651.0  $ (575.7) $ 75.3 

The gross carrying amount and accumulated amortization within other intangible assets—net in the condensed consolidated balance sheets at March 31, 2022, and December 31, 2021, differs from the value originally recorded at acquisition due to impairment charges recorded in prior years and the effects of currency fluctuations since the purchase date.

Other intangible assets are evaluated for potential impairment whenever events or circumstances indicate that the carrying value may not be recoverable. There were no impairment charges recorded on finite-lived intangible assets for the three months ended March 31, 2022 and 2021.



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QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2022
(In millions, except share and per share data and unless otherwise indicated)
Amortization expense for other intangible assets was $7.6 million and $9.1 million for the three months ended March 31, 2022 and 2021, respectively. The estimated future amortization expense related to other intangible assets as of March 31, 2022, was as follows:
Amortization Expense
Remainder of 2022 $ 23.1 
2023 26.6 
2024 15.4 
2025 2.7 
2026 0.4 
2027 — 
Total $ 68.2 

Note 5. Receivables

Prior to granting credit, the Company evaluates each client in an underwriting process, taking into consideration the prospective client’s financial condition, past payment experience, credit bureau information and other financial and qualitative factors that may affect the client’s ability to pay. Specific credit reviews and standard industry credit scoring models are used in performing this evaluation. Clients’ financial condition is continuously monitored as part of the normal course of business. Some of the Company’s clients are highly leveraged or otherwise subject to their own operating and regulatory risks.

Specific client provisions are made when a review of significant outstanding amounts, utilizing information about client creditworthiness, as well as current and future economic trends based on reasonable forecasts, indicates that collection is doubtful. The Company also records a general provision based on the overall risk profile of the receivables and through the assessment of reasonable economic forecasts. The risk profile is assessed on a quarterly basis using various methods, including external resources and credit scoring models. Accounts that are deemed uncollectible are written off when all reasonable collection efforts have been exhausted.

The Company has recorded credit loss expense of $0.7 million and $0.6 million during the three months ended March 31, 2022 and 2021, respectively, which is included in selling, general and administrative expenses in the condensed consolidated statements of operations.

Activity impacting the allowance for credit losses for the three months ended March 31, 2022, was as follows:
Allowance for Credit Losses
Balance at December 31, 2021 $ 28.2 
Provisions 0.7 
Write-offs (0.4)
Translation and other (0.1)
Balance at March 31, 2022 $ 28.4 



13



QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2022
(In millions, except share and per share data and unless otherwise indicated)
Note 6. Inventories

The components of inventories at March 31, 2022, and December 31, 2021, were as follows:
March 31,
2022
December 31,
2021
Raw materials and manufacturing supplies $ 166.1  $ 148.6 
Work in process 38.5  31.6 
Finished goods 44.5  46.0 
Total $ 249.1  $ 226.2 

Note 7. Property, Plant and Equipment

The components of property, plant and equipment at March 31, 2022, and December 31, 2021, were as follows:
March 31,
2022
December 31,
2021
Land $ 74.1  $ 73.6 
Buildings 658.0  658.4 
Machinery and equipment 2,881.2  2,883.7 
Other(1)
177.5  181.9 
Construction in progress 32.1  25.1 
Property, plant and equipment—gross $ 3,822.9  $ 3,822.7 
Less: accumulated depreciation (3,106.6) (3,095.7)
Property, plant and equipment—net $ 716.3  $ 727.0 
______________________________
(1)Other consists of computer equipment, vehicles, furniture and fixtures, leasehold improvements and communication-related equipment.

The Company recorded impairment charges of $0.1 million and $0.8 million during the three months ended March 31, 2022 and 2021, respectively, to reduce the carrying amounts of certain property, plant and equipment no longer utilized in production to fair value (see Note 3, “Restructuring, Impairment and Transaction-Related Charges,” for further discussion on impairment charges).

The Company recognized depreciation expense of $28.9 million and $32.8 million for the three months ended March 31, 2022 and 2021, respectively.


14



QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2022
(In millions, except share and per share data and unless otherwise indicated)
Note 8. Commitments and Contingencies

Litigation

The Company is named as a defendant in various lawsuits in which claims are asserted against the Company in the normal course of business. The liabilities, if any, which ultimately result from such lawsuits are not expected by management to have a material impact on the condensed consolidated financial statements of the Company.

Environmental Reserves

The Company is subject to various laws, regulations and government policies relating to health and safety, to the generation, storage, transportation, and disposal of hazardous substances, and to environmental protection in general. The Company provides for expenses associated with environmental remediation obligations when such amounts are probable and can be reasonably estimated. Such reserves are adjusted as new information develops or as circumstances change. The environmental reserves are not discounted. The Company believes it is in compliance with such laws, regulations and government policies in all material respects. Furthermore, the Company does not anticipate that maintaining compliance with such environmental statutes will have a material impact upon the Company’s condensed consolidated financial position.

Note 9. Debt

The components of long-term debt as of March 31, 2022, and December 31, 2021, were as follows:
March 31,
2022
December 31,
2021
Master note and security agreement $ 6.2  $ 7.2 
Term Loan A 575.4  575.4 
Revolving credit facility —  — 
Senior unsecured notes 209.1  211.5 
International term loans 5.2  5.3 
International revolving credit facilities 10.8  8.8 
Other 1.1  1.4 
Debt issuance costs (8.4) (9.1)
Total debt $ 799.4  $ 800.5 
Less: short-term debt and current portion of long-term debt (251.5) (245.6)
Long-term debt $ 547.9  $ 554.9 

Fair Value of Debt

Based upon the interest rates available to the Company for borrowings with similar terms and maturities, the fair value of the Company’s total debt was approximately $0.8 billion at March 31, 2022 and at December 31, 2021. The fair value determination of the Company’s total debt was categorized as Level 2 in the fair value hierarchy (see Note 11, “Financial Instruments and Fair Value Measurements,” for the definition of Level 2 inputs).



15



QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2022
(In millions, except share and per share data and unless otherwise indicated)
Senior Unsecured Notes

During the three months ended March 31, 2022, the Company repurchased $2.4 million of its outstanding unsecured 7.0% senior notes due May 1, 2022 (the “Senior Unsecured Notes”) in the open market. All repurchased Senior Unsecured Notes were canceled. The Company used cash flows from operating activities to fund the repurchases. These repurchases were completed primarily to reduce interest expense.

On May 2, 2022, the Company used liquidity available under its revolving credit facility and available cash on hand to fund the repayment on maturity of all $209.1 million aggregate principal amount of its Senior Unsecured Notes.

Debt Issuance Costs

Activity impacting the Company’s debt issuance costs for the three months ended March 31, 2022, was as follows:
Capitalized Debt
Issuance Costs
Balance at December 31, 2021 $ 9.1 
Amortization of debt issuance costs (0.7)
Balance at March 31, 2022 $ 8.4 

Covenants and Compliance

The Company’s various lending arrangements include certain financial covenants (all financial terms, numbers and ratios are as defined in the Company’s debt agreements, as amended to date). The Company was in compliance with all covenants in its debt agreements as of March 31, 2022. Among these covenants, the Company was required to maintain the following as of March 31, 2022:

Total Leverage Ratio. On a rolling twelve-month basis, the Total Leverage Ratio, defined as consolidated total indebtedness to consolidated EBITDA, shall not exceed 3.75 to 1.00 (for the twelve months ended March 31, 2022, the Company’s Total Leverage Ratio was 3.30 to 1.00).

Liquidity, defined as unrestricted cash and permitted investments of the Company and its subsidiaries (subject to certain conditions) plus the aggregate amount of the unused revolving credit facility commitments, shall not be less than $181.6 million at any time during the period commencing December 15, 2023 and ending when all obligations owed under the Senior Secured Credit Facility to lenders that are not extending lenders are paid in full.

If there is any amount outstanding on the Revolving Credit Facility or Term Loan A, or if any lender has any revolving credit exposure or Term Loan A credit exposure, the Company is required to maintain the following:
Senior Secured Leverage Ratio. On a rolling four-quarter basis, the Senior Secured Leverage Ratio, defined as the ratio of consolidated senior secured net indebtedness to consolidated EBITDA, shall not exceed (a) 3.50 to 1.00 for any fiscal quarter ending prior to December 31, 2023, and (b) 3.25 to 1.00 for any fiscal quarter ending on or after December 31, 2023 (other than, in the case of this clause (b), any fiscal quarter ending September 30 of any year, each of which shall be subject to a maximum Senior Secured Leverage Ratio not to exceed 3.50 to 1.00) (for the twelve months ended March 31, 2022, the Company’s Senior Secured Leverage Ratio was 1.89 to 1.00).
Interest Coverage Ratio. On a rolling twelve-month basis, the Interest Coverage Ratio, defined as consolidated EBITDA to cash consolidated interest expense, shall not be less than 3.00 to 1.00 (for the twelve months ended March 31, 2022, the Company’s Interest Coverage Ratio was 5.18 to 1.00).



16



QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2022
(In millions, except share and per share data and unless otherwise indicated)
The indenture underlying the Senior Unsecured Notes contains various covenants, including, but not limited to, covenants that, subject to certain exceptions, limit the Company’s and its restricted subsidiaries’ ability to incur and/or guarantee additional debt; pay dividends, repurchase stock or make certain other restricted payments; enter into agreements limiting dividends and certain other restricted payments; prepay, redeem or repurchase subordinated debt; grant liens on assets; enter into sale and leaseback transactions; merge, consolidate, transfer or dispose of substantially all of the Company’s consolidated assets; sell, transfer or otherwise dispose of property and assets; and engage in transactions with affiliates.

In addition to those covenants, the Senior Secured Credit Facility also includes certain limitations on acquisitions, indebtedness, liens, dividends and repurchases of capital stock.

If the Company’s Total Leverage Ratio is greater than 2.75 to 1.00, the Company is prohibited from making greater than $60.0 million of dividend payments, capital stock repurchases and certain other payments, over the course of the agreement. If the Company’s Total Leverage Ratio is above 2.50 to 1.00 but below 2.75 to 1.00, the Company is prohibited from making greater than $100.0 million of dividend payments, capital stock repurchases and certain other payments, over the course of the agreement. If the Total Leverage Ratio is less than 2.50 to 1.00, there are no such restrictions. As the Company’s Total Leverage Ratio as of March 31, 2022, was 3.30 to 1.00, the limitations described above are currently applicable.

If the Company’s Senior Secured Leverage Ratio is greater than 3.00 to 1.00 or the Company’s Total Net Leverage Ratio which, on a rolling twelve-month basis, is defined as consolidated net indebtedness to consolidated EBITDA, is greater than 3.50 to 1.00, the Company is prohibited from voluntarily prepaying any of the Senior Unsecured Notes and from voluntarily prepaying any other unsecured or subordinated indebtedness, with certain exceptions (including any mandatory prepayments on the Senior Unsecured Notes or any other unsecured or subordinated debt). If the Senior Secured Leverage Ratio is less than 3.00 to 1.00 and the Total Net Leverage Ratio is less than 3.50 to 1.00, there are no such restrictions. The limitations described above are currently not applicable, as the Company’s Senior Secured Leverage Ratio was 1.89 to 1.00 and the Total Net Leverage Ratio was 2.75 to 1.00, as of March 31, 2022.

Note 10. Income Taxes

The Company records income tax expense on an interim basis. The estimated effective income tax rate is adjusted quarterly, and items discrete to a specific quarter and adjustments to valuation allowances that could result in a reduction to tax expense or benefit are reflected in income tax expense for that interim period.

The effective income tax rate for the interim period can differ from the statutory tax rate, as it reflects discrete items, such as changes in the liability for unrecognized tax benefits related to the establishment and settlement of income tax exposures and expenses related to share-based compensation.

The Company currently has various open tax audits in multiple jurisdictions. From time to time, the Company will receive tax assessments as part of the process. Based on the information available as of March 31, 2022, the Company has recorded its best estimate of the potential settlements of these audits. Actual results could differ from the estimated amounts.

The Company’s liability for unrecognized tax benefits was $11.7 million as of March 31, 2022 and December 31, 2021. The Company anticipates a $0.5 million decrease to its liability for unrecognized tax benefits within the next twelve months due to the resolution of income tax audits or statute expirations.



17



QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2022
(In millions, except share and per share data and unless otherwise indicated)
Note 11. Financial Instruments and Fair Value Measurements

Certain assets and liabilities are required to be recorded at fair value on a recurring basis, while other assets and liabilities are recorded at fair value on a nonrecurring basis, generally as a result of acquisitions or impairment charges. Fair value is determined based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. GAAP also classifies the inputs used to measure fair value into the following hierarchy:

Level 1:    Quoted prices in active markets for identical assets or liabilities.

Level 2:    Quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability.

Level 3:    Unobservable inputs for the asset or liability. There were no recurring Level 3 fair value measurements of assets or liabilities as of March 31, 2022.

Interest Rate Swaps

The Company currently holds one active interest rate swap contract. Another previously held interest rate swap, effective on February 28, 2017, terminated on February 28, 2022. The purpose of entering into the contracts was to reduce the variability of cash flows from interest payments related to a portion of Quad’s variable-rate debt. The interest rate swap was previously designated as cash flow hedges as they effectively converted the notional value of the Company’s variable rate debt based on one-month London Interbank Offered Rate (“LIBOR”) to a fixed rate, including a spread on underlying debt, and a monthly reset in the variable interest rate. However, the Company amended its Senior Secured Credit Facility during the second quarter of 2020, which added a 0.75% LIBOR floor to the Company’s variable rate debt, changing the critical terms of the hedged instrument. Due to this change in critical terms, the Company has elected to de-designate the swaps as cash flow hedges, resulting in future changes in fair value being recognized in interest expense. The balance of the accumulated other comprehensive loss attributable to the interest rate swaps as of June 30, 2020, will be amortized to interest expense on a straight-line basis over the remaining life of the swap contract. The Company expects to reclassify $2.7 million of this balance to interest expense over the next twelve months.

The key terms of the active interest rate swap is as follows:
March 19, 2019
Interest Rate Swap
Effective date March 29, 2019
Termination date March 28, 2024
Term 5 years
Notional amount $130.0
Fixed swap rate 2.43%

The Company classifies the interest rate swaps as Level 2 because the inputs into the valuation model are observable or can be derived or corroborated utilizing observable market data at commonly quoted intervals. The fair value of the interest rate swaps classified as Level 2 as of March 31, 2022, and December 31, 2021, were as follows:
Balance Sheet Location March 31, 2022 December 31, 2021
Interest rate swap liabilities Other current liabilities $ —  $ (0.7)
Interest rate swap liabilities Other long-term liabilities $ (0.2) $ (4.4)



18



QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2022
(In millions, except share and per share data and unless otherwise indicated)
Prior to the Company’s de-designation of the interest rate swap as a cash flow hedge, the interest rate swap was considered highly effective, with no amount of ineffectiveness recorded into earnings. The change in the fair value of the interest rate swap is recorded as an adjustment to interest expense in the condensed consolidated statements of operations. The cash flows associated with the interest rate swap have been recognized as an adjustment to interest expense in the condensed consolidated statements of operations:
Three Months Ended March 31,
2022 2021
Cash Flow Impacts
Net interest paid $ 1.5  $ 1.8 
Impacts with Swaps as Nonhedging Instruments
Income recognized in interest expense excluded from hedge effectiveness assessments (5.0) (2.7)
Amounts reclassified out of accumulated other comprehensive loss to interest expense 1.4  1.8 
Net interest expense 1.5  1.8 
Total impact of swaps to interest expense $ (2.1) $ 0.9 

Foreign Exchange Contracts

The Company has operations in countries that have transactions outside their functional currencies and periodically enters into foreign exchange contracts. These contracts are used to hedge the net exposures of changes in foreign currency exchange rates and are designated as either cash flow hedges or fair value hedges. Gains or losses on net foreign currency hedges are intended to offset losses or gains on the underlying net exposures in an effort to reduce the earnings volatility resulting from fluctuating foreign currency exchange rates. There were no open foreign currency exchange contracts as of March 31, 2022.

Natural Gas Forward Contracts

The Company periodically enters into natural gas forward purchase contracts to hedge against increases in commodity costs. The Company’s commodity contracts qualified for the exception related to normal purchases and sales during the three months ended March 31, 2022 and 2021, as the Company takes delivery in the normal course of business.

Debt

The Company measures fair value on its debt instruments using interest rates available to the Company for borrowings with similar terms and maturities and is categorized as Level 2. See Note 9, “Debt,” for the fair value of the Company’s debt as of March 31, 2022.

Nonrecurring Fair Value Measurements

In addition to assets and liabilities that are recorded at fair value on a recurring basis, the Company is required to record certain assets and liabilities at fair value on a nonrecurring basis, generally as a result of acquisitions or the remeasurement of assets resulting in impairment charges, which are categorized as Level 3. See Note 3, “Restructuring, Impairment and Transaction-Related Charges” and Note 7, “Property, Plant and Equipment” for further discussion on impairment charges recorded as a result of the remeasurement of certain long-lived assets.



19



QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2022
(In millions, except share and per share data and unless otherwise indicated)
Other Estimated Fair Value Measurements

The Company records the fair value of its forward contracts and pension plan assets on a recurring basis. The fair value of cash and cash equivalents, receivables, inventories, accounts payable and other current liabilities approximate their carrying values as of March 31, 2022, and December 31, 2021.

Note 12. Other Current and Long-Term Liabilities

The components of other current and long-term liabilities as of March 31, 2022, and December 31, 2021, were as follows:
March 31, 2022 December 31, 2021
Other Current Liabilities Other
Long-Term Liabilities
Total Other Current Liabilities Other
Long-Term Liabilities
Total
Employee-related liabilities (1)
$ 82.4  $ 46.6  $ 129.0  $ 128.8  $ 52.8  $ 181.6 
Single employer pension plan obligations 1.6  14.3  15.9  1.6  17.6  19.2 
Multiemployer pension plans – withdrawal liability 3.9  27.4  31.3  3.8  28.4  32.2 
Deferred revenue 51.5  1.8  53.3  66.4  2.1  68.5 
Tax-related liabilities 19.1  5.3  24.4  20.0  5.3  25.3 
Restructuring liabilities 46.7  6.5  53.2  47.5  6.1  53.6 
Interest and rent liabilities 6.6  —  6.6  2.8  —  2.8 
Interest rate swap liabilities —  0.2  0.2  0.7  4.4  5.1 
Other 36.4  17.4  53.8  42.7  11.4  54.1 
Total $ 248.2  $ 119.5  $ 367.7  $ 314.3  $ 128.1  $ 442.4 
______________________________
(1)Employee-related liabilities consist primarily of payroll, bonus, vacation, health and workers’ compensation.

Note 13. Employee Retirement Plans

Defined Contribution Plans

The Quad/Graphics, Inc. Employee Stock Ownership Plan (“ESOP”) holds profit sharing contributions of Company stock, which are made at the discretion of the Company’s Board of Directors. There were no profit sharing contributions during the three months ended March 31, 2022 and 2021.

Pension Plans

The Company assumed various funded and unfunded frozen pension plans for a portion of its full-time employees in the United States as part of the acquisition of World Color Press Inc. (“World Color Press”) in 2010. Benefits are generally based upon years of service and compensation. These plans are funded in conformity with the applicable government regulations. The Company funds at least the minimum amount required for all qualified plans using actuarial cost methods and assumptions acceptable under government regulations.



20



QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2022
(In millions, except share and per share data and unless otherwise indicated)
The components of net pension income for the three months ended March 31, 2022 and 2021, were as follows:
Three Months Ended March 31,
2022 2021
Interest cost $ (2.4) $ (2.1)
Expected return on plan assets 5.6  6.2 
Net pension income $ 3.2  $ 4.1 

The Company made $0.2 million in benefit payments to its non-qualified defined benefit pension plans during the three months ended March 31, 2022. There were no contributions to its qualified defined benefit pension plans during the three months ended March 31, 2022.

Multiemployer Pension Plans (“MEPPs”)

The Company has withdrawn from all significant MEPPs and replaced these union sponsored “promise to pay in the future” defined benefit plans with a Company sponsored “pay as you go” defined contribution plan. The two MEPPs, the Graphic Communications International Union – Employer Retirement Fund (“GCIU”) and the Graphic Communications Conference of the International Brotherhood of Teamsters National Pension Fund (“GCC”), are significantly underfunded, and require the Company to pay a withdrawal liability to fund its pro rata share of the underfunding as of the plan year the full withdrawal was completed. As a result of the decision to withdraw, the Company accrued a withdrawal liability based on information provided by each plan’s trustee. The Company has reserved $31.3 million for the total MEPPs withdrawal liability as of March 31, 2022, of which $27.4 million was recorded in other long-term liabilities and $3.9 million was recorded in other current liabilities in the condensed consolidated balance sheets. The Company is scheduled to make payments to the GCIU and GCC until April 2032 and February 2024, respectively. The Company made payments totaling $1.5 million for the three months ended March 31, 2022 and 2021.

Note 14. Earnings (Loss) Per Share

Basic earnings (loss) per share is computed as net earnings (loss) divided by the basic weighted average common shares outstanding. The calculation of diluted earnings (loss) per share includes the effect of any dilutive equity incentive instruments. The Company uses the treasury stock method to calculate the effect of outstanding dilutive equity incentive instruments, which requires the Company to compute total proceeds as the sum of the amount the employee must pay upon exercise of the award and the amount of unearned stock-based compensation costs attributable to future services.

Equity incentive instruments for which the total employee proceeds from exercise exceed the average fair value of the same equity incentive instrument over the period have an anti-dilutive effect on earnings per share during periods with net earnings, and accordingly, the Company excludes them from the calculation. Due to the net loss incurred during the three months ended March 31, 2022, the assumed exercise of all equity incentive instruments was anti-dilutive and therefore, not included in the diluted loss per share calculation. Anti-dilutive equity instruments excluded from the computation of diluted net earnings per share were 0.9 million class A common shares for the three months ended March 31, 2021.



21



QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2022
(In millions, except share and per share data and unless otherwise indicated)
Reconciliations of the numerator and the denominator of the basic and diluted per share computations for the Company’s common stock for the three months ended March 31, 2022 and 2021, are summarized as follows:
Three Months Ended March 31,
2022 2021
Numerator
Net earnings (loss) $ (1.0) $ 10.2 
Denominator
Basic weighted average number of common shares outstanding for all classes of common shares 51.5  51.4 
Plus: effect of dilutive equity incentive instruments —  1.4 
Diluted weighted average number of common shares outstanding for all classes of common shares 51.5  52.8 
Earnings (loss) per share
Basic $ (0.02) $ 0.20 
Diluted $ (0.02) $ 0.19 

Note 15. Equity Incentive Programs

The shareholders of the Company approved the Quad/Graphics, Inc. 2020 Omnibus Incentive Plan (the “2020 Plan”) at the Company’s annual meeting of shareholders held on May 18, 2020 for two complementary purposes: (1) to attract and retain outstanding individuals to serve as directors, officers and employees; and (2) to increase shareholder value. The Company’s previous plan, the Quad/Graphics, Inc. 2010 Omnibus Plan (the “2010 Plan”), was terminated on May 18, 2020, and no new awards will be granted under the 2010 Plan. All awards that were granted under the 2010 Plan that were outstanding as of May 18, 2020 will remain outstanding and will continue to be governed by the 2010 Plan.

The 2020 Plan provides for an aggregate 3,000,000 shares of class A common stock reserved for issuance, plus shares still available for issuance or re-credited under the 2010 Plan. Awards under the 2020 Plan may consist of incentive awards, stock options, stock appreciation rights, performance shares, performance share units, shares of class A common stock, restricted stock (“RS”), restricted stock units (“RSU”), deferred stock units (“DSU”) or other stock-based awards as determined by the Company’s Board of Directors. Each stock option granted has an exercise price of no less than 100% of the fair market value of the class A common stock on the date of grant. There were 1,331,509 shares of class A common stock reserved for issuance under the 2020 Plan as of March 31, 2022. Authorized unissued shares or treasury shares may be used for issuance under the Company’s equity incentive programs. The Company plans to either use treasury shares of its class A common stock or issue shares of class A common stock to meet the stock requirements of its awards in the future.

The Company recognizes compensation expense based on estimated grant date fair values for all share-based awards issued to employees and non-employee directors, including stock options, performance shares, performance share units, RS awards, RSU awards and DSU awards. The Company recognizes these compensation costs for only those awards expected to vest, on a straight-line basis over the requisite three year service period of the awards, except deferred stock units, which are fully vested and expensed on the grant date. The Company estimated the number of awards expected to vest based, in part, on historical forfeiture rates and also based on management’s expectations of employee turnover within the specific employee groups receiving each type of award. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods, if actual forfeitures differ from those estimates.



22



QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2022
(In millions, except share and per share data and unless otherwise indicated)
Equity Incentive Compensation Expense

Equity incentive compensation expense was recorded primarily in selling, general and administrative expenses in the condensed consolidated statements of operations and includes expense recognized for liability awards that are remeasured on a quarterly basis. The total compensation expense recognized related to all equity incentive programs for the three months ended March 31, 2022 and 2021, was as follows:
Three Months Ended March 31,
2022 2021
RS and RSU equity awards expense $ 1.7  $ 2.2 
RSU liability awards expense 0.2  — 
DSU awards expense —  0.8 
Total equity incentive compensation expense $ 1.9  $ 3.0 

Total future compensation expense related to all equity incentive programs granted as of March 31, 2022, was estimated to be $9.4 million, which consists entirely of expense for RS and RSU awards. Estimated future compensation expense is $3.5 million for the remainder of 2022, $3.4 million for 2023, $2.2 million for 2024 and $0.3 million for 2025.

Stock Options

There were no stock options granted, and no compensation expense was recognized related to stock options for the three months ended March 31, 2022 and 2021. There is no future compensation expense for stock options as of March 31, 2022. The following table is a summary of the stock option activity for the three months ended March 31, 2022:
Shares Under
Option
Weighted Average
Exercise
Price
Weighted Average
Remaining
Contractual Term
(years)
Aggregate
Intrinsic Value
(millions)
Outstanding at December 31, 2021 56,034  $ 14.14  0.0 $ — 
Granted —  — 
Exercised —  — 
Canceled/forfeited/expired (56,034) 14.14 
Outstanding and exercisable at March 31, 2022 —  $ —  0.0 $ — 

The intrinsic value of options outstanding and exercisable at December 31, 2021 was based on the fair value of the stock price. There were no stock options exercised during the three months ended March 31, 2022 and 2021.

Restricted Stock and Restricted Stock Units

Restricted stock and restricted stock unit awards consist of shares or the rights to shares of the Company’s class A common stock which are awarded to employees of the Company. The awards are restricted such that they are subject to substantial risk of forfeiture and to restrictions on their sale or other transfer by the employee. RSU awards are typically granted to eligible employees outside of the United States. As defined in the individual grant agreements, acceleration of vesting may occur under a change in control, death, disability or normal retirement of the grantee. Grantees receiving RS awards are able to exercise full voting rights and receive full credit for dividends during the vesting period. All such dividends will be paid to the RS grantee within 45 days of full vesting. Grantees receiving RSU awards are not entitled to vote, but do earn dividends. Upon vesting, RSU awards will be settled either through cash payment equal to the fair market value of the RSU awards on the vesting date or through issuance of the Company’s class A common stock. In general, RS and RSU awards will vest on the third anniversary of the grant date, provided the holder of the share is continuously employed by the Company until the vesting date.


23



QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2022
(In millions, except share and per share data and unless otherwise indicated)
The following table is a summary of RS and RSU award activity for the three months ended March 31, 2022:
Restricted Stock Restricted Stock Units
Shares Weighted-
Average
Grant Date
Fair Value
Per Share
Weighted-
Average
Remaining
Contractual
Term (years)
Units Weighted-
Average
Grant Date
Fair Value
Per Share
Weighted-
Average
Remaining
Contractual
Term (years)
Nonvested at December 31, 2021 3,053,019  $ 6.99  1.2 222,093  $ 10.41  0.5
Granted 1,654,473  4.00  54,014  4.00 
Vested (1,039,567) 12.31  (169,489) 12.33 
Forfeited (37,656) 4.37  (6) 12.33 
Nonvested at March 31, 2022 3,630,269  $ 4.13  2.1 106,612  $ 4.11  2.2

In the first quarter of 2019, the Company issued RSU awards in connection with the acquisition of Periscope, Inc. that were accounted for as liability awards and vested on March 1, 2022. The awards were recorded at fair value on the initial issuance date and were remeasured to fair value at each reporting period, with the change in fair value being recorded in selling, general and administrative expense in the condensed consolidated statements of operations.

Deferred Stock Units

Deferred stock units are awards of rights to shares of the Company’s class A common stock and are awarded to non-employee directors of the Company. The following table is a summary of DSU award activity for the three months ended March 31, 2022:
Deferred Stock Units
Units Weighted-Average Grant Date Fair Value Per Share
Outstanding at December 31, 2021 687,391  $ 8.26 
Granted —  — 
Dividend equivalents granted —  — 
Settled (79,908) 4.62 
Outstanding at March 31, 2022 607,483  $ 8.74 

Each DSU award entitles the grantee to receive one share of class A common stock upon the earlier of the separation date of the grantee or the second anniversary of the grant date, but could be subject to acceleration for a change in control, death or disability as defined in the individual DSU grant agreement. Grantees of DSU awards may not exercise voting rights, but are credited with dividend equivalents, and those dividend equivalents will be converted into additional DSU awards based on the closing price of the class A common stock. As DSU awards are fully vested on the grant date, all compensation expense is recognized at the date of grant.



24



QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2022
(In millions, except share and per share data and unless otherwise indicated)
Note 16. Shareholders’ Equity

The Company has three classes of common stock as follows (share data in millions):
Issued Common Stock
Authorized Shares Outstanding Treasury Total Issued Shares
Class A stock ($0.025 par value)
March 31, 2022 105.0  42.1  0.5  42.6 
December 31, 2021 105.0  40.8  0.9  41.7 
Class B stock ($0.025 par value)
March 31, 2022 80.0  13.5  —  13.5 
December 31, 2021 80.0  13.5  —  13.5 
Class C stock ($0.025 par value)
March 31, 2022 20.0  —  0.5  0.5 
December 31, 2021 20.0  —  0.5  0.5 

In accordance with the Articles of Incorporation, each class A common share has one vote per share and each class B and class C common share has ten votes per share on all matters voted upon by the Company’s shareholders. Liquidation rights are the same for all three classes of common stock.

The Company also has 0.5 million shares of $0.01 par value preferred stock authorized, of which none were issued at March 31, 2022, and December 31, 2021. The Company has no present plans to issue any preferred stock.

On July 30, 2018, the Company’s Board of Directors authorized a share repurchase program of up to $100.0 million of the Company’s outstanding class A common stock. There were no shares repurchased during the three months ended March 31, 2022, or during the three months ended March 31, 2021. As of March 31, 2022, there were $100.0 million of authorized repurchases remaining under the program.

In accordance with the Articles of Incorporation, dividends are paid equally for all three classes of common shares. Due to uncertainty in client demand as a result of the COVID-19 pandemic, the Company’s Board of Directors proactively suspended the Company’s quarterly dividends beginning in the second quarter of 2020.



25



QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2022
(In millions, except share and per share data and unless otherwise indicated)
Note 17. Accumulated Other Comprehensive Loss

The changes in accumulated other comprehensive loss by component, net of tax, for the three months ended March 31, 2022, were as follows:
Translation Adjustments Interest Rate Swap Adjustments Pension Benefit Plan Adjustments Total
Balance at December 31, 2021 $ (143.1) $ (6.7) $ (11.4) $ (161.2)
Other comprehensive income before reclassifications 0.8  —  —  0.8 
Amounts reclassified from accumulated other comprehensive loss to net earnings (loss) —  1.1  —  1.1 
Net other comprehensive income 0.8  1.1  —  1.9 
Balance at March 31, 2022 $ (142.3) $ (5.6) $ (11.4) $ (159.3)

The changes in accumulated other comprehensive loss by component, net of tax, for the three months ended March 31, 2021, were as follows:
Translation Adjustments Interest Rate Swap Adjustments Pension Benefit Plan Adjustments Total
Balance at December 31, 2020 $ (130.8) $ (12.3) $ (28.2) $ (171.3)
Other comprehensive loss before reclassifications (6.0) —  —  (6.0)
Amounts reclassified from accumulated other comprehensive loss to net income —  1.8  —  1.8 
Net other comprehensive income (loss) (6.0) 1.8  —  (4.2)
Balance at March 31, 2021 $ (136.8) $ (10.5) $ (28.2) $ (175.5)

The details of the reclassifications from accumulated other comprehensive loss to net earnings (loss) for the three months ended March 31, 2022 and 2021, were as follows:
Details of Accumulated Other
Comprehensive Loss Components
Three Months Ended March 31, Condensed Consolidated Statements of Operations Presentation
2022 2021
Amortization of amounts accumulated for interest rate swaps de-designated as cash flow hedges $ 1.4  $ 1.8  Interest expense
Impact of income taxes (0.3) —  Income tax expense
Amortization of amounts accumulated for interest rate swaps de-designated as cash flow hedges, net of tax $ 1.1  $ 1.8 

Note 18. Segment Information

As a global marketing experience company, Quad leverages its more than 50-year heritage of platform excellence, innovation, strong culture and social purpose to create a better way for its clients, employees and communities. The Company’s operating and reportable segments are aligned with how the chief operating decision maker of the Company currently manages the business. The Company’s operating and reportable segments, including their product and service offerings, and a “Corporate” category are as follows:

United States Print and Related Services
International
Corporate


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QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2022
(In millions, except share and per share data and unless otherwise indicated)
United States Print and Related Services

The United States Print and Related Services segment is predominantly comprised of the Company’s United States printing operations and is managed as one integrated platform. This includes retail inserts, publications, catalogs, special interest publications, journals, direct mail, directories, in-store marketing and promotion, packaging, newspapers, custom print products, other commercial and specialty printed products and global paper procurement, together with marketing and other complementary services, including consumer insights, audience targeting, personalization, media planning and placement, process optimization, campaign planning and creation, pre-media production, videography, photography, digital execution, print execution and logistics. This segment also includes the manufacture of ink.

International

The International segment consists of the Company’s printing operations in Europe and Latin America, including operations in England, France, Germany, Poland, Argentina, Colombia, Mexico and Peru, as well as investments in printing operations in India. This segment provides printed products and marketing and other complementary services consistent with the United States Print and Related Services segment. As of March 31, 2022, the Company has no unrestricted subsidiaries as defined in the Company’s Senior Unsecured Notes indenture.

Corporate

Corporate consists of unallocated general and administrative activities and associated expenses including, in part, executive, legal and finance, as well as certain expenses and income from frozen employee retirement plans, such as pension benefit plans.

The following is a summary of segment information for the three months ended March 31, 2022 and 2021:
Net Sales Operating Income (Loss) Restructuring, Impairment and Transaction-
Related Charges
Products Services
Three months ended March 31, 2022
United States Print and Related Services $ 493.3  $ 157.8  $ 11.8  $ 1.7 
International 87.6  5.5  3.7  1.6 
Total operating segments 580.9  163.3  15.5  3.3 
Corporate —  —  (10.1) 0.3 
Total $ 580.9  $ 163.3  $ 5.4  $ 3.6 
Three months ended March 31, 2021
United States Print and Related Services $ 459.9  $ 174.7  $ 32.5  $ 1.1 
International 66.1  5.1  1.5  0.8 
Total operating segments 526.0  179.8  34.0  1.9 
Corporate —  —  (13.0) 0.7 
Total $ 526.0  $ 179.8  $ 21.0  $ 2.6 

Restructuring, impairment and transaction-related charges for the three months ended March 31, 2022 and 2021, are further described in Note 3, “Restructuring, Impairment and Transaction-Related Charges,” and are included in the operating income (loss) results by segment above.



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QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2022
(In millions, except share and per share data and unless otherwise indicated)
A reconciliation of operating income to earnings (loss) before income taxes and equity in earnings of unconsolidated entity as reported in the condensed consolidated statements of operations for the three months ended March 31, 2022 and 2021, was as follows:
Three Months Ended March 31,
2022 2021
Operating income $ 5.4  $ 21.0 
Less: interest expense 9.3  14.5 
Less: net pension income (3.2) (4.1)
Earnings (loss) before income taxes and equity in earnings of unconsolidated entity $ (0.7) $ 10.6 

Note 19. New Accounting Pronouncements

In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2020-04 “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”), which provides optional guidance for a limited period of time to ease the potential burden in accounting for reference rate reform. ASU 2020-04 permits entities to apply certain expedients and exceptions for contracts, hedging relationships, and other transactions impacted by the anticipated transition away from the use of LIBOR or other interbank offered rates to alternative reference rates. This optional guidance is effective as of March 12, 2020, through December 31, 2022. The Company is evaluating the impact of the adoption of ASU 2020-04 on the condensed consolidated financial statements.



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ITEM 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of the financial condition and results of operations of Quad should be read together with (1) the condensed consolidated financial statements for the three months ended March 31, 2022 and 2021, including the notes thereto, included in Item 1, “Condensed Consolidated Financial Statements (Unaudited),” of this Quarterly Report on Form 10-Q; and (2) the audited consolidated annual financial statements as of and for the year ended December 31, 2021, and notes thereto included in the Company’s Annual Report on Form 10-K, filed with the SEC on February 23, 2022.

Management’s discussion and analysis of financial condition and results of operations is provided as a supplement to the Company’s condensed consolidated financial statements and accompanying notes to help provide an understanding of the Company’s financial condition, the changes in the Company’s financial condition and the Company’s results of operations. This discussion and analysis is organized as follows:

Cautionary Statement Regarding Forward-Looking Statements.

Overview. This section includes a general description of the Company’s business and segments, an overview of key performance metrics the Company’s management measures and utilizes to evaluate business performance, and an overview of trends affecting the Company, including management’s actions related to the trends.

Results of Operations. This section contains an analysis of the Company’s results of operations by comparing the results for (1) the three months ended March 31, 2022, to the three months ended March 31, 2021. The comparability of the Company’s results of operations between periods was impacted by the divestiture of the Company’s third-party logistics business on June 30, 2021. The results of operations of the divestiture are included in the Company’s condensed consolidated results until the date of disposition. Forward-looking statements providing a general description of recent and projected industry and Company developments that are important to understanding the Company’s results of operations are included in this section. This section also provides a discussion of EBITDA and EBITDA margin, financial measures that the Company uses to assess the performance of its business that are not prepared in accordance with GAAP.

Liquidity and Capital Resources. This section provides an analysis of the Company’s capitalization, cash flows, a statement about off-balance sheet arrangements and a discussion of outstanding debt and commitments. Forward-looking statements important to understanding the Company’s financial condition are included in this section. This section also provides a discussion of Free Cash Flow and Debt Leverage Ratio, non-GAAP financial measures that the Company uses to assess liquidity and capital allocation and deployment.




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Cautionary Statement Regarding Forward-Looking Statements

To the extent any statements in this Quarterly Report on Form 10-Q contain information that is not historical, these statements are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements relate to, among other things, the objectives, goals, strategies, beliefs, intentions, plans, estimates, prospects, projections and outlook of the Company, and can generally be identified by the use of words such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “plan,” “foresee,” “believe” or “continue” or the negatives of these terms, variations on them and other similar expressions. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements.

These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond the control of the Company. These risks, uncertainties and other factors could cause actual results to differ materially from those expressed or implied by those forward-looking statements. Among risks, uncertainties and other factors that may impact Quad are those described in Part I, Item 1A, “Risk Factors,” of the Company’s 2021 Annual Report on Form 10-K, filed with the SEC on February 23, 2022, as such may be amended or supplemented in Part II, Item 1A, “Risk Factors,” of the Company’s subsequently filed Quarterly Reports on Form 10-Q (including this report), and the following:

The impact of fluctuations in costs (including labor and labor-related costs, energy costs, freight rates and raw materials, including paper and the materials to manufacture ink) and the impact of fluctuations in the availability of raw materials, including paper and the materials to manufacture ink;

The impact of inflationary cost pressures and supply chain shortages;

The impact of decreasing demand for printed materials and significant overcapacity in a highly competitive environment creates downward pricing pressures and potential under-utilization of assets;

The negative impacts the COVID-19 pandemic has had and will continue to have on the Company’s business, financial condition, cash flows, results of operations and supply chain, including rising inflationary cost pressures on raw materials, distribution and labor, and future uncertain impacts;

The failure to attract and retain qualified talent across the enterprise;

The impact of increased business complexity as a result of the Company’s transformation to a marketing experience company;

The impact of digital media and similar technological changes, including digital substitution by consumers;

The inability of the Company to reduce costs and improve operating efficiency rapidly enough to meet market conditions;

The impact of changes in postal rates, service levels or regulations, including delivery delays due to ongoing COVID-19 impacts on daily operational staffing at the United States Postal Service;

The impact of a data-breach of sensitive information, ransomware attack or other cyber incident on the Company;

The impact negative publicity could have on our business;

The impact of changing future economic conditions;

The failure of clients to perform under contracts or to renew contracts with clients on favorable terms or at all;

The fragility and decline in overall distribution channels;

The failure to successfully identify, manage, complete and integrate acquisitions, investment opportunities or other significant transactions, as well as the successful identification and execution of strategic divestitures;


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The impact of an other than temporary decline in operating results and enterprise value that could lead to non-cash impairment charges due to the impairment of property, plant and equipment and other intangible
assets;

The impact of risks associated with the operations outside of the United States (“U.S.”), including costs incurred or reputational damage suffered due to improper conduct of its employees, contractors or agents, and geopolitical events like war and terrorism;

Significant investments may be needed to maintain the Company’s platforms, processes, systems, client and product technology and marketing and to remain technologically and economically competitive;

The impact of the various restrictive covenants in the Company’s debt facilities on the Company’s ability to operate its business, as well as the uncertain negative impacts COVID-19 may have on the Company’s ability to continue to be in compliance with these restrictive covenants;

The impact of regulatory matters and legislative developments or changes in laws, including changes in cyber-security, privacy and environmental laws; and

The impact on the holders of Quad’s class A common stock of a limited active market for such shares and the inability to independently elect directors or control decisions due to the voting power of the class B common stock.

Quad cautions that the foregoing list of risks, uncertainties and other factors is not exhaustive, and you should carefully consider the other factors detailed from time to time in Quad’s filings with the SEC and other uncertainties and potential events when reviewing the Company’s forward-looking statements.

Because forward-looking statements are subject to assumptions and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. You are cautioned not to place undue reliance on such statements, which speak only as of the date of this Quarterly Report on Form 10-Q. Except to the extent required by the federal securities laws, Quad undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.



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Overview

Business Overview

Quad is a global marketing experience company that helps brands reimagine their marketing to be more streamlined, impactful, flexible and frictionless. Quad’s strategic priorities are powered by three key competitive advantages that include integrated marketing platform excellence, innovation, and culture and social purpose. The Company’s integrated marketing platform is powered by a set of core specialties including business strategy, insights and analytics, technology solutions, managed services, agency and studio solutions, media, print, in-store and packaging. Serving over 4,600 clients, Quad has more than 15,000 people working in 14 countries around the world.

Quad’s overarching business strategy and singular vision as a global marketing experience company is achieved through the execution of the following five consistent strategic priorities:

Walk in the Shoes of Clients

The Company encourages all employees, regardless of job title, to walk in the shoes of clients by putting a priority on listening to clients’ needs and challenges, doing what they can to make it easy to work with Quad, and making the client experience enjoyable and inclusive at every touchpoint. With a focus on solving problems and removing friction wherever a client experiences it in the marketing process, Quad seeks to become an invaluable strategic marketing partner for its clients, helping them successfully navigate today’s constantly evolving media landscape through innovative data-driven solutions, produced and deployed efficiently across multiple media channels. A key component of Quad’s client-facing strategy is to strengthen relationships at higher levels within a client’s organization so the Company can better understand, anticipate and satisfy the organization’s requirements, including their diversity, equity and inclusion goals, and broader environmental, social and governance objectives. The Company also believes its proactive thought leadership in the key issues facing its clients, including data-driven marketing, mar-tech and postal reform, will foster loyalty to the Quad brand.

Grow the Business Profitably

This strategic priority centers on Quad’s ability to defend against significant media disruption, deploy balanced use of capital, including disciplined and compelling investments, and grow the business as a marketing experience company. Key components of this priority are:

Acquire new and expand existing account relationships by introducing clients to the Company’s complete through-the-line marketing offering – from strategy and creative through production, execution and analytics – that helps them market more efficiently and effectively. To this end, Quad is focused on ensuring it has the right talent in the right positions to facilitate strategic marketing conversations and tailored solutions based on a better understanding of their needs.

Expand in key vertical industries with growth opportunities, such as consumer technology, consumer-packaged goods, financial services, insurance, healthcare and direct-to-consumer, while continuing to capitalize on the Company’s established expertise in retail and publishing. Through existing and new offerings, Quad delivers solutions dedicated to solving client marketing and process challenges.

Make disciplined and compelling investments that take many different forms. The Company intends to continue to pursue growth investments that help expand and strengthen its integrated marketing platform. In addition, the Company intends to continue making long-term investments in its talent, such as hiring business professionals with client-side marketing experience and consulting expertise to enhance its position as a marketing experience company, as well as investments to attract new employees and increase existing employee engagement, retention and productivity.



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Bolster Platform Strength

The Company operates what it believes to be a superior and unparalleled integrated marketing platform, which it has consciously built to remove friction in the marketing process and speed the overall marketing journey through reduced complexity, increased efficiencies and enhanced marketing spend effectiveness across channels. Through this unique platform, the Company offers a complete through-the-line marketing offering featuring agency, consulting and implementation solutions encompassing marketing strategy, including consumer insights and data analytics; creative solutions for producing quality content at scale; and media deployment and optimization for all channels, including print, broadcast, digital, in-store, out-of-home and packaging supported by 24/7 global production, including industry-leading print manufacturing and mail-distribution capabilities. Quad uses a disciplined return on capital framework to make regular, strategic investments in this platform, resulting in what it believes is the most integrated, automated, efficient, innovative and modern marketing platform of its kind. The Company’s long-standing, disciplined culture of holistic Continuous Improvement and commitment to Lean Enterprise methodologies, along with ongoing, strategic investments in talent, technology, products and services to accelerate its position as a marketing experience company.

To strengthen its offering, the Company continually seeks to enhance its product portfolio, especially in the direct marketing, in-store and packaging spaces, with innovations that support clients’ ability to stand out in a consumer’s mailbox or front doorstep, or on the store shelf. These innovations include proprietary solutions unavailable anywhere else in the marketing, communications or printing industries.

Additionally, Quad has chosen to strategically divest of those businesses that cannot be easily leveraged as part of its greater integrated marketing platform, such as the QuadExpress third-party logistics business Quad sold in 2021. Through these types of optimization efforts, Quad maintains a superior, unparalleled platform that delivers value to clients and, ultimately, their customers.

Empower Employees

Quad’s strategic priority to empower employees throughout their career journey builds on the key aspects of the Company’s distinct corporate culture, which the Company views as a competitive advantage. These aspects include the Company’s enduring values, which are centered on trust, innovation, growth, believing in people and doing the right thing. The Company understands that its employees perform better at work when they can simply be themselves – confident in their abilities, comfortable sharing their ideas, opinions and beliefs, and able to bring their truest and best selves to the workplace – all of which leads to a more inclusive environment and better engagement, decision-making and business outcomes. The Company embraces forward-thinking workplace practices, such as flexible work models for the long-term future of work; implements innovative talent acquisition strategies to meet its labor and business needs; and provides training and reward programs to engage, develop and retain its employees. Employees are encouraged to take advantage of the Company’s continuous growth environment, which not only teaches critical on-the-job and leadership skills, but also helps them respond to rapid change, cultivate effective networks, and create high-quality relationships necessary for personal, professional and company growth. The Company believes its approach to continuous growth for each employee is advantageously distinct from other employers. With the Company’s encouragement to do things differently, to be something greater and to create a better way, employees are more fully engaged in their day-to-day activities, producing better results for clients and advancing the Company’s strategic priorities. Additionally, the Company engages employees and fosters corporate pride by supporting community activities, initiatives and organizations that improve the quality of life near Quad’s operations.

Enhance Financial Strength and Create Shareholder Value

Quad follows a disciplined approach to maintaining and enhancing financial strength to create shareholder value, which is essential given ongoing media disruption, including printing industry challenges. This strategy is centered on the Company’s ability to drive profitable growth, and maximize net earnings, Free Cash Flow and operating margins; maintain consistent financial policies to ensure a strong balance sheet, liquidity level and access to capital; and retain the financial flexibility needed to strategically allocate and deploy capital as circumstances change. The priorities for capital allocation and deployment are balanced according to prevailing circumstances and what the Company thinks is best for shareholder value creation at any particular point in time. Those priorities currently include: deleveraging the Company’s balance sheet through debt and pension liability reductions; making compelling investments that drive profitable organic growth and productivity in the Company’s print manufacturing and distribution operations, as well as expansion into higher-growth marketing services; and paying dividends and stock buybacks over the long term.


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To provide ongoing improvement in manufacturing productivity and, ultimately, maximize operating margins, the Company applies holistic Continuous Improvement and Lean Enterprise methodologies to simplify and streamline processes. These same methodologies are applied to its selling, general and administrative functions to create a truly Lean Enterprise. The Company continually works to lower its cost structure by consolidating its manufacturing operations into its most efficient facilities, as well as realizing purchasing, mailing and logistics efficiencies by centralizing and consolidating print manufacturing volumes, and eliminating redundancies in its administrative and corporate operations. Quad believes that its focused efforts to be the high-quality, low-cost producer generates increased Free Cash Flow and allows the Company to maintain a strong balance sheet through debt and pension liability reduction. The Company’s disciplined financial approach also allows it to maintain sufficient liquidity and to reduce refinancing risk, with the nearest significant debt maturity of $91.5 million occurring in January 2024. The Company had total liquidity of $535.0 million as of March 31, 2022, which consisted of up to $396.7 million of unused capacity under its revolving credit arrangement, net of $35.8 million of issued letters of credit, and cash and cash equivalents of $138.3 million. On May 2, 2022, the Company used liquidity available under its revolving credit facility and available cash on hand to fund the repayment on maturity of all $209.1 million aggregate principal amount of its Senior Unsecured Notes. In addition, the Company completed the amendment of its $1 billion bank debt agreement during the fourth quarter of 2021, extending the maturity to November 2026. Quad is proud of its strong and trusted banking relationships, which provide the Company with increased financial flexibility to continue to pay down debt and to make strategic investments to accelerate its position as a marketing experience company.

Segments

The Company’s operating and reportable segments are aligned with how the chief operating decision maker of the Company currently manages the business. The Company’s operating and reportable segments, including their product and service offerings, and a “Corporate” category are summarized below.

The United States Print and Related Services segment is predominantly comprised of the Company’s United States printing operations and is managed as one integrated platform. This includes retail inserts, publications, catalogs, special interest publications, journals, direct mail, directories, in-store marketing and promotion, packaging, newspapers, custom print products, other commercial and specialty printed products and global paper procurement, together with marketing and other complementary services, including consumer insights, audience targeting, personalization, media planning and placement, process optimization, campaign planning and creation, pre-media production, videography, photography, digital execution, print execution and logistics. This segment also includes the manufacture of ink. The United States Print and Related Services segment accounted for approximately 87% of the Company’s consolidated net sales during the three months ended March 31, 2022.

The International segment consists of the Company’s printing operations in Europe and Latin America, including operations in England, France, Germany, Poland, Argentina, Colombia, Mexico and Peru, as well as investments in printing operations in India. This segment provides printed products and marketing and other complementary services consistent with the United States Print and Related Services segment. The International segment accounted for approximately 13% of the Company’s consolidated net sales during the three months ended March 31, 2022.

Corporate consists of unallocated general and administrative activities and associated expenses including, in part, executive, legal and finance, as well as certain expenses and income from frozen employee retirement plans, such as pension benefit plans.

Key Performance Metrics Overview

The Company’s management believes the ability to generate net sales growth, profit increases and positive cash flow, while maintaining the appropriate level of debt, are key indicators of the successful execution of the Company’s business strategy and will increase shareholder value. The Company uses period-over-period net sales growth, EBITDA, EBITDA margin, net cash provided by (used in) operating activities, Free Cash Flow and Debt Leverage Ratio as metrics to measure operating performance, financial condition and liquidity. EBITDA, EBITDA margin, Free Cash Flow and Debt Leverage Ratio are non-GAAP financial measures (see the definitions of EBITDA, EBITDA margin and the reconciliation of net earnings (loss) to EBITDA in the “Results of Operations” section below, and see the definitions of Free Cash Flow and Debt Leverage Ratio, the reconciliation of net cash provided by (used in) operating activities to Free Cash Flow, and the calculation of Debt Leverage Ratio in the “Liquidity and Capital Resources” section below).



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Net sales growth. The Company uses period-over-period net sales growth as a key performance metric. The Company’s management assesses net sales growth based on the ability to generate increased net sales through increased sales to existing clients, sales to new clients, sales of new or expanded solutions to existing and new clients and opportunities to expand sales through strategic investments, including acquisitions.

EBITDA and EBITDA margin. The Company uses EBITDA and EBITDA margin as metrics to assess operating performance. The Company’s management assesses EBITDA and EBITDA margin based on the ability to increase revenues while controlling variable expense growth.

Net cash provided by (used in) operating activities. The Company uses net cash provided by (used in) operating activities as a metric to assess liquidity. The Company’s management assesses net cash provided by (used in) operating activities based on the ability to meet recurring cash obligations while increasing available cash to fund debt service requirements, capital expenditures, acquisitions and other investments in future growth, cash restructuring requirements related to cost reduction activities, shareholder dividends and share repurchases. Net cash provided by (used in) operating activities can be significantly impacted by the timing of non-recurring or infrequent receipts or expenditures.

Free Cash Flow. The Company uses Free Cash Flow as a metric to assess liquidity and capital deployment. The Company’s management assesses Free Cash Flow as a measure to quantify cash available for strengthening the balance sheet (debt and pension liability reduction), for strategic capital allocation and deployment through investments in the business (acquisitions and strategic investments) and for returning capital to the shareholders (dividends and share repurchases). The Company’s priorities for capital allocation and deployment will change as circumstances dictate for the business, and Free Cash Flow can be significantly impacted by the Company’s restructuring activities and other unusual items.

Debt Leverage Ratio. The Company uses the Debt Leverage Ratio as a metric to assess liquidity and the flexibility of its balance sheet. Consistent with other liquidity metrics, the Company monitors the Debt Leverage Ratio as a measure to determine the appropriate level of debt the Company believes is optimal to operate its business, and accordingly, to quantify debt capacity available for strengthening the balance sheet (debt and pension liability reduction), for strategic capital allocation and deployment through investments in the business (capital expenditures, acquisitions and strategic investments), and for returning capital to the shareholders (dividends and share repurchases). The priorities for capital allocation and deployment will change as circumstances dictate for the business, and the Debt Leverage Ratio can be significantly impacted by the amount and timing of large expenditures requiring debt financing, as well as changes in profitability.

The Company remains disciplined with its debt leverage. The Company’s consolidated debt and finance lease obligations decreased by $2 million during the three months ended March 31, 2022. Since the Company completed the World Color Press acquisition in July 2010, the Company has reduced debt and finance lease obligations by $937 million and has reduced the obligations for pension, postretirement and MEPPs by $515 million, for a total obligation reduction since July of 2010 of $1.4 billion.

The Company is subject to seasonality in its quarterly results as net sales and operating income are typically higher in the third and fourth quarters of the calendar year as compared to the first and second quarters. The fourth quarter is typically the highest seasonal quarter for cash flows provided by operating activities and Free Cash Flow due to the reduction of working capital requirements that reach peak levels during the third quarter. Seasonality is driven by increased retail inserts and catalogs primarily due to back-to-school and holiday-related advertising and promotions. Due to the impacts from supply chain disruptions in 2022, the Company expects to reach higher than typical levels of working capital requirements during the first and second quarters. The Company expects seasonality impacts to continue in future years.

Overview of Trends Affecting Quad

As consumer media consumption habits change, marketing services providers face increased demand to offer end-to-end marketing services, from strategy and creative through execution, across all channels, traditional and digital. As new marketing and advertising channels emerge, marketing services providers must expand their services beyond traditional channels, such as for television, newspapers, print publications and radio, to digital channels, such as mobile, internet search, internet display and video, to create effective multichannel campaigns for their clients. This trend greatly influences Quad’s ongoing efforts to redefine the future of integrated marketing and create greater value for its clients who are looking for less complexity, greater transparency and accountability from their business partners.



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The Company leverages its data-driven print expertise as part of an integrated marketing platform that helps its clients not only plan and produce marketing programs, but also deploy, manage and measure them across all media channels. Competition in the printing industry remains highly fragmented and intense, and the Company believes that there are indicators of heightened competitive pressures. The industry has excess manufacturing capacity created by continued declines in industry volumes, compounded by the COVID-19 pandemic, which, in turn, have created accelerated downward pricing pressures. The Company faces competition due to the increased accessibility and quality of digital alternatives to traditional delivery of printed documents through the online distribution and hosting of media content, and the digital distribution of documents and data. The Company faces competition from print management and marketing consulting firms that look to streamline processes and reduce the overall print spend of the Company’s clients.

The Company believes that a disciplined approach for capital management and a strong balance sheet are critical to be able to invest in profitable growth opportunities and technological advances, thereby providing the highest return for shareholders. Management balances the use of cash between deleveraging the Company’s balance sheet (through reduction in debt and pension obligations), compelling investment opportunities (through capital expenditures, acquisitions and strategic investments) and returns to shareholders (through dividends and share repurchases).

The Company continues to make progress on integrating and streamlining all aspects of its business, thereby lowering its cost structure by consolidating its manufacturing platform into its most efficient facilities, as well as realizing purchasing, mailing and logistics efficiencies by centralizing and consolidating print manufacturing volumes and eliminating redundancies in its administrative and corporate operations. The Company has continued to evolve its manufacturing platform, equipping facilities to be product line agnostic, which enables the Company to maximize equipment utilization. Quad believes that the large plant size of certain of its key printing facilities allows the Company to drive savings in certain product lines (such as publications and catalogs) due to economies of scale and from investments in automation and technology. The Company continues to focus on proactively aligning its cost structure to the realities of the top-line pressures it faces in the printing industry through Lean Manufacturing and sustainable continuous improvement programs.

The Company believes it will continue to drive productivity improvements and sustainable cost reduction initiatives into the future through an engaged workforce and ongoing adoption of the latest manufacturing automation and technology. Through this strategy, the Company believes it can maintain the strongest, most efficient print manufacturing platform to remain a high-quality, low-cost producer.

Integrated distribution with the United States Postal Service (“USPS”) is an important component of the Company’s business. Any material change in the current service levels provided by the postal service could impact the demand that clients have for print services. The USPS continues to experience financial problems. The passing of the Postal Service Reform Act of 2022, signed in April 2022, gives the USPS considerable financial relief as well as significant cost relief over the next ten years. While the legislative postal reform helps considerably, without decreased operational cost structures, increased efficiencies or increased volumes and revenues, these losses will potentially continue into the future. As a result of these financial difficulties, the USPS has continued to adjust its postal rates and service levels. Additional price increases may result in clients reducing mail volumes and exploring the use of alternative methods for delivering a larger portion of their products, such as continued diversion to the internet and other alternative media channels in order to ensure that they stay within their expected postage budgets.

Federal statute requires the Postal Regulatory Commission (“PRC”) to conduct reviews of the overall rate-making structure for the USPS to ensure funding stability. As a result of those reviews, the PRC authorized a five year rate-making structure that provides the USPS with additional pricing flexibility over the Consumer Price Index cap, which may result in a substantially altered rate structure for mailers. The revised rate authority that is effective as a result of the rules issued by the PRC includes a higher overall rate cap on the USPS’ ability to increase rates from year to year. This has led to price spikes for mailers and may also reduce the incentive for the USPS to continue to take out costs and instead continue to rely on postage to cover the costs of an outdated postal service that does not reflect the industry’s ability or willingness to pay. The uncertainty as to how much of the authority the USPS will use also creates potential volume declines as rate predictability with respect to cost is no longer known for mailers. The result may be reduced demand for printed products as clients may move more aggressively into other delivery methods, such as the many digital and mobile options now available to consumers.



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The Company has invested significantly in its mail preparation and distribution capabilities to mitigate the impact of increases in postage costs, and to help clients successfully navigate the ever-changing postal environment. Through its data analytics, unique software to merge mail streams on a large scale, advanced finishing capabilities and technology, and in-house transportation and logistics operations, the Company manages the mail preparation and distribution of most of its clients’ products to maximize efficiency, to enable on-time and consistent delivery and to partially reduce these costs; however, the net impact of increasing postal costs may create a decrease in client demand for print and mail products.

The Company’s results of operations have been adversely impacted as a result of the COVID-19 pandemic and the emergence of new variants. Through the Company’s Crisis Management Team, including executive and operations leadership, the Company has been executing business continuity plans focused on protecting the health and well-being of our employees, while also continuing to service clients, and protect the long-term financial health of the Company as the COVID-19 pandemic continues. With ongoing advancements against the COVID-19 pandemic, the effects on the Company have lessened from previous periods. The Company is continuing to evaluate the impact and may implement additional cost reduction measures as necessary. The ultimate impact of COVID-19 on the Company’s business, financial condition, cash flows, results of operations and supply chain will depend on future developments, including the continuing duration of the pandemic and the related length of its impact on the global economy, all of which are still uncertain.

Additionally, the increasing cost and availability of raw materials, such as paper, ink, supplies, distribution and labor, have been and are expected to continue to adversely impact the Company’s results of operation. The Company is dependent on its production personnel to print the Company’s products in a cost-effective and efficient manner that allows the Company to obtain new clients and to drive sales from existing clients. The nationwide shortage of available production personnel may put a strain on the Company’s ability to accept new work from client requests, including the Company’s seasonally higher third and fourth quarters. The ongoing labor shortage is also placing upward price pressure on freight, as the number of available drivers have been reduced, and may have an adverse effect on our operations. Due to the reduced number of freight drivers available, the Company may not be able to meet rising customer demand and could fail to meet our clients’ expectations.

The Company has also experienced and anticipates it will continue to experience certain distribution challenges, including, but not limited to, the above-noted delivery delays at the USPS and recent volume restrictions at the United Parcel Service, Federal Express and certain local couriers. As the labor shortages, supply chain and distribution challenges continue to evolve, the Company is unable to predict the duration of the shortages and challenges and the extent of the impact on the Company’s business, financial condition, cash flows and results of operations. As a result of the rising inflationary cost pressures within our raw materials, distribution and labor, the Company has and will continue to pass along price increases to our clients. The Company expects inflationary cost pressures and supply chain shortages to potentially continue through fiscal year 2022. The Company is unable to predict the future impact of the labor and supply chain shortages as well as cost inflation, and the resulting impact on the Company’s business, financial condition, cash flows and results of operations.




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Results of Operations for the Three Months Ended March 31, 2022, Compared to the Three Months Ended March 31, 2021

Summary Results

The Company’s operating income, operating margin, net earnings (loss) (computed using a 25% normalized tax rate for all items subject to tax) and diluted earnings (loss) per share for the three months ended March 31, 2022, changed from the three months ended March 31, 2021, as follows (dollars in millions, except margin and per share data):
Operating
Income
Operating Margin Net Earnings (Loss) Diluted Earnings (Loss) Per Share
For the three months ended March 31, 2021 $ 21.0  3.0  % $ 10.2  $ 0.19 
Restructuring, impairment and transaction-related charges (1)
(1.0) (0.1) % (0.8) (0.01)
Other operating income elements (2)
(14.6) (2.2) % (10.8) (0.21)
Operating Income 5.4  0.7  % (1.4) (0.03)
Interest expense (3)
N/A N/A 3.9  0.07 
Net pension income (4)
N/A N/A (0.7) (0.01)
Income taxes (5)
N/A N/A (2.7) (0.05)
Investments in unconsolidated entity, net of tax (6)
N/A N/A (0.1) — 
For the three months ended March 31, 2022 $ 5.4  0.7  % $ (1.0) $ (0.02)
______________________________
(1)Restructuring, impairment and transaction-related charges increased $1.0 million ($0.8 million, net of tax), to $3.6 million during the three months ended March 31, 2022, and included the following:

a.A $3.6 million decrease in employee termination charges from $4.7 million during the three months ended March 31, 2021, to $1.1 million during the three months ended March 31, 2022;

b.A $0.7 million decrease in impairment charges from $0.8 million during the three months ended March 31, 2021, to $0.1 million during the three months ended March 31, 2022;

c.Transaction-related charges of $0.2 million for both of the three months ended March 31, 2022 and 2021; and

d.A $5.3 million increase in various other restructuring charges from $3.1 million of income during the three months ended March 31, 2021, to $2.2 million of expense during the three months ended March 31, 2022.

The Company expects to incur additional restructuring costs in future reporting periods in connection with eliminating excess manufacturing capacity and properly aligning its cost structure in conjunction with the Company’s acquisitions and strategic investments, and other cost reduction programs.

(2)Other operating income elements decreased $14.6 million ($10.8 million, net of tax impact) during the three months ended March 31, 2022, primarily due to net cost increases from supply chain disruptions, cost inflation in materials and freight and labor shortages. These cost increases were partially offset by the following: (1) an $8.5 million increase in paper byproduct recoveries; (2) a $5.4 million decrease in depreciation and amortization expense; and (3) savings from other cost reduction initiatives.

(3)Interest expense decreased $5.2 million ($3.9 million, net of tax) during the three months ended March 31, 2022, to $9.3 million. This change was due to a $3.0 million decrease in interest expense related to the interest rate swaps and lower average debt levels in the three months ended March 31, 2022, as compared to the three months ended March 31, 2021.

(4)Net pension income decreased $0.9 million ($0.7 million, net of tax) during the three months ended March 31, 2022, to $3.2 million. This was due to a $0.6 million decrease from the expected long-term return on pension plan assets and a $0.3 million increase from interest cost on pension plan liabilities.


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(5)The $2.7 million decrease in income tax benefit as calculated in the following table is primarily due to a $2.8 million decrease in valuation allowance reserves.
Three Months Ended March 31,
2022 2021 $ Change
Earnings (loss) before income taxes and equity in earnings of unconsolidated entity $ (0.7) $ 10.6  $ (11.3)
Normalized tax rate 25.0  % 25.0  %
Income tax expense (benefit) at normalized tax rate (0.2) 2.7  (2.9)
Income tax expense from the condensed consolidated statements of operations 0.3  0.5  (0.2)
Impact of income taxes $ (0.5) $ 2.2  $ (2.7)

(6)The decrease in investments in unconsolidated entity, net of tax, of $0.1 million during the three months ended March 31, 2022, was due to a $0.1 million decrease in earnings at the Company’s investment in Plural Industria Grafica Ltda., the Company’s Brazilian joint venture. In January 2022, the Company sold its investment in Plural.

Operating Results

The following table sets forth certain information from the Company’s condensed consolidated statements of operations on an absolute dollar basis and as a relative percentage of total net sales for each noted period, together with the relative percentage change in such information between the periods set forth below:
Three Months Ended March 31,
2022 2021
(dollars in millions)
Amount % of
Sales
Amount % of
Sales
$ Change %
Change
Net sales:
Products $ 580.9  78.1  % $ 526.0  74.5  % $ 54.9  10.4  %
Services 163.3  21.9  % 179.8  25.5  % (16.5) (9.2) %
Total net sales 744.2  100.0  % 705.8  100.0  % 38.4  5.4  %
Cost of sales:
Products 503.1  67.6  % 428.3  60.7  % 74.8  17.5  %