Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Following discussion of the financial condition and results of operations of Quad should be read together with Quad’s audited consolidated financial statements for each of the three years in the period ended December 31, 2020, including the notes thereto, included in Part II, Item 8, “Financial Statements and Supplementary Data,” of this Annual Report on Form 10-K. This discussion contains forward-looking statements that reflect the Company’s plans, estimates and beliefs. The Company’s actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed in “Forward-Looking Statements” and Part I, Item 1A, “Risk Factors,” included earlier within this Annual Report on Form 10-K.
Management’s discussion and analysis of financial condition and results of operations is provided as a supplement to the Company’s consolidated financial statements and accompanying notes to help provide an understanding of the Company’s financial condition, the changes in the Company’s financial condition and the Company’s results of operations. This discussion and analysis is organized as follows:
•Overview. This section includes a general description of the Company’s business and segments, an overview of key performance metrics the Company’s management measures and utilizes to evaluate business performance, and an overview of trends affecting the Company, including management’s actions related to the trends.
•Results of Operations. This section contains an analysis of the Company’s results of operations by comparing the results for the year ended December 31, 2020, to the year ended December 31, 2019. The comparability of the Company’s results of operations between periods was impacted by acquisitions, strategic investments and divestitures, including the the divestiture of the Omaha, Nebraska packaging plant, which was sold on January 31, 2020, and the additional investment in Rise in June 2020. The results of operations of the packaging plant divestiture are included in the Company’s consolidated results until the date of disposition, and the results of operations of the investment in Rise reflect the Company’s ownership interest from the respective dates of change in ownership. The results of the Company’s United States Book business (“Book buiness”) have been reported as discontinued operations for all periods presented. Forward-looking statements providing a general description of recent and projected industry and Company developments that are important to understanding the Company’s results of operations are included in this section. This section also provides a discussion of EBITDA and EBITDA margin, financial measures that the Company uses to assess the performance of its business that are not prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
•Liquidity and Capital Resources. This section provides an analysis of the Company’s capitalization, cash flows and a discussion and table of outstanding debt and commitments. Forward-looking statements important to understanding the Company’s financial condition are included in this section. This section also provides a discussion of Free Cash Flow and Debt Leverage Ratio, non-GAAP financial measures that the Company uses to assess liquidity and capital allocation and deployment.
•Critical Accounting Policies and Estimates. This section contains a discussion of the accounting policies that the Company’s management believes are important to the Company’s financial condition and results of operations, as well as allowances and reserves that require significant judgment and estimates on the part of the Company’s management. In addition, all of the Company’s significant accounting policies, including critical accounting policies, are summarized in Note 1, “Basis of Presentation and Summary of Significant Accounting Policies,” to the consolidated financial statements in Part II, Item 8, “Financial Statements and Supplementary Data,” of this Annual Report on Form 10-K.
Overview
Business Overview
As a worldwide marketing solutions partner, Quad leverages its 50-year heritage of platform excellence, innovation, strong culture and social purpose to create a better way for its clients, employees and communities. The Company’s integrated marketing platform helps brands and marketers reduce complexity, increase efficiency and enhance marketing spend effectiveness.
For a full description of the Company’s business overview, refer to Part I, Item 1, “Business,” of this Annual Report on Form 10-K.
The Company’s operating and reportable segments are aligned with how the chief operating decision maker of the Company currently manages the business. The Company’s operating and reportable segments, including 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 90% of the Company’s consolidated net sales during the year ended December 31, 2020.
The International segment consists of the Company’s printing operations in Europe and Latin America, including operations in England, France, Germany, Poland, Argentina, Colombia, Mexico and Peru, as well as investments in printing operations in Brazil and India. This segment provides printed products and marketing and other complementary services consistent with the United States Print and Related Services segment. The International segment accounted for approximately 10% of the Company’s consolidated net sales during the year ended December 31, 2020.
Corporate consists of unallocated general and administrative activities and associated expenses including, in part, executive, legal and finance, as well as certain expenses and income from frozen employee retirement plans, such as pension benefit plans.
Key Performance Metrics Overview
The Company’s management believes the ability to generate net sales growth, profit increases and positive cash flow, while maintaining the appropriate level of debt, are key indicators of the successful execution of the Company’s business strategy and will increase shareholder value. The Company uses period-over-period net sales growth, EBITDA, EBITDA margin, net cash provided by operating activities, Free Cash Flow and Debt Leverage Ratio as metrics to measure operating performance, financial condition and liquidity. EBITDA, EBITDA margin, Free Cash Flow and Debt Leverage Ratio are non-GAAP financial measures (see the definitions of EBITDA, EBITDA margin and the reconciliation of net earnings (loss) attributable to Quad common shareholders to EBITDA in the “Results of Operations” section below, and see the definitions of Free Cash Flow and Debt Leverage Ratio, the reconciliation of net cash provided by operating activities to Free Cash Flow, and the calculation of Debt Leverage Ratio in the “Liquidity and Capital Resources” section below).
Net sales growth. The Company uses period-over-period net sales growth as a key performance metric. The Company’s management assesses net sales growth based on the ability to generate increased net sales through increased sales to existing clients, sales to new clients, sales of new or expanded solutions to existing and new clients, and opportunities to expand sales through strategic investments, including acquisitions.
EBITDA and EBITDA margin. The Company uses EBITDA and EBITDA margin as metrics to assess operating performance. The Company’s management assesses EBITDA and EBITDA margin based on the ability to increase revenues while controlling variable expense growth.
Net cash provided by operating activities. The Company uses net cash provided by operating activities as a metric to assess liquidity. The Company’s management assesses net cash provided by operating activities based on the ability to meet recurring cash obligations while increasing available cash to fund debt service requirements, capital expenditures, cash restructuring requirements related to cost reduction activities, World Color Press single employer pension plan contributions, World Color Press MEPPs withdrawal liabilities, acquisitions and other investments in future growth, shareholder dividends and share repurchases. Net cash provided by operating activities can be significantly impacted by the timing of non-recurring or infrequent receipts or expenditures.
Free Cash Flow. The Company uses Free Cash Flow as a metric to assess liquidity and capital deployment. The Company’s management assesses Free Cash Flow as a measure to quantify cash available for strengthening the balance sheet (debt and pension liability reduction), for strategic capital allocation and deployment through investments in the business (acquisitions and strategic investments) and for returning capital to the shareholders (dividends and share repurchases). The Company’s priorities for capital allocation and deployment will change as circumstances dictate for the business, and Free Cash Flow can be significantly impacted by the Company’s restructuring activities and other unusual items.
Debt Leverage Ratio. The Company uses the Debt Leverage Ratio as a metric to assess liquidity and the flexibility of its balance sheet. Consistent with other liquidity metrics, the Company monitors the Debt Leverage Ratio as a measure to determine the appropriate level of debt the Company believes is optimal to operate its business, and accordingly, to quantify debt capacity available for strengthening the balance sheet (debt and pension liability reduction), for strategic capital allocation and deployment through investments in the business (capital expenditures, acquisitions and strategic investments), and for returning capital to the shareholders (dividends and share repurchases). The Company’s priorities for capital allocation and deployment will change as circumstances dictate for the business, and the Debt Leverage Ratio can be significantly impacted by the amount and timing of large expenditures requiring debt financing, as well as changes in profitability.
The Company remains disciplined with its debt leverage. The Company’s consolidated debt and finance lease obligations decreased by $184 million during the year ended December 31, 2020, primarily due to the use of cash proceeds from the sale of the Omaha packaging plant and from the sale of the Book business to reduce debt obligations, and due to the redemption of certain of its senior notes under the Master Note and Security Agreement, at par (the outstanding principal balance as of the date of payment). Since the Company completed the World Color Press acquisition in July 2010, the Company has reduced debt and finance lease obligations by $811 million and has reduced the obligations for pension, postretirement and MEPPs by $470 million, for a total obligation reduction since July 2010 of approximately $1.3 billion.
Overview of Trends Affecting Quad
As consumer media consumption habits change, marketing services providers face increased demand to offer end-to-end marketing services, from strategy and creative through execution, across all channels, traditional and digital. As new marketing and advertising channels emerge, marketing services providers must expand their services beyond traditional channels, such as for television, newspapers, print publications and radio, to digital channels, such as mobile, internet search, internet display and video, to create effective multichannel campaigns for their clients. This trend greatly influences Quad’s ongoing efforts to redefine the future of integrated marketing and create greater value for its clients who are looking for less complexity, greater transparency and accountability from their business partners.
The Company leverages its data-driven print expertise as part of an integrated marketing platform that helps its clients not only plan and produce marketing programs, but also deploy, manage and measure them across all media channels. Competition in the printing industry remains highly fragmented and intense, and the Company believes that
there are indicators of heightened competitive pressures. The industry has excess manufacturing capacity created by continued declines in industry volumes, compounded by the COVID-19 pandemic, which, in turn, have created accelerated downward pricing pressures. The Company faces competition due to the increased accessibility and quality of digital alternatives to traditional delivery of printed documents through the online distribution and hosting of media content, and the digital distribution of documents and data. The Company faces competition from print management and marketing consulting firms that look to streamline processes and reduce the overall print spend of the Company’s clients.
For a full description of the Company’s industry and competition overview, refer to Part I, Item 1, “Business,” of this Annual Report on Form 10-K.
The Company believes that a disciplined approach for capital management and a strong balance sheet are critical to be able to invest in profitable growth opportunities and technological advances, thereby providing the highest return for shareholders. Management balances the use of cash between deleveraging the Company’s balance sheet (through reduction in debt and pension obligations), compelling investment opportunities (through capital expenditures, acquisitions and strategic investments) and returns to shareholders (through quarterly dividends and share repurchases).
The Company continues to make progress on integrating and streamlining all aspects of its business, thereby lowering its cost structure by consolidating its manufacturing platform into its most efficient facilities, as well as realizing purchasing, mailing and logistics efficiencies by centralizing and consolidating print manufacturing volumes and eliminating redundancies in its administrative and corporate operations. The Company has continued to evolve its manufacturing platform, equipping facilities to be product line agnostic, which enables the Company to maximize equipment utilization. Quad believes that the large plant size of certain of its key printing facilities allows the Company to drive savings in certain product lines (such as publications and catalogs) due to economies of scale and from investments in automation and technology. The Company continues to focus on proactively aligning its cost structure to the realities of the top-line pressures it faces in the printing industry through Lean Manufacturing and sustainable continuous improvement programs. Restructuring actions initiated by the Company beginning in 2010 have resulted in the announcement of 50 plant closures through December 31, 2020.
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 postal service is an important component of the Company’s business. Any material change in the current service levels provided by the postal service could impact the demand that clients have for print services. The USPS continues to experience financial problems. Without increased revenues or action by Congress to reform the USPS’ cost structure, these losses will continue into the future. As a result of these financial difficulties, the USPS has come under increased pressure to adjust its postal rates and service levels. Additional price increases may result in clients reducing mail volumes and exploring the use of alternative methods for delivering a larger portion of their products, such as continued diversion to the internet and other alternative media channels in order to ensure that they stay within their expected postage budgets. There are also continued risks of delivery delays due to ongoing COVID-19 impacts on daily operational staffing at the USPS.
Federal statute requires the PRC to conduct reviews of the overall rate-making structure for the USPS to ensure funding stability. As a result of those reviews, the PRC has authorized a new five year rate-making structure that would provide the USPS with additional pricing flexibility over the current Consumer Price Index cap, which may result in a substantially altered rate structure for mailers. The newly revised rate authority that is effective as a result of new rules issued by the PRC includes a higher overall rate cap on the USPS’ ability to increase rates from year to year. This may lead to price spikes for mailers and may also reduce the incentive for the USPS to continue to take out costs and instead continue to rely on postage to cover the costs of an outdated postal service that does not reflect the industry’s ability or willingness to pay. The uncertainty as to the actual rate increases due to competing lawsuits from both industry and the USPS, as well as how much of the authority the USPS will use, also creates potential volume declines as rate predictability with respect to cost and timing is no longer known for mailers. The result may be reduced demand for printed products as clients may move more aggressively into other delivery methods, such as the many digital and mobile options now available to consumers.
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.
During 2020, the Company continued to focus on providing brands and marketers with a more efficient and effective way to go to market and reach consumers. Through its integrated marketing platform, the Company creates greater value for clients by helping them reduce the complexities of working with multiple agency partners and vendors; reduce process inefficiencies through workflow re-engineering, content production and process optimization; and improve marketing spend effectiveness through demand-driving ideas and integrated solutions that help clients target audiences, plan and measure marketing, strategize, create and activate big ideas, produce content at scale, and connect with consumers through multiple channels.
Throughout 2020, the Company also continued to make strategic investments in its manufacturing platform as part of its ongoing commitment to maintaining the most efficient, automated and dependable manufacturing and distribution platform in the printing industry. These investments, which included digital press technology to help clients gain a competitive edge with data-driven, personalized print marketing and quick-makeready wide-web offset press technology, help Quad sustain its position as a high-quality, low-cost producer.
During 2020, the Company also completed the sale of the Omaha packaging plant and the Book business as a part of an ongoing process to review its business portfolio and divest assets not core to its transformation strategy.
The Company’s results of operations have been and continue to be adversely impacted as a result of the COVID-19 pandemic. 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. As a part of the business continuity plans, the Company implemented cost reduction and cash conservation initiatives, including implementing a COVID-19 Temporary Furlough Program through which employees take an unpaid leave of absence, the length of which varies upon business needs; temporary salary reductions for leaders through the end of July 2020, including a 50% salary reduction for the Chief Executive Officer and a 35% salary reduction for named executive officers; a temporary 50% reduction in retainer fees for the Company’s non-employee directors; temporarily suspending use of vacation and vacation payouts through the end of June 2020; temporarily suspending production at several manufacturing facilities where declining client volume or other effects of the pandemic impacted the Company’s ability to operate, all of which resumed operations by the end of September 2020; suspending quarterly dividend payments through the Covenant Relief Period; and delaying capital spending projects. The Company also announced the permanent closures of the facilities located in the following locations as a result of ongoing volume declines, particularly in retail, that have been exacerbated by the COVID-19 pandemic during the year ended December 31, 2020: (1) Taunton, Massachusetts; (2) Fernley, Nevada; (3) Nashville, Tennessee; (4) Oklahoma City, Oklahoma; and (5) Charlotte, North Carolina. In addition, the Company also amended its Senior Secured Credit Facility in the second quarter of 2020 to provide for certain financial covenant relief through a Covenant Relief Period. The Company is continuing to evaluate its cost structure and expects to implement additional cost reduction measures as necessary. As the pandemic continues to evolve, the extent of the impact on the Company’s business, financial condition, cash flows, results of operations and supply chain will depend on future developments, all of which are still highly uncertain and cannot be predicted.
Results of Operations for the Year Ended December 31, 2020, Compared to the Year Ended December 31, 2019
Summary Results
The Company’s operating income (loss) from continuing operations, operating margin, net loss attributable to Quad common shareholders (computed using a 25% normalized tax rate for all items subject to tax) and diluted loss per share attributable to Quad common shareholders for the year ended December 31, 2020, changed from the year ended December 31, 2019, as follows (dollars in millions, except per share data):
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Operating Income (Loss) from Continuing Operations
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Operating Margin
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Net Loss Attributable to Quad Common Shareholders
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Diluted Loss Per Share Attributable to Quad Common Shareholders
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For the year ended December 31, 2019
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$
|
34.7
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|
|
0.9
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%
|
|
$
|
(156.3)
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|
|
$
|
(3.12)
|
|
Restructuring, impairment and transaction-related charges (1)
|
(34.7)
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|
(1.9)
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%
|
|
(26.1)
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|
|
(0.50)
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|
Interest expense (2)
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N/A
|
|
N/A
|
|
15.9
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|
|
0.33
|
|
Net pension income (3)
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N/A
|
|
N/A
|
|
3.4
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|
|
0.07
|
|
2020 loss on debt extinguishment (4)
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N/A
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|
N/A
|
|
(1.4)
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|
|
(0.03)
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2019 loss on debt extinguishment (4)
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N/A
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N/A
|
|
22.9
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|
|
0.46
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|
Income taxes (5)
|
N/A
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|
N/A
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|
(31.3)
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|
|
(0.62)
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Loss from discontinued operations, net of tax (6)
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N/A
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|
N/A
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|
78.7
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|
|
1.58
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|
Investments in unconsolidated entity and noncontrolling interests, net of tax (7)
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N/A
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|
N/A
|
|
0.3
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|
|
0.01
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|
Operating loss from continuing operations (8)
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(46.0)
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|
(0.6)
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%
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(34.4)
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(0.71)
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For the year ended December 31, 2020
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$
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(46.0)
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(1.6)
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%
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$
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(128.3)
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$
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(2.53)
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______________________________
(1)Restructuring, impairment and transaction-related charges increased $34.7 million ($26.1 million, net of tax), to $124.1 million during the year ended December 31, 2020, and included the following:
a.A $12.5 million increase in employee termination charges from $22.2 million during the year ended December 31, 2019, to $34.7 million during the year ended December 31, 2020;
b.A $56.2 million increase in impairment charges from $7.9 million during the year ended December 31, 2019, to $64.1 million during the year ended December 31, 2020;
c.A $50.2 million decrease in transaction-related charges from $51.6 million during the year ended December 31, 2019, to $1.4 million during the year ended December 31, 2020;
d.A $1.4 million decrease in integration-related charges from $3.3 million during the year ended December 31, 2019, to $1.9 million during the year ended December 31, 2020; and
e.A $17.6 million increase in various other restructuring charges from $4.4 million during the year ended December 31, 2019, to $22.0 million during the year ended December 31, 2020.
The Company expects to incur additional restructuring and integration costs in future reporting periods in connection with eliminating excess manufacturing capacity and properly aligning its cost structure in conjunction with the Company’s acquisitions and strategic investments, and other cost reduction programs.
(2)Interest expense decreased $21.2 million ($15.9 million, net of tax) during the year ended December 31, 2020, to $68.8 million. This change was due to lower average debt levels and a lower weighted average interest rate on borrowings, partially offset by a $6.9 million increase in interest expense related to the interest rate swaps during the year ended December 31, 2020, as compared to the year ended December 31, 2019.
(3)Net pension income increased $4.5 million ($3.4 million, net of tax) during the year ended December 31, 2020, to $10.5 million. This was due to a $3.9 million decrease from interest cost on pension plan liabilities and a $0.7 million increase from the change in the expected long-term return on pension plan assets.
(4)The $1.8 million loss on debt extinguishment ($1.4 million, net of tax) recognized during the year ended December 31, 2020, relates to a $2.4 million loss on debt extinguishment from the fourth amendment to the Company’s April 28, 2014 Senior Secured Credit Facility, completed on June 29, 2020, partially offset by a $0.6 million gain on debt extinguishment recorded during the first quarter of 2020, primarily related to the repurchase of the Company’s unsecured 7.0% senior notes due May 1, 2022. A $30.5 million loss on debt extinguishment ($22.9 million, net of tax) was recognized during the year ended December 31, 2019, and includes $15.9 million relating to the third amendment to the Company’s April 28, 2014 Senior Secured Credit Facility, completed on January 31, 2019; and $14.6 million relating to the retirement of the Term Loan B, completed on July 26, 2019.
(5)The $31.3 million decrease in income tax benefit as calculated in the following table is primarily due to the following: (1) a $32.6 million decrease from increased valuation allowance reserves; (2) a $5.8 million decrease from equity award activity; and (3) a $3.3 million decrease in the Company’s liability for unrecognized tax benefits in 2019 that did not repeat in 2020. These decreases were partially offset by a $14.3 million income tax benefit related to the Coronavirus Aid, Relief, and Economic Security Act net operating loss carry back provisions.
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Year Ended December 31,
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|
|
2020
|
|
2019
|
|
$ Change
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Loss from continuing operations before income taxes and equity in loss of unconsolidated entity
|
$
|
(106.1)
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|
|
$
|
(79.8)
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|
|
$
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(26.3)
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|
Normalized tax rate
|
25.0
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%
|
|
25.0
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%
|
|
|
Income tax benefit at normalized tax rate
|
(26.6)
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|
|
(20.0)
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|
|
(6.6)
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|
|
|
|
|
|
|
Less: Income tax expense (benefit) from the consolidated statements of operations
|
0.3
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|
|
(24.4)
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|
|
24.7
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|
|
|
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|
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Impact of income taxes
|
$
|
(26.9)
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|
|
$
|
4.4
|
|
|
$
|
(31.3)
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|
(6)The decrease in loss from discontinued operations, net of tax, of $78.7 million during the year ended December 31, 2020, primarily due to a $75.7 million decrease in restructuring, impairment and transaction-related charges.
(7)The decrease from investments in unconsolidated entity and noncontrolling interests, net of tax, of $0.3 million during the year ended December 31, 2020, was primarily due to a $0.2 million increase in loss attributed to noncontrolling interests in the Company’s consolidated statements of operations related to the Company’s majority ownership of Rise and a $0.1 million decrease in earnings at the Company’s investment in Plural Industria Gráfica Ltda. (“Plural”), the Company’s Brazilian joint venture.
(8)Operating income from continuing operations, excluding restructuring, impairment and transaction-related charges, decreased $46.0 million ($34.4 million, net of tax) primarily due to the following: (1) lower print volume, pricing and print service sales; (2) a $12.1 million decrease in paper byproduct recoveries; and (3) a $10.8 million increase in production hourly wages in our most competitive labor markets. These decreases were partially offset by the following: (1) a $62.5 million decrease in selling, general and administrative expenses, including a $3.9 million net benefit in 2020 in gains from property insurance claims and the receipt of a $2.2 million COVID-19 related government subsidy in Poland; (2) a $14.7 million net reduction in the cost of worker’s compensation claims from improved production safety procedures; (3) a $9.4 million net benefit from a change in the hourly production employee vacation policy; and (4) savings from other cost reduction initiatives.
Operating Results From Continuing Operations
The following table sets forth certain information from the Company’s consolidated statements of operations on an absolute dollar basis and as a relative percentage of total net sales for each noted period, together with the relative percentage change in such information between the periods set forth below:
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|
Year Ended December 31,
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|
2020
|
|
2019
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(dollars in millions)
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|
|
|
Amount
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% of Net
Sales
|
|
Amount
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|
% of Net
Sales
|
|
$ Change
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|
%
Change
|
Net sales:
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|
|
|
|
|
|
|
|
|
Products
|
$
|
2,228.7
|
|
|
76.1
|
%
|
|
$
|
3,098.3
|
|
|
79.0
|
%
|
|
$
|
(869.6)
|
|
|
(28.1)
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%
|
Services
|
700.9
|
|
|
23.9
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%
|
|
825.1
|
|
|
21.0
|
%
|
|
(124.2)
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|
|
(15.1)
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%
|
Total net sales
|
2,929.6
|
|
|
100.0
|
%
|
|
3,923.4
|
|
|
100.0
|
%
|
|
(993.8)
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|
|
(25.3)
|
%
|
Cost of sales:
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
1,831.5
|
|
|
62.5
|
%
|
|
2,615.6
|
|
|
66.7
|
%
|
|
(784.1)
|
|
|
(30.0)
|
%
|
Services
|
503.3
|
|
|
17.2
|
%
|
|
576.6
|
|
|
14.7
|
%
|
|
(73.3)
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|
|
(12.7)
|
%
|
Total cost of sales
|
2,334.8
|
|
|
79.7
|
%
|
|
3,192.2
|
|
|
81.4
|
%
|
|
(857.4)
|
|
|
(26.9)
|
%
|
Selling, general & administrative expenses
|
335.1
|
|
|
11.4
|
%
|
|
397.6
|
|
|
10.1
|
%
|
|
(62.5)
|
|
|
(15.7)
|
%
|
Depreciation and amortization
|
181.6
|
|
|
6.2
|
%
|
|
209.5
|
|
|
5.3
|
%
|
|
(27.9)
|
|
|
(13.3)
|
%
|
Restructuring, impairment and transaction-related charges
|
124.1
|
|
|
4.2
|
%
|
|
89.4
|
|
|
2.3
|
%
|
|
34.7
|
|
|
38.8
|
%
|
Total operating expenses
|
2,975.6
|
|
|
101.5
|
%
|
|
3,888.7
|
|
|
99.1
|
%
|
|
(913.1)
|
|
|
(23.5)
|
%
|
Operating income (loss) from continuing operations
|
$
|
(46.0)
|
|
|
(1.6)
|
%
|
|
$
|
34.7
|
|
|
0.9
|
%
|
|
$
|
(80.7)
|
|
|
(232.6)
|
%
|
Net Sales
Product sales decreased $869.6 million, or 28.1%, for the year ended December 31, 2020, compared to the year ended December 31, 2019, primarily due to the following: (1) a $402.4 million decrease from pass-through paper sales; (2) a $388.8 million decrease in sales in the Company’s print product lines due to ongoing industry volume and pricing pressures, including the ongoing impacts from the COVID-19 pandemic; (3) a $68.9 million decrease in sales due to the divestiture of the Company’s Omaha packaging plant; and (4) $9.5 million in unfavorable foreign exchange impacts.
Service sales, which primarily consist of logistics, distribution, marketing services, imaging and medical services, decreased $124.2 million, or 15.1%, for the year ended December 31, 2020, compared to the year ended December 31, 2019, primarily due to the following: (1) a $72.0 million decrease in logistics sales; (2) a $24.9 million decrease of sales of marketing services; and (3) an $21.4 million decrease in print imaging services.
Cost of Sales
Cost of product sales decreased $784.1 million, or 30.0%, for the year ended December 31, 2020, compared with the year ended December 31, 2019, primarily due to the following: (1) a decrease in pass-through paper costs; (2) lower print volume; (3) the impact from the divestiture of the Omaha packaging plant; (4) a $9.4 million net benefit from a change in the hourly production employee vacation policy; (5) a $14.7 million net reduction in the cost of worker’s compensation claims from improved production safety procedures; and (6) other cost reduction initiatives. These decreases were partially offset by a $12.1 million decrease in paper byproduct recoveries and a $10.8 million increase in production hourly wages in our most competitive labor markets.
Cost of service sales decreased $73.3 million, or 12.7%, for the year ended December 31, 2020, compared with the year ended December 31, 2019, primarily due to lower logistics, marketing services and print imaging sales.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased $62.5 million, or 15.7%, for the year ended December 31, 2020, compared with the year ended December 31, 2019, primarily due to the following: (1) a $68.6 million decrease in employee-related costs; (2) a $3.9 million net benefit in 2020 in gains from property insurance claims; (3) savings from other cost reduction initiatives; and (4) the receipt of a $2.2 million COVID-19 related government subsidy in Poland. These decreases were partially offset by a $9.4 million increase in legal expenses, a $3.5 million increase in credit loss expense (primarily due to specific client credit reviews) and a $3.2 million increase from foreign translation losses. Selling, general and administrative expenses as a percentage of net sales increased from 10.1% for the year ended December 31, 2019, to 11.4% for the year ended December 31, 2020.
Depreciation and Amortization
Depreciation and amortization decreased $27.9 million, or 13.3%, for the year ended December 31, 2020, compared with the year ended December 31, 2019, due to a $22.2 million decrease in depreciation expense from property, plant and equipment becoming fully depreciated over the past year, and a $5.7 million decrease in amortization expense.
Restructuring, Impairment and Transaction-Related Charges
Restructuring, impairment and transaction-related charges increased $34.7 million, or 38.8%, for the year ended December 31, 2020, compared to the year ended December 31, 2019, primarily due to the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
2019
|
|
$ Change
|
Employee termination charges
|
$
|
34.7
|
|
|
$
|
22.2
|
|
|
$
|
12.5
|
|
Impairment charges (a)
|
64.1
|
|
|
7.9
|
|
|
56.2
|
|
Transaction-related charges (b)
|
1.4
|
|
|
51.6
|
|
|
(50.2)
|
|
Integration costs
|
1.9
|
|
|
3.3
|
|
|
(1.4)
|
|
Other restructuring charges
|
|
|
|
|
|
Vacant facility carrying costs and lease exit charges
|
11.5
|
|
|
9.5
|
|
|
2.0
|
|
Equipment and infrastructure removal costs
|
1.1
|
|
|
0.4
|
|
|
0.7
|
|
Gains on the sale of facilities (c)
|
(1.6)
|
|
|
(6.1)
|
|
|
4.5
|
|
Other restructuring activities (d)
|
11.0
|
|
|
0.6
|
|
|
10.4
|
|
Other restructuring charges
|
22.0
|
|
|
4.4
|
|
|
17.6
|
|
Total restructuring, impairment and transaction-related charges
|
$
|
124.1
|
|
|
$
|
89.4
|
|
|
$
|
34.7
|
|
______________________________
(a)Includes $22.1 million and $7.6 million of impairment charges for machinery and equipment no longer being utilized in production as a result of facility consolidations, as well as other capacity reduction restructuring activities during the years ended December 31, 2020 and 2019, respectively; and $42.0 million and $0.3 million of land and building impairment charges during the years ended December 31, 2020 and 2019, respectively. $56.6 million of the impairment charges recorded during the year ended December 31, 2020 were related to property, plant and equipment for the Oklahoma City, Oklahoma facility.
(b)Includes a $45 million reverse termination fee paid during the year ended December 31, 2019, in connection with the termination of the definitive agreement pursuant to which Quad would have acquired LSC Communications, Inc. (“LSC”).
(c)Includes an $0.8 million gain on the sale of the Shakopee, Minnesota facility and an $0.8 million gain on the sale of the Midland, Michigan facility during the year ended December 31, 2020; and a $3.5 million gain on the sale of the Hazleton, Pennsylvania facility and a $2.5 million gain on the sale of the Franklin, Kentucky facility during the year ended December 31, 2019.
(d)Includes a $2.9 million loss on the sale of a business during the year ended December 31, 2020; and includes $2.3 million in charges related to a value-added tax assessment for a closed facility, as well as other restructuring activities, net of an $8.4 million gain on the sale of a business during the year ended December 31, 2019.
EBITDA and EBITDA Margin—Consolidated
EBITDA is defined as net earnings (loss) attributable to Quad common shareholders, excluding (1) interest expense, (2) income tax expense (benefit) and (3) depreciation and amortization. EBITDA margin represents EBITDA as a percentage of net sales. EBITDA and EBITDA margin are presented to provide additional information regarding Quad’s performance. Both are important measures by which Quad gauges the profitability and assesses the performance of its business. EBITDA and EBITDA margin are non-GAAP financial measures and should not be considered alternatives to net earnings (loss) as a measure of operating performance, or to cash flows provided by operating activities as a measure of liquidity. Quad’s calculation of EBITDA and EBITDA margin may be different from the calculations used by other companies, and therefore, comparability may be limited.
EBITDA and EBITDA margin for the year ended December 31, 2020, compared to the year ended December 31, 2019, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
Amount
|
|
% of Net Sales
|
|
Amount
|
|
% of Net Sales
|
|
(dollars in millions)
|
EBITDA and EBITDA margin (non-GAAP)
|
$
|
122.4
|
|
|
4.2
|
%
|
|
$
|
118.8
|
|
|
3.0
|
%
|
EBITDA increased $3.6 million for the year ended December 31, 2020, compared to the year ended December 31, 2019, primarily due to the following: (1) a $78.7 million decrease in loss from discontinued operations, net of tax; (2) a $62.5 million decrease in selling, general and administrative expenses, including a $3.9 million net benefit in 2020 in gains from property insurance claims and the receipt of a $2.2 million COVID-19 related government subsidy in Poland; (3) a $9.4 million net benefit from a change in the hourly production employee vacation policy; (4) a $14.7 million net reduction in the cost of worker’s compensation claims from improved production safety procedures; and (5) savings from other cost reduction initiatives. These increases were partially offset by the following: (1) lower print volume, pricing and print service sales; (2) $34.7 million of increased restructuring, impairment and transaction-related charges; (3) a $12.1 million decrease in paper byproduct recoveries; and (4) a $10.8 million increase in production hourly wages in our most competitive labor markets.
A reconciliation of EBITDA to net loss attributable to Quad common shareholders for the years ended December 31, 2020 and 2019, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
(dollars in millions)
|
Net loss attributable to Quad common shareholders(1)
|
$
|
(128.3)
|
|
|
$
|
(156.3)
|
|
Interest expense
|
68.8
|
|
|
90.0
|
|
Income tax expense (benefit)
|
0.3
|
|
|
(24.4)
|
|
Depreciation and amortization
|
181.6
|
|
|
209.5
|
|
EBITDA (non-GAAP)
|
$
|
122.4
|
|
|
$
|
118.8
|
|
______________________________
(1)Net loss attributable to Quad common shareholders included the following:
a.Restructuring, impairment and transaction-related charges of $124.1 million and $89.4 million for the years ended December 31, 2020 and 2019, respectively;
b.Net pension income of $10.5 million and $6.0 million for the years ended December 31, 2020 and 2019, respectively;
c.Loss on debt extinguishment of $1.8 million and $30.5 million for the years ended December 31, 2020 and 2019, respectively;
d.Equity in loss of unconsolidated entity of $0.2 million and $0.3 million for the years ended December 31, 2020 and 2019, respectively;
e.Loss from discontinued operations, net of tax, of $21.9 million and $100.6 million for the years ended December 31, 2020 and 2019, respectively; and
f.Net loss attributable to noncontrolling interests of $0.2 million for the year ended December 31, 2020.
United States Print and Related Services
The following table summarizes net sales, operating income from continuing operations, operating margin and certain items impacting comparability within the United States Print and Related Services segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
2020
|
|
2019
|
|
|
|
|
|
(dollars in millions)
|
|
|
|
Amount
|
|
Amount
|
|
$ Change
|
|
% Change
|
Net sales:
|
|
|
|
|
|
|
|
Products
|
$
|
1,944.0
|
|
|
$
|
2,713.3
|
|
|
$
|
(769.3)
|
|
|
(28.4)
|
%
|
Services
|
683.6
|
|
|
807.7
|
|
|
(124.1)
|
|
|
(15.4)
|
%
|
Operating income from continuing operations (including restructuring, impairment and transaction-related charges)
|
1.7
|
|
|
130.1
|
|
|
(128.4)
|
|
|
(98.7)
|
%
|
Operating margin
|
0.1
|
%
|
|
3.7
|
%
|
|
N/A
|
|
N/A
|
Restructuring, impairment and transaction-related charges
|
$
|
110.1
|
|
|
$
|
24.6
|
|
|
$
|
85.5
|
|
|
347.6
|
%
|
Net Sales
Product sales for the United States Print and Related Services segment decreased $769.3 million, or 28.4%, for the year ended December 31, 2020, compared to the year ended December 31, 2019, primarily due to the following (1) a $350.8 million decrease from pass-through paper sales; (2) a $349.6 million decrease in sales in the Company’s print product lines due to ongoing industry volume and pricing pressures, including the ongoing impacts from the COVID-19 pandemic; and (3) a $68.9 million decrease in sales due to the divestiture of the Company’s Omaha packaging plant.
Service sales for the United States Print and Related Services segment decreased $124.1 million, or 15.4%, for the year ended December 31, 2020, compared to the year ended December 31, 2019, primarily due to the following: (1) a $72.2 million decrease in logistics sales; (2) a $24.6 million decrease of sales of marketing services; and (3) an $21.4 million decrease in print imaging services.
Operating Income from Continuing Operations
Operating income from continuing operations for the United States Print and Related Services segment decreased $128.4 million, or 98.7%, for the year ended December 31, 2020, compared to the year ended December 31, 2019, primarily due to the following: (1) lower print volume and pricing due to ongoing industry pressures, including the ongoing impacts from the COVID-19 pandemic; (2) an $85.5 million increase in restructuring, impairment and transaction-related charges; (3) a $12.1 million decrease in paper byproduct recoveries; (4) a $10.8 million increase in production hourly wages in our most competitive labor markets; and (5) lower print service sales. These decreases were partially offset by the following: (1) a $14.7 million net reduction in the cost of worker’s compensation claims from improved production safety procedures; (2) a $9.4 million net benefit from a change in the hourly production employee vacation policy; (3) a $3.9 million net benefit in 2020 in gains from property insurance claims; and (4) savings from other cost reduction initiatives.
The operating margin for the United States Print and Related Services segment decreased to 0.1% for the year ended December 31, 2020, from 3.7% for the year ended December 31, 2019, primarily due to the reasons provided above.
Restructuring, Impairment and Transaction-Related Charges
Restructuring, impairment and transaction-related charges for the United States Print and Related Services segment increased $85.5 million, or 347.6%, for the year ended December 31, 2020, compared to the year ended December 31, 2019, primarily due to the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
2019
|
|
$ Change
|
Employee termination charges
|
$
|
30.0
|
|
|
$
|
20.9
|
|
|
$
|
9.1
|
|
Impairment charges (a)
|
64.0
|
|
|
4.5
|
|
|
59.5
|
|
Transaction-related charges
|
0.1
|
|
|
—
|
|
|
0.1
|
|
Integration costs
|
1.9
|
|
|
3.3
|
|
|
(1.4)
|
|
Other restructuring charges (income)
|
|
|
|
|
|
Vacant facility carrying costs and lease exit charges
|
11.5
|
|
|
9.2
|
|
|
2.3
|
|
Equipment and infrastructure removal costs
|
1.1
|
|
|
0.4
|
|
|
0.7
|
|
Gains on the sale of facilities (b)
|
(1.6)
|
|
|
(5.8)
|
|
|
4.2
|
|
Other restructuring activities (c)
|
3.1
|
|
|
(7.9)
|
|
|
11.0
|
|
Other restructuring charges
|
14.1
|
|
|
(4.1)
|
|
|
18.2
|
|
Total restructuring, impairment and transaction-related charges
|
$
|
110.1
|
|
|
$
|
24.6
|
|
|
$
|
85.5
|
|
______________________________
(a)Includes $22.0 million and $4.5 million of impairment charges for machinery and equipment no longer being utilized in production as a result of facility consolidations, as well as other capacity reduction restructuring activities during the years ended December 31, 2020 and 2019, respectively; and $42.0 million of land and building impairment charges during the year ended December 31, 2020. $56.6 million of the impairment charges recorded during the year ended December 31, 2020 were related to property, plant and equipment for the Oklahoma City, Oklahoma facility.
(b)Includes an $0.8 million gain on the sale of the Shakopee, Minnesota facility and an $0.8 million gain on the sale of the Midland, Michigan facility during the year ended December 31, 2020; and a $3.5 million gain on the sale of the Hazleton, Pennsylvania facility and a $2.5 million gain on the sale of the Franklin, Kentucky facility during the year ended December 31, 2019.
(c)Includes a $2.9 million loss on the sale of a business during the year ended December 31, 2020; and a $8.4 million gain on the sale of a business during the year ended December 31, 2019.
International
The following table summarizes net sales, operating income from continuing operations, operating margin, certain items impacting comparability and equity in loss of unconsolidated entities within the International segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
2020
|
|
2019
|
|
|
|
|
|
(dollars in millions)
|
|
|
|
Amount
|
|
Amount
|
|
$ Change
|
|
% Change
|
Net sales:
|
|
|
|
|
|
|
|
Products
|
$
|
284.7
|
|
|
$
|
385.0
|
|
|
$
|
(100.3)
|
|
|
(26.1)
|
%
|
Services
|
17.3
|
|
|
17.4
|
|
|
(0.1)
|
|
|
(0.6)
|
%
|
Operating income (including restructuring, impairment and transaction-related charges)
|
(0.8)
|
|
|
8.6
|
|
|
(9.4)
|
|
|
(109.3)
|
%
|
Operating margin
|
(0.3)
|
%
|
|
2.1
|
%
|
|
N/A
|
|
N/A
|
Restructuring, impairment and transaction-related charges
|
$
|
12.2
|
|
|
$
|
10.0
|
|
|
$
|
2.2
|
|
|
22.0
|
%
|
Equity in loss of unconsolidated entity
|
0.2
|
|
|
0.3
|
|
|
(0.1)
|
|
|
(33.3)
|
%
|
Net Sales
Product sales for the International segment decreased $100.3 million, or 26.1%, for the year ended December 31, 2020, compared to the year ended December 31, 2019, primarily due to the following (1) a $51.6 million decrease in pass-through paper sales; (2) a $39.2 million decrease in volume, primarily in Europe, Peru and Colombia, including the ongoing impacts from the COVID-19 pandemic; and (3) $9.5 million in unfavorable foreign exchange impacts, primarily in Argentina, Europe and Mexico.
Service sales for the International segment decreased $0.1 million, or 0.6%, for the year ended December 31, 2020, compared to the year ended December 31, 2019, primarily due to a decrease in marketing services sales in Europe.
Operating Income from Continuing Operations
Operating income from continuing operations for the International segment decreased $9.4 million for the year ended December 31, 2020, compared to the year ended December 31, 2019, primarily due to lower print volume and pricing due to ongoing industry pressures, including the ongoing impacts from the COVID-19 pandemic, a $2.2 million increase in restructuring, impairment and transaction-related charges, partially offset by the receipt of a $2.2 million COVID-19 related government subsidy in Poland.
Restructuring, Impairment and Transaction-Related Charges
Restructuring, impairment and transaction-related charges for the International segment increased $2.2 million, or 22.0%, for the year ended December 31, 2020, compared to the year ended December 31, 2019, primarily due to the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
2019
|
|
$ Change
|
Employee termination charges
|
$
|
4.5
|
|
|
$
|
1.3
|
|
|
$
|
3.2
|
|
Impairment charges (a)
|
0.1
|
|
|
0.4
|
|
|
(0.3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other restructuring charges (b)
|
7.6
|
|
|
8.3
|
|
|
(0.7)
|
|
Total restructuring, impairment and transaction-related charges
|
$
|
12.2
|
|
|
$
|
10.0
|
|
|
$
|
2.2
|
|
______________________________
(a)Includes $0.1 million of impairment charges for machinery and equipment no longer being utilized in production as a result of facility consolidations, as well as other capacity reduction restructuring activities during the years ended December 31, 2020 and 2019; and $0.3 million of land and building impairment charges during the year ended December 31, 2019.
(b)Includes $5.9 million and $2.8 million in charges from foreign currency losses as result of the economy in Argentina being classified as highly inflationary during the years ended December 31, 2020 and 2019, respectively; and includes $2.3 million in charges related to a value-added tax assessment for a closed facility during the year ended December 31, 2019.
Equity in Loss of Unconsolidated Entities
Investments in entities where Quad has the ability to exert significant influence, but not control, are accounted for using the equity method of accounting. The Company holds a 49% ownership interest in Plural, a commercial printer based in São Paulo, Brazil. The equity in loss of unconsolidated entity in the International segment decreased $0.1 million for the year ended December 31, 2020, compared to the year ended December 31, 2019, due to a decrease in earnings at the Company’s investment in Plural.
Unrestricted Subsidiaries
As of December 31, 2020, the Company has no unrestricted subsidiaries as defined in the Senior Unsecured Notes indenture.
Corporate
The following table summarizes unallocated operating expenses presented as Corporate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
2020
|
|
2019
|
|
|
|
|
|
(dollars in millions)
|
|
|
|
Amount
|
|
Amount
|
|
$ Change
|
|
% Change
|
Operating expenses (including restructuring, impairment and transaction-related charges)
|
$
|
46.9
|
|
|
$
|
104.0
|
|
|
$
|
(57.1)
|
|
|
(54.9)
|
%
|
Restructuring, impairment and transaction-related charges
|
1.8
|
|
|
54.8
|
|
|
(53.0)
|
|
|
(96.7)
|
%
|
Operating Expenses
Corporate operating expenses decreased $57.1 million, or 54.9%, for the year ended December 31, 2020, compared with the year ended December 31, 2019, primarily due to the following: (1) a $53.0 million decrease in restructuring, impairment and transaction-related charges, (2) a $2.5 million decrease in employee-related costs, and (3) other cost reduction initiatives.
Restructuring, Impairment and Transaction-Related Charges
Corporate restructuring, impairment and transaction-related charges decreased $53.0 million, or 96.7%, for the year ended December 31, 2020, compared to the year ended December 31, 2019, primarily due to the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
2019
|
|
$ Change
|
Employee termination charges
|
$
|
0.2
|
|
|
$
|
—
|
|
|
$
|
0.2
|
|
Impairment charges (a)
|
—
|
|
|
3.0
|
|
|
(3.0)
|
|
Transaction-related charges (b)
|
1.3
|
|
|
51.6
|
|
|
(50.3)
|
|
|
|
|
|
|
|
Other restructuring charges
|
0.3
|
|
|
0.2
|
|
|
0.1
|
|
Total restructuring, impairment and transaction-related charges
|
$
|
1.8
|
|
|
$
|
54.8
|
|
|
$
|
(53.0)
|
|
______________________________
(a)Includes $3.0 million of impairment charges for equipment during the year ended December 31, 2019.
(b)Includes a $45.0 million reverse termination fee paid during the year ended December 31, 2019, in connection with the termination of the definitive agreement pursuant to which Quad would have acquired LSC.
Liquidity and Capital Resources
The Company utilizes cash flows from operating activities and borrowings under its credit facilities to satisfy its liquidity and capital requirements. The Company had total liquidity of $516.6 million as of December 31, 2020, which consisted of up to $461.4 million of unused capacity under its revolving credit arrangement, which was net of $38.6 million of issued letters of credit, and cash and cash equivalents of $55.2 million. Total liquidity is reduced to $382.9 million under the Company’s most restrictive debt covenants, and consists of $55.2 million in cash and cash equivalents and $327.7 million available under its revolving credit arrangement. There were no borrowings under the $500.0 million revolving credit facility as of December 31, 2020, and peak borrowings were $150.0 million during the year ended December 31, 2020.
The Company implemented cost reduction and cash conservation initiatives as previously described herein in response to the impact of the COVID-19 pandemic on its business. These actions include, among many others, delaying capital spending projects and temporarily suspending the Company’s quarterly dividend. The Company believes its expected future cash flows from operating activities, cost reduction and cash preservation initiatives, and its current liquidity and capital resources, are sufficient to fund ongoing operating requirements and service debt and pension requirements.
Net Cash Provided by Operating Activities
Year Ended December 31, 2020, Compared to Year Ended December 31, 2019
Net cash provided by operating activities was $190.2 million for the year ended December 31, 2020, compared to $155.5 million for the year ended December 31, 2019, resulting in a $34.7 million increase in cash provided by operating activities. The increase was primarily due to a $37.4 million increase in cash from earnings, partially offset by a $2.7 million decrease in cash flows from changes in operating assets and liabilities.
Net Cash Provided by (Used in) Investing Activities
Year Ended December 31, 2020, Compared to Year Ended December 31, 2019
Net cash provided by investing activities was $9.7 million for the year ended December 31, 2020, compared to $208.1 million used in investing activities for the year ended December 31, 2019, resulting in a $217.8 million increase in cash provided by investing activities. The increase was primarily due to the following: (1) a $118.8 million decrease from the acquisition of businesses; (2) a $50.2 million increase in the proceeds from the sale of businesses; (3) a $50.0 million decrease in purchases of property, plant and equipment; (4) a $5.0 million decrease in loan to an unconsolidated entity; and (5) a $4.5 million increase in the proceeds from property insurance claims. These increases were partially offset by (1) a $10.1 million decrease in proceeds from the sale of property, plant and equipment; (2) a $0.5 million investment in an unconsolidated entity; and (3) a $0.1 million decrease in other investing activities.
Net Cash Provided by (Used in) Financing Activities
Year Ended December 31, 2020, Compared to Year Ended December 31, 2019
Net cash used in financing activities was $223.6 million for the year ended December 31, 2020, compared to $61.8 million provided by financing activities for the year ended December 31, 2019, resulting in a $285.4 million increase in cash used in financing activities. The increase was primarily due to a $336.4 million decrease in net borrowings of debt and lease obligations in 2020 compared to 2019, and a $22.4 million increase in cash used in changes in ownership of noncontrolling interests. These increases were partially offset by (1) a $47.6 million decrease in payment of cash dividends; (2) a $17.5 million decrease in payments of debt issuance costs and financing fees; (3) a $5.6 million decrease in equity awards redeemed to pay employees’ tax obligations; and (4) a $2.7 million decrease in other financing activities.
Free Cash Flow
Free Cash Flow is defined as net cash provided by operating activities less purchases of property, plant and equipment, plus LSC-related payments.
The Company’s management assesses Free Cash Flow as a measure to quantify cash available for (1) strengthening the balance sheet (debt reduction), (2) strategic capital allocation and deployment through investments in the business (acquisitions and strategic investments) and (3) returning capital to the shareholders (dividends and share repurchases). The priorities for capital allocation and deployment will change as circumstances dictate for the business, and Free Cash Flow can be significantly impacted by the Company’s restructuring activities and other unusual items.
Free Cash Flow is a non-GAAP financial measure and should not be considered an alternative to cash flows provided by operating activities as a measure of liquidity. Quad’s calculation of Free Cash Flow may be different from similar calculations used by other companies, and therefore, comparability may be limited.
Free Cash Flow for the years ended December 31, 2020 and 2019, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
|
|
(dollars in millions)
|
Net cash provided by operating activities
|
$
|
190.2
|
|
|
$
|
155.5
|
|
|
|
|
|
|
|
|
|
Less: purchases of property, plant and equipment
|
(61.0)
|
|
|
(111.0)
|
|
|
|
Plus: LSC-related payments (1)
|
—
|
|
|
61.3
|
|
|
|
|
|
|
|
|
|
Free Cash Flow (non-GAAP)
|
$
|
129.2
|
|
|
$
|
105.8
|
|
|
|
______________________________
(1)LSC-related payments include transaction-related costs associated with the proposed, but now terminated, acquisition of LSC, including the $45.0 million reverse termination fee and incremental interest payments associated with the 2019 amended debt refinancing.
Free Cash Flow increased $23.4 million for the year ended December 31, 2020, compared to the year ended December 31, 2019, primarily due to a $50.0 million decrease in capital expenditures, partially offset by a $26.6 million decrease in net cash provided by operating activities, when excluding $61.3 million in LSC-related payments. See the “Net Cash Provided by Operating Activities” section above for further explanations of the change in operating cash flows and the “Net Cash Used in Investing Activities” section above for further explanations of the changes in purchases of property, plant and equipment. The above calculation of Free Cash Flow includes the cash flows related to the Book business for all periods presented.
Debt Leverage Ratio
The Debt Leverage Ratio is defined as total debt and finance lease obligations less cash and cash equivalents (Net Debt) divided by the trailing twelve months Adjusted EBITDA, comprised of the sum of the following: (1) the last twelve months of EBITDA (see the definition of EBITDA and the reconciliation of net earnings (loss) attributable to Quad common shareholders to EBITDA in the “Results of Operations” section above); (2) restructuring, impairment and transaction-related charges; (3) earnings (loss) from discontinued operations, net of tax; (4) net pension income; (5) employee stock ownership plan contributions; (6) loss (gain) on debt extinguishment; (7) equity in (earnings) loss of unconsolidated entity; (8) Adjusted EBITDA for unconsolidated equity method investments (calculated in a consistent manner with the calculation for Quad); and (9) net earnings (loss) attributable to noncontrolling interests.
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 strategic capital allocation and deployment through investments in the business (capital expenditures, acquisitions and strategic investments), for strengthening the balance sheet (pension liability reduction), 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 Debt Leverage Ratio is a non-GAAP measure, and should not be considered an alternative to cash flows provided by operating activities as a measure of liquidity. Quad’s calculation of the Debt Leverage Ratio may be different from similar calculations used by other companies and, therefore, comparability may be limited.
The Debt Leverage Ratio calculated below differs from the Total Leverage Ratio, the Total Net Leverage Ratio and Senior Secured Leverage Ratio included in the Company’s debt covenant calculations (see Note 12, “Debt,” to the consolidated financial statements in Part II, Item 8, “Financial Statements and Supplementary Data,” of this Annual Report on Form 10-K for further information on debt covenants). The Total Leverage Ratio included in the Company’s debt covenants includes interest rate swap liabilities, letters of credit and surety bonds as debt, excludes non-cash stock-based compensation expense from EBITDA and includes net income (loss) attributable to noncontrolling interests in EBITDA. The Total Net Leverage Ratio includes and excludes the same adjustments as the Total Leverage Ratio, in addition to netting domestic unrestricted cash with debt. Similarly, the Senior Secured Leverage Ratio includes and excludes the same adjustments as the Total Leverage Ratio, in addition to the exclusion of the outstanding balance of the Senior Unsecured Notes and surety bonds from debt and netting domestic unrestricted cash with debt.
The Debt Leverage Ratio as of December 31, 2020 and 2019, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
|
(dollars in millions)
|
Total debt and finance lease obligations on the consolidated balance sheets
|
$
|
928.2
|
|
|
$
|
1,112.2
|
|
Less: Cash and cash equivalents
|
55.2
|
|
|
78.7
|
|
Net Debt (non-GAAP)
|
$
|
873.0
|
|
|
$
|
1,033.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Divided by: Adjusted EBITDA for the year ended (non-GAAP)
|
$
|
260.4
|
|
|
$
|
334.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt Leverage Ratio (non-GAAP)
|
3.35
|
x
|
|
3.09
|
x
|
The calculation of Adjusted EBITDA for the years ended December 31, 2020 and 2019, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
(dollars in millions)
|
Net loss attributable to Quad common shareholders
|
$
|
(128.3)
|
|
|
$
|
(156.3)
|
|
Interest expense
|
68.8
|
|
|
90.0
|
|
Income tax benefit
|
0.3
|
|
|
(24.4)
|
|
Depreciation and amortization
|
181.6
|
|
|
209.5
|
|
EBITDA (non-GAAP)
|
$
|
122.4
|
|
|
$
|
118.8
|
|
Restructuring, impairment and transaction-related charges
|
124.1
|
|
|
89.4
|
|
Loss from discontinued operations, net of tax
|
21.9
|
|
|
100.6
|
|
Net pension income
|
(10.5)
|
|
|
(6.0)
|
|
|
|
|
|
Loss on debt extinguishment
|
1.8
|
|
|
30.5
|
|
Other (1)
|
0.7
|
|
|
1.6
|
|
Adjusted EBITDA (non-GAAP)
|
$
|
260.4
|
|
|
$
|
334.9
|
|
______________________________
(1)Other is comprised of equity in loss of unconsolidated entity, Adjusted EBITDA for unconsolidated equity method investments and net loss attributable to noncontrolling interests.
The Debt Leverage Ratio, at December 31, 2020, increased 0.26x to 3.35x compared to December 31, 2019, primarily due to a $74.5 million decrease in Adjusted EBITDA, partially offset by a $160.5 million decrease in debt and finance lease obligations. The Debt Leverage Ratio, at December 31, 2020, is above management’s desired target Debt Leverage Ratio range of 2.0x to 2.5x; however, the Company expects to operate above the Debt Leverage Ratio target range due to the ongoing impacts from the COVID-19 pandemic. The Company will also operate at times above the Debt Leverage Ratio target range depending on the timing of compelling strategic investment opportunities, as well as seasonal working capital needs.
Description of Significant Outstanding Debt Obligations as of December 31, 2020
As of December 31, 2020, the Company utilized a combination of debt instruments to fund cash requirements, including the following:
•Senior Secured Credit Facility:
◦$500.0 million revolving credit facility (no outstanding balance as of December 31, 2020); and
◦$825.0 million Term Loan A ($657.6 million outstanding as of December 31, 2020);
•Senior Unsecured Notes ($238.7 million outstanding as of December 31, 2020); and
•Master Note and Security Agreement ($15.6 million outstanding as of December 31, 2020).
Senior Secured Credit Facility
On April 28, 2014, the Company entered into its Senior Secured Credit Facility, which included a revolving credit facility, Term Loan A and Term Loan B. The Company completed the third amendment to the Senior Secured Credit Facility on January 31, 2019. This third amendment was completed to provide Quad with the liquidity and structural flexibility to consummate the proposed, but now terminated, acquisition of LSC and to extend existing maturities by (a) increasing the aggregate amount of the existing revolving credit facility from $725.0 million to $800.0 million with a term of five years, maturing on January 31, 2024; (b) increasing the aggregate amount of the existing Term Loan A from $375.0 million to $825.0 million with a delayed draw feature and term of five years, maturing on January 31, 2024; and (c) increasing the aggregate amount of the existing Term Loan B from $300.0 million to $500.0 million with a term of seven years, maturing on January 31, 2026. The Company intended that the loans available under the amended revolving credit facility would be used to repay, refinance, repurchase, redeem, exchange or otherwise terminate LSC’s existing indebtedness in connection with the consummation of the merger, and to pay transaction expenses. On July 26, 2019, following the termination of the proposed acquisition of LSC, Quad fully funded the $825.0 million delayed draw Term Loan A to retire the entire amount outstanding on the $500.0 million Term Loan B and reduced the borrowings under the revolving credit facility.
The Company completed the fourth amendment to the Senior Secured Credit Facility on June 29, 2020. The Senior Secured Credit Facility was amended to (a) provide for certain financial covenant relief through the fiscal quarter ending September 30, 2021 (the Covenant Relief Period); (b) reduce the aggregate amount of the existing revolving credit facility from $800.0 million to $500.0 million; (c) make certain adjustments to pricing such as the addition of a 0.75% LIBOR floor; and (d) prohibit repurchases of capital stock and payments of cash dividends during the Covenant
Relief Period. Certain amendments were also made to the quarterly financial covenants to which the Company is subject, which are further described below.
At December 31, 2020, the Company had no outstanding borrowings on the revolving credit facility, and had $38.6 million of issued letters of credit, leaving $461.4 million available for future borrowings. Borrowings under the revolving credit facility and delayed draw Term Loan A made under the Senior Secured Credit Facility at December 31, 2020, bear interest at 2.50% in excess of reserve adjusted LIBOR, with a LIBOR floor of 0.75%, or 1.50% in excess of an alternate base rate. The Senior Secured Credit Facility is secured by substantially all of the unencumbered assets of the Company. The Senior Secured Credit Facility also requires the Company to provide additional collateral to the lenders in certain limited circumstances.
Senior Unsecured Notes
The Company issued $300.0 million aggregate principal amount of its Senior Unsecured Notes due May 1, 2022, on April 28, 2014, of which $238.7 million is outstanding as of December 31, 2020. The Senior Unsecured Notes bear interest at 7.0%, and interest is payable semi-annually. The Senior Unsecured Notes were issued to extend and stagger the Company’s debt maturity profile, further diversify its capital structure and provide more borrowing capacity to better position the Company to execute on its strategic goals. The Company received $294.8 million in net proceeds from the sale of the Senior Unsecured Notes, after deducting the initial purchasers’ discounts and commissions. The proceeds from the Senior Unsecured Notes were used for the same purposes detailed above for the Senior Secured Credit Facility.
The Company repurchased $4.7 million of its outstanding Senior Unsecured Notes in the open market, resulting in a net gain on debt extinguishment of $0.8 million during the year ended December 31, 2020. All repurchased Senior Unsecured Notes were canceled. The Company used cash flows from operating activities and borrowings under its revolving credit facility to fund the repurchases. These repurchases were primarily completed to reallocate debt to the lower interest rate revolving credit facility and thereby reduce interest expense based on current LIBOR rates.
Each of the Company’s existing and future domestic subsidiaries that is a borrower or guarantees indebtedness under the Company’s Senior Secured Credit Facility or that guarantees certain of the Company’s other indebtedness or indebtedness of the Company’s restricted subsidiaries (other than intercompany indebtedness) fully and unconditionally guarantee or, in the case of future subsidiaries, will guarantee, on a joint and several basis, the Senior Unsecured Notes (the “Guarantor Subsidiaries”). All of the Guarantor Subsidiaries are 100% owned by the Company. Guarantor Subsidiaries will be automatically released from these guarantees upon the occurrence of certain events.
Master Note and Security Agreement
On September 1, 1995, and as last amended on November 24, 2014, the Company entered into the Master Note and Security Agreement pursuant to which the Company issued over time senior notes in an aggregate principal amount of $1.1 billion in various tranches, of which $15.6 million was outstanding as of December 31, 2020. The senior notes under the Master Note and Security Agreement had a weighted average interest rate of 7.78% at December 31, 2020, which is fixed to maturity, with interest payable semiannually. Principal payments commenced September 1997 and extend through April 2026 in various tranches. The notes are collateralized by certain United States press equipment under the terms of the Master Note and Security Agreement.
The Company redeemed $37.6 million of its senior notes under the Master Note and Security Agreement, at par (the outstanding principal balance as of the date of payment), during the year ended December 31, 2020. There was no direct gain or loss recognized as a result of the tender as all notes were redeemed at par; however, $0.2 million of unamortized debt issuance costs related to the tendered notes were recognized as a loss on debt extinguishment during the year ended December 31, 2020. All tendered senior notes under the Master Note and Security Agreement were canceled. The Company used cash flows from operating activities and borrowings under its revolving credit facility to fund the tender. The tender was primarily completed to reallocate debt to the lower interest rate revolving credit facility and thereby reduce interest expense based on current LIBOR rates.
Covenants and Compliance
The Company’s various lending arrangements include certain financial covenants (all financial terms, numbers and ratios are as defined in the Company’s debt agreements). Among these covenants, the Company was required to maintain the following as of December 31, 2020:
•Maximum Total Net Leverage Ratio. On a rolling twelve-month basis, the Maximum Total Net Leverage Ratio, defined as consolidated total indebtedness, net of no more than $75.0 million of unrestricted cash, to consolidated EBITDA, shall not exceed (i) 4.50 to 1.00 for the quarters ending December 31, 2020 and March 31, 2021, (ii) 4.25 to 1.00 for the quarter ending June 30, 2021, and (iii) 4.125 to 1.00 for the quarter ending September 30, 2021 (for the twelve months ended December 31, 2020, the Company’s Maximum Total Net Leverage Ratio was 3.29 to 1.00). After the Covenant Relief Period, the Company will be required to comply with the Total Leverage Ratio covenant, defined as consolidated total indebtedness to consolidated EBITDA which shall not exceed 3.75 to 1.00.
•If there is any amount outstanding on the Revolving Credit Facility or Term Loan A, or if any lender has any revolving credit exposure or Term Loan A credit exposure, the Company is required to maintain the following:
◦Senior Secured Leverage Ratio. On a rolling twelve-month basis, the Senior Secured Leverage Ratio, defined as consolidated senior secured net indebtedness to consolidated EBITDA, shall not exceed 3.50 to 1.00 (for the twelve months ended December 31, 2020, the Company’s Senior Secured Leverage Ratio was 2.41 to 1.00).
•Interest Coverage Ratio. On a rolling twelve-month basis, the Interest Coverage Ratio, defined as consolidated EBITDA to cash consolidated interest expense, shall not be less than 3.00 to 1.00 (for the twelve months ended December 31, 2020, the Company’s Interest Coverage Ratio was 4.64 to 1.00).
The indenture underlying the Senior Unsecured Notes contains various covenants, including, but not limited to, covenants that, subject to certain exceptions, limit the Company’s and its restricted subsidiaries’ ability to incur and/or guarantee additional debt; pay dividends, repurchase stock or make certain other restricted payments; enter into agreements limiting dividends and certain other restricted payments; prepay, redeem or repurchase subordinated debt; grant liens on assets; enter into sale and leaseback transactions; merge, consolidate, transfer or dispose of substantially all of the Company’s consolidated assets; sell, transfer or otherwise dispose of property and assets; and engage in transactions with affiliates.
The Company was in compliance with all financial covenants in its debt agreements as of December 31, 2020. While the Company currently expects to be in compliance in future periods with all of the financial covenants, there can be no assurance that these covenants will continue to be met. The Company’s failure to maintain compliance with the covenants could prevent the Company from borrowing additional amounts and could result in a default under any of the debt agreements. Such default could cause the outstanding indebtedness to become immediately due and payable, by virtue of cross-acceleration or cross-default provisions.
In addition to those covenants, the Senior Secured Credit Facility also includes certain limitations on acquisitions, indebtedness, liens, dividends and repurchases of capital stock. The following limitations utilize a Total Net Leverage Ratio calculation, which, on a rolling twelve-month basis, is defined as consolidated net indebtedness to consolidated EBITDA (for the twelve months ended December 31, 2020, the Company’s Total Net Leverage Ratio was 3.30 to 1.00).
•If the Company’s Total Net Leverage Ratio is greater than 2.75 to 1.00, the Company is prohibited from making greater than $60.0 million of annual dividend payments, capital stock repurchases and certain other payments. If the Total Net Leverage Ratio is less than 2.75 to 1.00, there are no such restrictions, provided, however, that no such restricted payments shall be made during the Covenant Relief Period. As the Company’s Total Net Leverage Ratio as of December 31, 2020, was 3.30 to 1.00, and we are in the Covenant Relief Period, the limitations described above are currently applicable.
•If the Company’s Senior Secured Leverage Ratio is greater than 3.00 to 1.00 or the Company’s Total Net Leverage Ratio is greater than 3.50 to 1.00, the Company is prohibited from voluntarily prepaying any of the Senior Unsecured Notes and from voluntarily prepaying any other unsecured or subordinated indebtedness, with certain exceptions (including any mandatory prepayments on the Senior Unsecured Notes or any other unsecured or subordinated debt). If the Senior Secured Leverage Ratio is less than 3.00 to 1.00 and the Total Net Leverage Ratio is less than 3.50 to 1.00, there are no such restrictions. The limitations described above are currently not applicable, as the Company’s Senior Secured Leverage Ratio was 2.41 to 1.00 and Total Net Leverage Ratio was 3.30 to 1.00, as of December 31, 2020.
Net Pension Obligations
The net underfunded pension and MEPPs obligations decreased by $30.7 million during the year ended December 31, 2020, from $123.0 million at December 31, 2019, to $92.3 million at December 31, 2020. This decrease in overall pension obligations was primarily due to an actual return on pension plan assets of 17.0% during the year ended December 31, 2020, which was above the expected return on plan assets assumption of 5.75%, payments totaling $11.4 million made to the MEPPs and $7.8 million in employer pension contributions during the year ended December 31, 2020. The decrease was partially offset by an 83 basis point decrease in the pension discount rate from 3.20% at December 31, 2019, to 2.37% at December 31, 2020.
The Company continues to focus on reducing pension obligations through cash contributions to the plans, lump-sum settlements and plan design changes.
Share Repurchase Program
On July 30, 2018, the Company’s Board of Directors authorized a share repurchase program of up to $100.0 million of the Company’s outstanding class A common stock. Under the authorization, share repurchases may be made at the Company’s discretion, from time to time, in the open market and/or in privately negotiated transactions as permitted by federal securities laws and other legal requirements. The timing, manner, price and amount of any repurchase will depend on economic and market conditions, share price, trading volume, applicable legal requirements and other factors. The program may be suspended or discontinued at any time.
The Company is currently prohibited from repurchasing capital stock through the Covenant Relief Period, in accordance with the fourth amendment to the April 28, 2014 Senior Secured Credit Facility, completed on June 29, 2020. There were no shares of the Company’s class A stock repurchased during the years December 31, 2020 and 2019. As of December 31, 2020, there were $100.0 million of authorized repurchases remaining under the program.
Risk Management
For a discussion of the Company’s exposure to market risks and management of those market risks, see Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” of this Annual Report on Form 10-K.
Off-Balance Sheet Arrangements
Except as set forth below in the Contractual Obligations and Other Commitments table, the Company has no off-balance sheet arrangements, financings or special purpose entities that the Company expects to have a material current or future effect on financial condition, changes in financial condition, results of operations, liquidity, capital expenditures, capital resources or significant components of sales or expenses.
Contractual Obligations and Other Commitments
The Company’s contractual cash obligations at December 31, 2020, were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
Total
|
|
2021
|
|
2022
|
|
2023
|
|
2024
|
|
2025
|
|
Thereafter
|
Debt obligations(1)
|
$
|
1,036.6
|
|
|
$
|
67.8
|
|
|
$
|
317.7
|
|
|
$
|
109.7
|
|
|
$
|
539.8
|
|
|
$
|
1.1
|
|
|
$
|
0.5
|
|
Operating lease obligations(2)
|
93.7
|
|
|
31.1
|
|
|
23.1
|
|
|
16.6
|
|
|
9.6
|
|
|
6.8
|
|
|
6.5
|
|
MEPPs withdrawal obligations(3)
|
51.2
|
|
|
6.2
|
|
|
6.2
|
|
|
6.2
|
|
|
4.0
|
|
|
3.8
|
|
|
24.8
|
|
Pension benefit obligations(4)
|
12.2
|
|
|
4.0
|
|
|
0.7
|
|
|
0.7
|
|
|
0.6
|
|
|
6.2
|
|
|
—
|
|
Finance lease obligations(5)
|
5.1
|
|
|
2.9
|
|
|
1.6
|
|
|
0.4
|
|
|
0.1
|
|
|
0.1
|
|
|
—
|
|
Purchase obligations(6)
|
11.1
|
|
|
10.4
|
|
|
0.3
|
|
|
0.3
|
|
|
0.1
|
|
|
—
|
|
|
—
|
|
Business acquisitions(7)
|
7.7
|
|
|
7.7
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total(8)(9)
|
$
|
1,217.6
|
|
|
$
|
130.1
|
|
|
$
|
349.6
|
|
|
$
|
133.9
|
|
|
$
|
554.2
|
|
|
$
|
18.0
|
|
|
$
|
31.8
|
|
______________________________
(1)Debt obligations include $106.3 million for anticipated future interest payments, including $14.7 million of estimated interest payments from the interest rate swaps, and excludes $6.9 million for future amortization of debt issuance costs. During 2020, the Company paid in advance the full amount of required amortization payments on its Term Loan A, totaling $67.1 million for the year ended December 31, 2021. The Company also paid in advance $43.6 million of required amortization payments on its Term Loan A for the year ended December 31, 2022. Amounts included in “Thereafter” include principal payments and estimated interest expense through April 2026.
(2)Operating lease obligations include $10.8 million for anticipated future interest payments.
(3)MEPPs withdrawal obligations include $15.5 million for anticipated future interest payments. See Note 16, “Employee Retirement Plans,” to the consolidated financial statements in Part II, Item 8, “Financial Statements and Supplementary Data,” of this Annual Report on Form 10-K for further discussion of the MEPPs withdrawal liability.
(4)For the pension benefit obligations, contributions and benefit payments to be funded from Company assets included in the table have been actuarially estimated over a five year period. While benefit payments under these benefit plans are expected to continue beyond 2025, the Company believes that an estimate beyond this period is unreasonable.
(5)Finance lease obligations include $0.3 million for anticipated future interest payments.
(6)Purchase obligations consist primarily of $8.7 million in firm commitments to purchase press and finishing equipment and $2.4 million of other purchase obligations.
(7)Business acquisitions represents an estimated $7.7 million of future cash payments associated with the acquisition of Ivie.
(8)The contractual obligations table above does not include reserves for uncertain tax positions recorded in accordance with the accounting guidance on uncertainties in income taxes. The Company has taken tax positions for which the ultimate amount and the year(s) any necessary payments will be made that pertain to those tax positions is uncertain. The reserve for uncertain tax positions prior to interest and penalties was $11.6 million as of December 31, 2020, of which $5.2 million was included in other long-term liabilities, $6.1 million was included in deferred income taxes and $0.3 million was included in accrued liabilities in the consolidated balance sheets. The Company has also recorded reserves for interest and penalties related to uncertain tax positions of $0.6 million and $0.1 million, respectively, as of December 31, 2020.
(9)The contractual obligations table above does not include the share repurchase program as no repurchases are required under the program. See the “Share Repurchase Program” section above for further discussion, including the maximum potential cash payments under the program.
Critical Accounting Policies and Estimates
The Company’s consolidated financial statements are prepared in accordance with GAAP. The Company’s most critical accounting policies are those that are most important to the portrayal of its financial condition and results of operations, and which require the Company to make its most difficult and subjective estimates. Management is required to make judgments and estimates that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the statements, and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. The Company’s management believes that such judgments and estimates are made with consistent and appropriate methods based on information available at the time, and that any reasonable deviation from those judgments and estimates would not have a material impact on the Company’s consolidated financial position or results of operations. Actual results may differ from these estimates under different assumptions or conditions. To the extent that the estimates used differ from actual results, adjustments to the consolidated statements of operations and corresponding consolidated balance sheets would be necessary. These adjustments would be made in future statements.
The Company has identified the following as its critical accounting policies and estimates.
Revenue Recognition
Performance Obligations
At contract inception, the Company assesses the products and services promised in its contracts with customers and identifies performance obligations for each promise to transfer to the customer a product or service that is distinct. To identify the performance obligations, the Company considers the goods or services promised in the contract regardless of whether they are explicitly stated or are implied by customary business practices. The Company determined that the following distinct products and services represent separate performance obligations:
•Pre-Press Services
•Print
•Other Services
For Pre-Press and Other Services, the Company recognizes revenue at point-in-time upon completion of the performed service and acceptance by the customer. The Company considers transfer of control to occur once the service is performed as the Company has right to payment and the customer has legal title and risk and reward of ownership.
The Company recognizes its Print revenues upon transfer of title and the passage of risk of loss, which is point-in-time upon shipment to the customer, and when there is a reasonable assurance as to collectability. Revenues related to the Company’s logistics operations, which includes the delivery of printed material, are included in the Print performance obligation and are also recognized at point-in-time as services are completed. Revenues related to the Company’s imaging operations, which include digital content management, photography, color services and page production, are recognized in accordance with the terms of the contract, typically upon completion of the performed service and acceptance by the customer. Under agreements with certain customers, products may be stored by the Company for future delivery. In these situations, the Company may receive warehouse management fees for the services it provides.
Certain revenues earned by the Company require judgment to determine if revenue should be recorded gross as principal or net of related costs as an agent. Billings for third-party shipping and handling costs, primarily in the Company’s logistics operations, and out-of-pocket expenses are recorded gross in net sales and cost of sales in the consolidated statements of operations in Item 8, “Financial Statements and Supplementary Data,” of this Annual Report
on Form 10-K. Many of the Company’s operations process materials, primarily paper, that may be supplied directly by customers or may be purchased by the Company and sold to customers. No revenue is recognized for customer-supplied paper. Revenues for the Company-supplied paper are recognized on a gross basis. In some instances, the Company will deliver print work for a customer and bill the customer for postage. In these cases, the Company is acting as an agent and billings are recorded on a net basis in net sales.
Significant Payment Terms
Payment terms and conditions for contracts with customers vary. The Company typically offers standard terms of net 30 days. It is not the Company’s standard business practice to offer extended payment terms longer than one year. The Company may offer cash discounts or prepayment and extended terms depending on certain facts and circumstances. As such, when the timing of the Company’s delivery of products and services differs from the timing of payment, the Company will record either a contract asset or a contract liability.
Variable Consideration
When evaluating the transaction price, the Company analyzes on a contract by contract basis all applicable variable considerations and non-cash consideration and also performs a constraint analysis. The nature of the Company’s contracts give rise to variable consideration, including, volume rebates, credits, discounts, and other similar items that generally decrease the transaction price. These variable amounts generally are credited to the customer, based on achieving certain levels of sales activity, when contracts are signed, or making payments within specific terms.
Product returns are not significant because the products are customized; however, the Company accrues for the estimated amount of customer allowances at the time of sale based on historical experience and known trends.
When the transaction price requires allocation to multiple performance obligations, the Company uses the estimated stand-alone selling prices using the adjusted market assessment approach.
Costs to Obtain Contracts
The Company capitalizes certain sales incentives of the sales compensation packages for costs that are directly attributed to being awarded a customer 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 customer 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.
Impairment of Goodwill
Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired in a business combination and is assigned to specific reporting units. Changes in management’s estimates or judgments, including changes based on actual results differing from the estimates and judgments used in the purchase price allocation process, could result in an impairment charge, and such a charge could have a material adverse effect on the Company's results of operations. In accordance with accounting guidance, the Company performs an annual impairment test for goodwill 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.
Within the United States Print and Related Services Segment, the Company has identified three reporting units: (1) Core Print and Related Services; (2) Specialty Print and Related Services; and (3) Other United States Products and Services. As of December 31, 2020, goodwill totaled $103.0 million and was allocated to the Core Print and Related Services. The Specialty Print and Related Services reporting unit and the Other United States Products and Services reporting unit have no goodwill allocated to them. Additionally, there is no goodwill in the International segment on the consolidated balance sheets.
Due to the decline in the Company’s stock price and the uncertainty and impacts of the COVID-19 pandemic on the Company and the global economy, an interim goodwill impairment test was completed on the goodwill in the Core Print and Related Services reporting unit during the first quarter of 2020. As a result, the Company determined the fair value of the Core Print and Related Services reporting unit exceeded the carrying value, and therefore no impairment was recorded. The Company completed its annual impairment test as of October 31, 2020, and identified no indicators of impairment in any of the Company's reporting units during the year ended December 31, 2020.
In determining the fair value of the Core Print and Related Services reporting unit as of October 31, 2020, the Company used an equal weighting of both the income and market approaches. Significant assumptions used under the income approach included: estimated future cash flows including expected future revenue growth, profit margins, capital expenditures, working capital levels, terminal value multiples and an 11.1% after-tax weighted average cost of capital for the Core Print and Related Services. Estimated future cash flows were based on the Company's internal projection models, industry projections and other assumptions deemed reasonable by management. Significant assumptions used under the market approach included: a control premium based on similar transactions, selection of the guideline public companies and selected market multiples. This fair value determination was categorized as Level 3 in the fair value hierarchy (see Note 15, “Financial Instruments and Fair Value Measurements,” to the consolidated financial statements in Item 8, “Financial Statements and Supplementary Data,” of this Annual Report on Form 10-K for the definition of Level 3 inputs).
After completing the annual evaluation, the estimated fair value of the Core Print and Related Services reporting unit in the United States Print and Related Services segment was determined to exceed the carrying value of the reporting unit. In addition, the Company performed a sensitivity analysis as of October 31, 2020, on the material assumptions used in the discounted cash flow valuation models. In performing the annual goodwill impairment assessment, the percentage by which estimated fair value exceeded carrying value in the Core Print and Related Services reporting unit was more than 50%. As such, management concluded that no impairment existed as of October 31, 2020. No additional indications of impairment were identified between October 31, 2020, and December 31, 2020.
Impairment of Property, Plant and Equipment and Finite-lived Intangible Assets
The Company performs impairment evaluations of its long-lived assets whenever business conditions, events or circumstances indicate that those assets may be impaired, including whether the estimated useful life of such long-lived assets may warrant revision or whether the remaining balance of an asset may not be recoverable. The Company’s most significant long-lived assets are property, plant and equipment and customer relationship intangible assets recorded in conjunction with an acquisition. Assessing the impairment of long-lived assets requires the Company to make important estimates and assumptions, including, but not limited to, the expected future cash flows that the assets will generate, how the assets will be used based on the strategic direction of the Company, their remaining useful life and their residual value, if any. Considerable judgment is also applied in incorporating the potential impact of the current economic climate on customer demand and selling prices, the cost of production and the limited activity on secondary markets for the assets and on the cost of capital. When the estimated future undiscounted cash flows to be generated by the assets are less than the carrying value of the long-lived assets, the assets are written down to fair value and a charge is recorded to current operations. The Company uses internal discounted cash flow estimates, quoted market prices when available and independent appraisals, as appropriate, to determine fair value. This fair value determination was categorized as Level 3 in the fair value hierarchy (see Note 15, “Financial Instruments and Fair Value Measurements,” to the consolidated financial statements in Part II, Item 8, “Financial Statements and Supplementary Data,” of this Annual Report on Form 10-K for the definition of Level 3 inputs).
The Company classifies long-lived assets to be sold as held for sale in the period in which: (i) there is an approved plan to sell the asset and the Company is committed to that plan, (ii) the asset is available for immediate sale in its present condition, (iii) an active program to locate a buyer and other actions required to sell the asset have been initiated, (iv) the sale of the asset is probable, (v) the asset is being actively marketed for sale at a price that is reasonable in relation to its current fair value, and (vi) it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. Assets held for sale are initially measured at the lower of the carrying value or the fair value less cost to sell. Losses resulting from this measurement are recognized in the period in which the held for sale criteria are met while gains are not recognized until the date of sale. Once designated as held for sale, the Company stops recording
depreciation expense on the property, plant and equipment. The fair value less cost to sell of long-lived assets held for sale is assessed at each reporting period until it no longer meets this classification.
Based on the assessments completed during the years ended December 31, 2020, and 2019, the Company recognized property, plant and equipment impairment charges from continuing operations of $64.1 million and $7.9 million, respectively, primarily related to facility consolidations, as well as other capacity and strategic reduction restructuring initiatives. There were no finite-lived intangible asset impairment charges recorded during the years ended December 31, 2020 and 2019.
The Company continues to monitor groups of assets to identify any new events or changes in circumstances that could indicate that their carrying values are not recoverable, particularly in light of potential declines in profitability that may result from the highly competitive industry landscape and continued uncertainty in the global economy. In the event that there are significant and unanticipated changes in circumstances, such as significant adverse changes in business climate, adverse actions by regulators, unanticipated competition, loss of key customers and/or changes in technology or markets, or that actual results differ from management’s estimates, a provision for impairment could be required in a future period.
Pension Plans
As a result of the acquisition of World Color Press, the Company acquired multiple underfunded pension plans. Pension plan costs are determined using actuarial methods and are funded through contributions determined in accordance with the projected benefit method pro-rated based on service. The Company records amounts relating to its pension plans based on calculations which include various actuarial assumptions. The Company believes that the two most critical assumptions are the discount rate and assumed rate of return on assets. Changes in these assumptions are primarily influenced by factors outside of the Company’s control and can have a significant effect on the amounts reported in the financial statements. The Company reviews its actuarial assumptions on an annual basis and modifies the assumptions based on current rates and trends when it is appropriate to do so. The effects of modifications are recognized immediately on the consolidated balance sheets, but are generally amortized into operating income over future periods, with the deferred amount recorded in accumulated other comprehensive loss on the consolidated balance sheets included in Item 8, “Financial Statements and Supplementary Data,” of this Annual Report on Form 10-K. The Company believes that the assumptions utilized in recording its obligations under its plans are reasonable based on its experience, market conditions and input from its actuaries and investment advisors. When an event gives rise to both a curtailment and a settlement, the curtailment is accounted for prior to the settlement. The Company’s measurement date to measure the defined benefit plan assets and the projected benefit obligation is December 31. For the purposes of calculating the expected return on plan assets, those assets are valued at fair value.
The Company determines its assumption for the discount rate to be used for purposes of computing annual service and interest costs for each pension plan based on an index of high-quality corporate bond yields and matched-funding yield curve analysis as of that date. The Company measures interest costs for pension benefits by applying the specific spot rates along that yield curve to the plans’ liability cash flows.
The weighted average discount rate used to determine benefit obligations for the pension plans at December 31, 2020, was 2.37%, a 83 basis point decrease from the discount rate of 3.20% at December 31, 2019. A one-percentage point change in the discount rate would have the following impact on the projected benefit obligation and the net periodic benefit cost as of December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
1.0%
Increase
|
|
1.0%
Decrease
|
|
(in millions)
|
Projected benefit obligation
|
$
|
(47.9)
|
|
|
$
|
55.9
|
|
Net pension income
|
$
|
(3.4)
|
|
|
$
|
2.6
|
|
The Company employs a total return on investment approach for its pension plans whereby a diversified mix of equity securities and debt securities are used to maximize the long-term pension plan assets. The intent of this strategy is to outperform the growth in plan liabilities over the long run, such that plan contributions can be decreased, balanced with maintaining a lower degree of investment risk. Risk tolerance is established through careful consideration of plan liabilities, plan funded status, and corporate financial condition. Equity securities are diversified across geography and market capitalization through investments in United States large-capitalization stocks, United States small-capitalization stocks and international securities. Investment risk is measured and monitored on an ongoing basis through annual liability measurements, periodic asset/liability studies and quarterly investment portfolio reviews. The expected long-term rate of return for plan assets is based upon many factors including expected asset allocations, historical asset returns, current and expected future market conditions and risk. The current target asset allocation for plan assets on a weighted average basis are 30% equity securities and 70% debt securities. The actual asset allocation as of December 31, 2020, was approximately 30% equity securities and 70% debt securities. The expected return on plan assets assumption was 5.75% and 6.25% at December 31, 2020 and 2019, respectively, for the Company’s funded United States pension plans. Actual return on plan assets was 17.00% and 21.28% for the years ended December 31, 2020 and 2019, respectively. Certain pension plans are unfunded (those plans do not hold plan assets).
A 25 basis point change in the expected return on plan assets would have the following impact on net pension income for the year ended December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
0.25%
Increase
|
|
0.25%
Decrease
|
|
(in millions)
|
Net pension income
|
$
|
1.1
|
|
|
$
|
(1.1)
|
|
The Company also participated in MEPPs as a result of the acquisition of World Color Press. The Company has withdrawn from all significant MEPPs and replaced these union sponsored “promise to pay in the future” defined benefit plans with a Company sponsored “pay as you go” defined contribution plan. The two MEPPs, the GCIU and the 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 the estimated withdrawal liability based on information provided by each plan’s trustee.
In 2016, the Company and the GCC reached a settlement agreement for all claims, with scheduled payments until February 2024. In 2019, the Company and the GCIU reached a settlement agreement for all claims, with scheduled payments until April 2032.
New Accounting Pronouncements
See Note 23, “New Accounting Pronouncements,” to the consolidated financial statements in Part II, Item 8, “Financial Statements and Supplementary Data,” of this Annual Report on Form 10-K.
Summarized Financial Information of Subsidiary Guarantors Indebtedness
On April 28, 2014, Quad completed an offering of the Senior Unsecured Notes (see Note 12, “Debt,” for further details on the Senior Unsecured Notes). Each of the Company’s Guarantor Subsidiaries fully and unconditionally guarantee or, in the case of future subsidiaries, will guarantee, on a joint and several basis, the Senior Unsecured Notes. All of the current Guarantor Subsidiaries are 100% owned by the Company. Guarantor Subsidiaries will be automatically released from these guarantees upon the occurrence of certain events, including the following:
•the designation of any of the Guarantor Subsidiaries as an unrestricted subsidiary;
•the release or discharge of any guarantee or indebtedness that resulted in the creation of the guarantee of the Senior Unsecured Notes by any of the Guarantor Subsidiaries; or
•the sale or disposition, including the sale of substantially all the assets, of any of the Guarantor Subsidiaries.
The following tables present summarized financial information for Quad and the Guarantor Subsidiaries on a combined basis after intercompany transactions have been eliminated, including adjustments to remove the equity in earnings from the Non-Guarantor Subsidiaries. During the year ended December 31, 2020, six Non-Guarantor subsidiaries of the Company became Guarantor subsidiaries. Accordingly, the material supplemental financial information for all periods presented below has been recast to reflect subsidiaries per the Senior Unsecured Notes agreement that were Guarantor Subsidiaries as of December 31, 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
Statement of Operations Financial Information
|
December 31, 2020
|
|
December 31, 2019
|
Net sales
|
$
|
2,660.6
|
|
|
$
|
3,580.2
|
|
Cost of sales
|
2,114.4
|
|
|
2,906.8
|
|
Gross Profit
|
546.2
|
|
|
673.4
|
|
|
|
|
|
Net earnings (loss) from continuing operations
|
(106.5)
|
|
|
(62.0)
|
|
Loss from discontinued operations, net of tax
|
(21.9)
|
|
|
(100.6)
|
|
Net earnings (loss)
|
(128.4)
|
|
|
(162.6)
|
|
Less: net earnings (loss) attributable to noncontrolling interests
|
(0.2)
|
|
|
—
|
|
Net earnings (loss) attributable to Quad common shareholders
|
$
|
(128.2)
|
|
|
$
|
(162.6)
|
|
|
|
|
|
|
|
|
|
Balance Sheet Financial Information
|
December 31, 2020
|
|
December 31, 2019
|
Total current assets
|
$
|
580.0
|
|
|
$
|
794.9
|
|
Total long-term assets
|
1,555.5
|
|
|
1,911.2
|
|
Total current liabilities
|
598.1
|
|
|
729.8
|
|
Total long-term liabilities
|
1,143.3
|
|
|
1,335.7
|
|
Noncontrolling interests
|
0.7
|
|
|
17.7
|
|
Included in long-term assets in the table above are $11.6 million and $12.5 million of current intercompany loan receivables due to Quad from the Non-Guarantor Subsidiaries as of December 31, 2020 and 2019, respectively. Also included in long-term assets are $428.8 million and $427.9 million of intercompany investments by Quad and the Guarantor Subsidiaries in the Non-Guarantor Subsidiaries. Included in current liabilities are $2.9 million and $16.3 million of current intercompany payables due to the Non-Guarantor Subsidiaries from Quad and the Guarantor Subsidiaries as of December 31, 2020 and 2019, respectively.
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Quad/Graphics, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Quad/Graphics, Inc. and subsidiaries (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive loss, shareholders’ equity and cash flows for each of the two years in the period ended December 31, 2020, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 24, 2021, expressed an unqualified opinion on the Company’s internal control over financial reporting.
Change in Accounting Principles
As discussed in Note 13 to the financial statements, the Company has changed its method of accounting for leases, effective January 1, 2019, due to the adoption of Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842).
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Revenues - Refer to Notes 1 and 2 to the consolidated financial statements
Critical Audit Matter Description
The Company recognizes revenue upon transfer of control of promised products or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. The Company has various products and service lines which have differing levels involvement of management judgment and timing of revenue recognition.
We identified revenues as a critical audit matter because of the diversity in products and service lines and diversity in audit evidence obtained as each billing arrangement is individually unique which requires a higher degree of auditor judgment and an increased extent of effort when designing and performing audit procedures to evaluate the appropriateness of management’s estimates and audit evidence related to the recognition of revenues.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to revenues included the following:
•We tested the effectiveness of controls related to the revenue recognition process.
•We evaluated management’s significant accounting policies related to revenue recognition for reasonableness.
•We selected a sample of recorded revenue transactions and performed the following procedures:
◦Obtained customer source documents and the contract for each selection, including master agreements and related amendments to evaluate if relevant contractual terms have been appropriately considered by management.
◦Evaluated management’s application of their accounting policy and tested revenue recognition for specific performance obligations by comparing management’s conclusions to the underlying master agreement and any related amendments.
◦Tested the mathematical accuracy of management’s calculations of revenue and the associated timing of revenue recognized in the financial statements.
/s/ Deloitte & Touche LLP
Milwaukee, Wisconsin
February 24, 2021
We have served as the Company's auditor since 2002.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Quad/Graphics, Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Quad/Graphics, Inc. and subsidiaries (the “Company”) as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2020, of the Company and our report dated February 24, 2021, expressed an unqualified opinion on those financial statements and included an explanatory paragraph regarding the Company’s adoption of a new accounting standard.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
Milwaukee, Wisconsin
February 24, 2021
QUAD/GRAPHICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
|
Net sales
|
|
|
|
|
|
Products
|
$
|
2,228.7
|
|
|
$
|
3,098.3
|
|
|
|
Services
|
700.9
|
|
|
825.1
|
|
|
|
Total net sales
|
2,929.6
|
|
|
3,923.4
|
|
|
|
Cost of sales
|
|
|
|
|
|
Products
|
1,831.5
|
|
|
2,615.6
|
|
|
|
Services
|
503.3
|
|
|
576.6
|
|
|
|
Total cost of sales
|
2,334.8
|
|
|
3,192.2
|
|
|
|
Operating expenses
|
|
|
|
|
|
Selling, general and administrative expenses
|
335.1
|
|
|
397.6
|
|
|
|
Depreciation and amortization
|
181.6
|
|
|
209.5
|
|
|
|
Restructuring, impairment and transaction-related charges
|
124.1
|
|
|
89.4
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
2,975.6
|
|
|
3,888.7
|
|
|
|
Operating income (loss) from continuing operations
|
(46.0)
|
|
|
34.7
|
|
|
|
Interest expense
|
68.8
|
|
|
90.0
|
|
|
|
Net pension income
|
(10.5)
|
|
|
(6.0)
|
|
|
|
Loss on debt extinguishment
|
1.8
|
|
|
30.5
|
|
|
|
Loss from continuing operations before income taxes and equity in loss of unconsolidated entity
|
(106.1)
|
|
|
(79.8)
|
|
|
|
Income tax expense (benefit)
|
0.3
|
|
|
(24.4)
|
|
|
|
Loss from continuing operations before equity in loss of unconsolidated entity
|
(106.4)
|
|
|
(55.4)
|
|
|
|
Equity in loss of unconsolidated entity
|
0.2
|
|
|
0.3
|
|
|
|
Net loss from continuing operations
|
(106.6)
|
|
|
(55.7)
|
|
|
|
Loss from discontinued operations, net of tax
|
(21.9)
|
|
|
(100.6)
|
|
|
|
Net loss
|
(128.5)
|
|
|
(156.3)
|
|
|
|
Less: net loss attributable to noncontrolling interests
|
(0.2)
|
|
|
—
|
|
|
|
Net loss attributable to Quad common shareholders
|
$
|
(128.3)
|
|
|
$
|
(156.3)
|
|
|
|
|
|
|
|
|
|
Loss per share attributable to Quad common shareholders
|
|
|
|
|
|
Basic and diluted:
|
|
|
|
|
|
Continuing operations
|
$
|
(2.10)
|
|
|
$
|
(1.11)
|
|
|
|
Discontinued operations
|
(0.43)
|
|
|
(2.01)
|
|
|
|
Basic and diluted loss per share attributable to Quad common shareholders
|
$
|
(2.53)
|
|
|
$
|
(3.12)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
|
|
|
|
Basic and diluted
|
50.6
|
|
|
50.0
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
QUAD/GRAPHICS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
|
Net loss
|
$
|
(128.5)
|
|
|
$
|
(156.3)
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss
|
|
|
|
|
|
Translation adjustments
|
|
|
|
|
|
Foreign currency translation adjustments
|
0.9
|
|
|
(1.3)
|
|
|
|
Translation of long-term loans to foreign subsidiaries
|
(0.7)
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total translation adjustments
|
0.2
|
|
|
(1.0)
|
|
|
|
|
|
|
|
|
|
Interest rate swap adjustments
|
(7.5)
|
|
|
(10.7)
|
|
|
|
|
|
|
|
|
|
Pension benefit plan adjustments
|
|
|
|
|
|
Net gain (loss) arising during period
|
3.2
|
|
|
(8.1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlement charge on pension benefit plans included in net loss
|
0.1
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Total pension benefit plan adjustments
|
3.3
|
|
|
(8.1)
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss, before tax
|
(4.0)
|
|
|
(19.8)
|
|
|
|
|
|
|
|
|
|
Income tax impact related to items of other comprehensive loss
|
(0.1)
|
|
|
4.8
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss, net of tax
|
(4.1)
|
|
|
(15.0)
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
(132.6)
|
|
|
(171.3)
|
|
|
|
|
|
|
|
|
|
Less: comprehensive loss attributable to noncontrolling interests
|
(0.2)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Comprehensive loss attributable to Quad common shareholders
|
$
|
(132.4)
|
|
|
$
|
(171.3)
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
QUAD/GRAPHICS, INC.
CONSOLIDATED BALANCE SHEETS
(in millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2020
|
|
December 31,
2019
|
ASSETS
|
|
|
|
Cash and cash equivalents
|
$
|
55.2
|
|
|
$
|
78.7
|
|
Receivables, less allowances for credit losses of $33.8 million at December 31, 2020, and $25.0 million at December 31, 2019
|
399.1
|
|
|
456.1
|
|
Inventories
|
170.2
|
|
|
210.5
|
|
Prepaid expenses and other current assets
|
54.7
|
|
|
109.0
|
|
Current assets of discontinued operations
|
—
|
|
|
56.6
|
|
Total current assets
|
679.2
|
|
|
910.9
|
|
Property, plant and equipment—net
|
884.2
|
|
|
1,036.5
|
|
Operating lease right-of-use assets—net
|
81.0
|
|
|
97.9
|
|
Goodwill
|
103.0
|
|
|
103.0
|
|
Other intangible assets—net
|
104.3
|
|
|
137.2
|
|
Equity method investment in unconsolidated entity
|
2.6
|
|
|
3.6
|
|
|
|
|
|
Other long-term assets
|
73.4
|
|
|
127.5
|
|
Long-term assets of discontinued operations
|
—
|
|
|
0.5
|
|
Total assets
|
$
|
1,927.7
|
|
|
$
|
2,417.1
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
Accounts payable
|
$
|
320.0
|
|
|
$
|
416.7
|
|
Other current liabilities
|
310.8
|
|
|
303.0
|
|
Short-term debt and current portion of long-term debt
|
20.7
|
|
|
40.0
|
|
Current portion of finance lease obligations
|
2.8
|
|
|
7.7
|
|
Current portion of operating lease obligations
|
28.4
|
|
|
30.2
|
|
Current liabilities of discontinued operations
|
—
|
|
|
15.8
|
|
Total current liabilities
|
682.7
|
|
|
813.4
|
|
Long-term debt
|
902.7
|
|
|
1,058.5
|
|
Finance lease obligations
|
2.0
|
|
|
6.0
|
|
Operating lease obligations
|
54.5
|
|
|
70.4
|
|
Deferred income taxes
|
4.2
|
|
|
2.8
|
|
Other long-term liabilities
|
196.8
|
|
|
221.1
|
|
Long-term liabilities of discontinued operations
|
—
|
|
|
0.6
|
|
Total liabilities
|
1,842.9
|
|
|
2,172.8
|
|
Commitments and contingencies (Note 11)
|
|
|
|
Shareholders’ equity (Note 19)
|
|
|
|
Preferred stock, $0.01 par value; Authorized: 0.5 million shares; Issued: None
|
—
|
|
|
—
|
|
Common stock, Class A, $0.025 par value; Authorized: 105.0 million shares; Issued: 40.4 million shares at December 31, 2020, and 40.3 million shares at December 31, 2019
|
1.0
|
|
|
1.0
|
|
Common stock, Class B, $0.025 par value; Authorized: 80.0 million shares; Issued: 13.5 million shares at December 31, 2020 and 2019
|
0.4
|
|
|
0.4
|
|
Common stock, Class C, $0.025 par value; Authorized: 20.0 million shares; Issued: 0.5 million shares at December 31, 2020 and 2019
|
—
|
|
|
—
|
|
Additional paid-in capital
|
833.1
|
|
|
847.4
|
|
Treasury stock, at cost, 0.7 million shares at December 31, 2020, and 1.6 million shares at December 31, 2019
|
(13.1)
|
|
|
(31.5)
|
|
Accumulated deficit
|
(566.0)
|
|
|
(423.5)
|
|
Accumulated other comprehensive loss
|
(171.3)
|
|
|
(167.2)
|
|
Quad’s shareholders’ equity
|
84.1
|
|
|
226.6
|
|
Noncontrolling interests
|
0.7
|
|
|
17.7
|
|
Total shareholders’ equity and noncontrolling interests
|
84.8
|
|
|
244.3
|
|
Total liabilities and shareholders’ equity
|
$
|
1,927.7
|
|
|
$
|
2,417.1
|
|
See accompanying Notes to Consolidated Financial Statements.
QUAD/GRAPHICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
|
OPERATING ACTIVITIES
|
|
|
|
|
|
Net loss
|
$
|
(128.5)
|
|
|
$
|
(156.3)
|
|
|
|
Adjustments to reconcile net loss to net cash provided by operating activities:
|
|
|
|
|
|
Depreciation and amortization
|
181.6
|
|
|
223.1
|
|
|
|
|
|
|
|
|
|
Impairment charges
|
75.6
|
|
|
100.0
|
|
|
|
Goodwill impairment
|
—
|
|
|
10.1
|
|
|
|
Amortization of debt issuance costs and original issue discount
|
2.6
|
|
|
3.6
|
|
|
|
Loss on debt extinguishment
|
1.8
|
|
|
30.5
|
|
|
|
Stock-based compensation
|
10.6
|
|
|
13.6
|
|
|
|
Gain on the sale or disposal of property, plant and equipment
|
(1.8)
|
|
|
(6.6)
|
|
|
|
Loss (gain) on the sale of businesses
|
3.5
|
|
|
(8.4)
|
|
|
|
Gain from property insurance claims
|
(4.7)
|
|
|
(0.8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
48.5
|
|
|
(57.1)
|
|
|
|
Equity in loss of unconsolidated entity
|
0.2
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities—net of acquisitions:
|
|
|
|
|
|
Receivables
|
72.8
|
|
|
57.1
|
|
|
|
Inventories
|
45.8
|
|
|
61.3
|
|
|
|
Prepaid expenses and other current assets
|
0.2
|
|
|
(8.5)
|
|
|
|
Accounts payable and other current liabilities
|
(90.5)
|
|
|
(87.6)
|
|
|
|
Other
|
(27.5)
|
|
|
(18.8)
|
|
|
|
Net cash provided by operating activities
|
190.2
|
|
|
155.5
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES
|
|
|
|
|
|
Purchases of property, plant and equipment
|
(61.0)
|
|
|
(111.0)
|
|
|
|
Cost investment in unconsolidated entities
|
(0.5)
|
|
|
—
|
|
|
|
Proceeds from the sale of property, plant and equipment
|
7.4
|
|
|
17.5
|
|
|
|
Proceeds from the sale of businesses
|
61.3
|
|
|
11.1
|
|
|
|
Proceeds from property insurance claims
|
4.8
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
Loan to an unconsolidated entity
|
—
|
|
|
(5.0)
|
|
|
|
Acquisition of businesses—net of cash acquired (Note 3)
|
(2.2)
|
|
|
(121.0)
|
|
|
|
Other investing activities
|
(0.1)
|
|
|
—
|
|
|
|
Net cash provided by (used in) investing activities
|
9.7
|
|
|
(208.1)
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES
|
|
|
|
|
|
Proceeds from issuance of long-term debt
|
1.0
|
|
|
1,285.1
|
|
|
|
Payments of long-term debt
|
(177.9)
|
|
|
(1,119.4)
|
|
|
|
Payments of finance lease obligations
|
(7.4)
|
|
|
(8.7)
|
|
|
|
Borrowings on revolving credit facilities
|
350.6
|
|
|
3,636.1
|
|
|
|
Payments on revolving credit facilities
|
(351.7)
|
|
|
(3,642.1)
|
|
|
|
Payments of debt issuance costs and financing fees
|
(2.7)
|
|
|
(20.2)
|
|
|
|
Change in ownership of noncontrolling interests
|
(22.4)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity awards redeemed to pay employees’ tax obligations
|
(1.0)
|
|
|
(6.6)
|
|
|
|
Payment of cash dividends
|
(9.5)
|
|
|
(57.1)
|
|
|
|
Other financing activities
|
(2.6)
|
|
|
(5.3)
|
|
|
|
Net cash provided by (used in) financing activities
|
(223.6)
|
|
|
61.8
|
|
|
|
Effect of exchange rates on cash and cash equivalents
|
0.2
|
|
|
—
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
(23.5)
|
|
|
9.2
|
|
|
|
Cash and cash equivalents at beginning of year
|
78.7
|
|
|
69.5
|
|
|
|
Cash and cash equivalents at end of year
|
$
|
55.2
|
|
|
$
|
78.7
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
QUAD/GRAPHICS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Additional
Paid-in
Capital
|
|
Treasury Stock
|
|
Accumulated
Deficit
|
|
Accumulated
Other
Comprehensive
Loss
|
|
Quad’s Shareholders’
Equity
|
|
Noncontrolling
Interests
|
|
|
|
Shares
|
|
Amount
|
|
|
Shares
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
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|
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|
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|
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|
|
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|
|
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|
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|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2019
|
54.3
|
|
|
$
|
1.4
|
|
|
$
|
861.3
|
|
|
(2.7)
|
|
|
$
|
(56.6)
|
|
|
$
|
(211.4)
|
|
|
$
|
(152.2)
|
|
|
$
|
442.5
|
|
|
$
|
17.7
|
|
|
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(156.3)
|
|
|
—
|
|
|
(156.3)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1.0)
|
|
|
(1.0)
|
|
|
—
|
|
|
|
Pension benefit plan liability adjustments, net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(6.0)
|
|
|
(6.0)
|
|
|
—
|
|
|
|
Interest rate swap adjustments, net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(8.0)
|
|
|
(8.0)
|
|
|
—
|
|
|
|
Cash dividends declared ($1.05 per share)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(55.8)
|
|
|
—
|
|
|
(55.8)
|
|
|
—
|
|
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
14.7
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
14.7
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of share-based awards, net of other activity
|
—
|
|
|
—
|
|
|
(28.6)
|
|
|
1.6
|
|
|
31.7
|
|
|
—
|
|
|
—
|
|
|
3.1
|
|
|
—
|
|
|
|
Equity awards redeemed to pay employees’ tax obligations
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.5)
|
|
|
(6.6)
|
|
|
—
|
|
|
—
|
|
|
(6.6)
|
|
|
—
|
|
|
|
Balance at December 31, 2019
|
54.3
|
|
|
1.4
|
|
|
847.4
|
|
|
(1.6)
|
|
|
(31.5)
|
|
|
(423.5)
|
|
|
(167.2)
|
|
|
226.6
|
|
|
17.7
|
|
|
|
Accumulated deficit transition adjustment for adoption of ASU 2016-13, net of tax (Note 7)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(6.3)
|
|
|
—
|
|
|
(6.3)
|
|
|
—
|
|
|
|
Balance at January 1, 2020
|
54.3
|
|
|
1.4
|
|
|
847.4
|
|
|
(1.6)
|
|
|
(31.5)
|
|
|
(429.8)
|
|
|
(167.2)
|
|
|
220.3
|
|
|
17.7
|
|
|
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(128.3)
|
|
|
—
|
|
|
(128.3)
|
|
|
(0.2)
|
|
|
|
Change in ownership of noncontrolling interests
|
—
|
|
|
—
|
|
|
(5.4)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5.4)
|
|
|
(16.8)
|
|
|
|
Foreign currency translation adjustments
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.2
|
|
|
0.2
|
|
|
—
|
|
|
|
Pension benefit plan liability adjustments, net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3.3
|
|
|
3.3
|
|
|
—
|
|
|
|
Interest rate swap adjustments, net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(7.6)
|
|
|
(7.6)
|
|
|
—
|
|
|
|
Cash dividends declared ($0.15 per share)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(7.9)
|
|
|
—
|
|
|
(7.9)
|
|
|
—
|
|
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
10.7
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
10.7
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of share-based awards, net of other activity
|
0.1
|
|
|
—
|
|
|
(19.6)
|
|
|
1.0
|
|
|
19.4
|
|
|
—
|
|
|
—
|
|
|
(0.2)
|
|
|
—
|
|
|
|
Equity awards redeemed to pay employees’ tax obligations
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.2)
|
|
|
(1.0)
|
|
|
—
|
|
|
—
|
|
|
(1.0)
|
|
|
—
|
|
|
|
Balance at December 31, 2020
|
54.4
|
|
|
$
|
1.4
|
|
|
$
|
833.1
|
|
|
(0.8)
|
|
|
$
|
(13.1)
|
|
|
$
|
(566.0)
|
|
|
$
|
(171.3)
|
|
|
$
|
84.1
|
|
|
$
|
0.7
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
Note 1. Basis of Presentation and Summary of Significant Accounting Policies
Nature of Operations—As a worldwide marketing solutions partner, Quad leverages its 50-year heritage of platform excellence, innovation, strong culture and social purpose to create a better way for its clients, employees and communities. The Company’s integrated marketing platform helps brands and marketers reduce complexity, increase efficiency and enhance marketing spend effectiveness. Quad provides its clients with unmatched scale for on-site services and expanded subject expertise in marketing strategy, creative solutions, media deployment and marketing management services. With a client-centric approach that drives the Company to continuously evolve its offering, combined with leading-edge technology and single-source simplicity, the Company has the resources and knowledge to help a wide variety of clients in multiple vertical industries, including retail, publishing, consumer technology, consumer packaged goods, financial services, insurance, healthcare and direct-to-consumer.
The Company operates primarily in the commercial print portion of the printing industry as a printer of 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’s products and services for a variety of industries are sold primarily throughout North America, South America and Europe. In addition, the Company strategically sources packaging product manufacturing over multiple end markets in Central America and Asia.
Principles of Consolidation and Basis of Presentation—The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned controlled subsidiaries and have been prepared in accordance with GAAP. The results of operations and accounts of businesses acquired are included in the consolidated financial statements from the dates of acquisition (see Note 3, “Acquisitions and Strategic Investments”).
Investments in entities where the Company has both the ability to exert significant influence but not control and an ownership interest of 50% or less but more than 20% are accounted for using the equity method of accounting. Investments in entities where the Company does not exert significant influence or control and has an ownership interest of less than 20% are accounted for using the cost method of accounting. Intercompany transactions and balances have been eliminated in consolidation.
Discontinued Operations—The results of operations of the Company’s Book business have been reported as discontinued operations for all periods presented, in accordance with Accounting Standards Codification (“ASC”) 205-20 — Discontinued Operations. The corresponding current and long-term assets and liabilities of the Book business have been classified as held for sale in the consolidated balance sheets in accordance with ASC 205-20 as of December 31, 2019. The sale of the Book business was completed during 2020. The financial information pertaining to discontinued operations has been excluded from all relevant notes to the consolidated financial statements, unless otherwise noted. See all required disclosures and further information in Note 4, “Discontinued Operations” for information about the Company’s sale of its Book business.
Foreign Operations—Assets and liabilities denominated in foreign currencies are translated into United States dollars at the exchange rate existing at the respective balance sheet dates. Income and expense items are translated at the average rates during the respective periods. Translation adjustments resulting from fluctuations in exchange rates are recorded as a separate component of accumulated other comprehensive income (loss) on the consolidated statements of shareholders’ equity, while transaction gains and losses are recorded in selling, general and administrative expenses on the consolidated statements of operations. Foreign exchange transactions resulted in losses of $2.0 million during the year ended December 31, 2020 and gains of $1.2 million during the year ended December 31, 2019.
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
The Company had a 49% interest in Plural, a commercial printer based in São Paulo, Brazil, as of December 31, 2020. The Company accounts for this entity using the equity method of accounting. The Company’s equity in the (earnings) loss of Plural’s operations was recorded in equity in (earnings) loss of unconsolidated entity in the Company’s consolidated statements of operations, and was included within the International segment. Distributions received from equity method investees follow the nature of the distribution approach, where each distribution is evaluated on the basis of the source of the payment and is classified as either operating cash inflows or investing cash inflows. The Company reviews its equity method investment regularly for indicators of other than temporary impairment. Quad had no other significant unconsolidated entities as of December 31, 2020.
Use of Estimates—The preparation of consolidated financial statements requires the use of management’s estimates and assumptions that affect the reported assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from these estimates. Estimates are used when accounting for items and matters including, but not limited to: allowances for doubtful accounts, inventory obsolescence, asset valuations and useful lives, pension and postretirement benefits, self-insurance reserves, stock-based compensation, taxes, restructuring and other provisions and contingencies.
Revenue Recognition—The Company recognizes its products and services revenue based on when the transfer of control passes to the customer or when the service is completed and accepted by the customer. Under agreements with certain customers, products may be stored by the Company for future delivery. In these situations, the Company may receive warehouse management fees for the services it provides. Product returns are not significant because the products are customized; however, the Company accrues for the estimated amount of customer allowances at the time of sale based on historical experience and known trends.
Revenue from services is recognized as services are performed. Revenues related to the Company’s imaging operations, which include digital content management, photography, color services and page production, are recognized in accordance with the terms of the contract, typically upon completion of the performed service and acceptance by the customer. Revenues related to the Company’s logistics operations, which includes the delivery of printed material, are recognized upon completion of services.
Certain revenues earned by the Company require judgment to determine if revenue should be recorded gross as a principal or net of related costs as an agent. Billings for third-party shipping and handling costs, primarily in the Company’s logistics operations, and out-of-pocket expenses are recorded gross in net sales and cost of sales in the consolidated statements of operations. Many of the Company’s operations process materials, primarily paper, that may be supplied directly by customers or may be purchased by the Company and sold to customers. No revenue is recognized for customer-supplied paper. Revenues for Company-supplied paper are recognized on a gross basis.
Byproduct Recoveries—The Company presents byproduct recoveries as a reduction of cost of sales–products in the consolidated statements of operations. Classification of byproduct recoveries as a reduction of cost of sales aligns the proceeds from byproduct recoveries with the corresponding manufacturing costs.
Financial Instruments—The Company uses derivative financial instruments for the purpose of hedging interest rate, commodity and foreign exchange exposures that exist as part of ongoing business operations, including interest rate swap agreements, natural gas forward purchase contracts and foreign exchange contracts. As a policy, the Company does not engage in speculative or leveraged transactions, nor does the Company hold or issue financial instruments for trading purposes.
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
Derivative instruments are recorded on the consolidated balance sheets as either assets or liabilities measured at their fair value. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings. If the derivative is designated as a cash flow hedge, the effective portion of the changes in the fair value of the derivative are recorded as a component of accumulated other comprehensive income (loss) and recognized in the consolidated statements of operations when the hedged item affects earnings.
The ineffective portions of the changes in the fair value of hedges are insignificant and recognized in earnings. Cash flows from derivatives that are accounted for as cash flow or fair value hedges are included in the consolidated statements of cash flows in the same category as the item being hedged.
Fair Value Measurement—The Company applies fair value accounting for all assets and liabilities that are recognized or disclosed at fair value in its consolidated financial statements on a recurring basis. Fair value represents the amount that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities that are required to be recorded at fair value, the Company considers the principal or most advantageous market and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability. See Note 15, “Financial Instruments and Fair Value Measurements,” for further discussion.
Research and Development—Research and development costs related to the development of new products or the adaptation of existing products are expensed as incurred, included in cost of sales and totaled $3.0 million and $3.6 million during the years ended December 31, 2020 and 2019, respectively.
Cash and Cash Equivalents and Restricted Cash—The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents.
Receivables—Receivables are stated net of allowances for credit losses. No single customer comprised more than 5% of the Company’s consolidated net sales in 2020 or 2019, or 5% of the Company’s consolidated receivables as of December 31, 2020 or 2019. On January 1, 2020, the Company adopted Accounting Standards Update 2016-13 “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”), which changes the impairment model for most financial assets and certain other instruments. This new impairment model, also known as the current expected credit loss (“CECL”) model, is based on expected losses rather than incurred losses. Under ASC 326—Financial Instruments—Credit Losses (“ASC 326”), the Company is required to measure expected credit losses for financial instruments, including trade receivables, based on historical experience, current conditions and reasonable forecasts. The Company has adopted ASU 2016-13 using a modified retrospective transition approach and has recorded a cumulative-effect transition adjustment to accumulated deficit to increase the allowance for credit losses balance as of January 1, 2020. See Note 7, “Receivables,” for further discussion on the transactions affecting the allowances for doubtful accounts.
Inventories—Inventories include material, labor, and plant overhead and are stated at the lower of cost or net realizable value. At December 31, 2020 and 2019, all inventories were valued using the first-in, first-out method. See Note 8, “Inventories,” for the components of the Company’s inventories.
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
Leases—On January 1, 2019, the Company adopted Accounting Standards Update 2016-02, “Leases (Topic 842)” (“ASU 2016-02”), which establishes a right-of-use model requiring a lessee to record a right-of-use asset and a lease liability on the balance sheet for all leases with terms longer than twelve months. Leases are classified as either finance or operating, with classification affecting the pattern of expense recognition. The Company adopted ASU 2016-02 using the modified retrospective approach and applied the new guidance under ASC 842 — Leases (“ASC 842”) to those contracts existing at, or entered into after, January 1, 2019. See Note 13, “Leases,” for additional accounting policy and transition disclosures.
Property, Plant and Equipment—Property, plant and equipment are recorded at cost, and are depreciated over the estimated useful lives of the assets using the straight-line method for financial reporting purposes. See Note 9, “Property, Plant and Equipment,” for the components of the Company’s property, plant and equipment. Major improvements that extend the useful lives of existing assets are capitalized and charged to the asset accounts. Repairs and maintenance, which do not significantly improve or extend the useful lives of the respective assets, are expensed as incurred. Leasehold improvements are depreciated over the shorter of the lease term or the estimated useful life of the respective asset. When an asset is retired or disposed, the associated costs and accumulated depreciation are eliminated, and the resulting gain or loss is recognized in the Company’s consolidated statements of operations.
|
|
|
|
|
|
|
|
|
Asset Category
|
|
Range of Useful Lives
|
Buildings
|
|
10 to 40 Years
|
Machinery and equipment
|
|
3 to 15 Years
|
Other
|
|
3 to 10 Years
|
Other Intangible Assets—Identifiable intangible assets are recognized apart from goodwill and are amortized over their estimated useful lives.
Impairment of Long-Lived and Other Intangible Assets—The Company evaluates long-lived assets and other intangible assets (of which the most significant are property, plant and equipment; right-of-use assets and customer relationship intangible assets) whenever events and circumstances have occurred that indicate the carrying value of an asset may not be recoverable. Determining whether impairment has occurred typically requires various estimates and assumptions, including determining which cash flows are directly related to the potentially impaired asset, the useful life over which cash flows will occur, their amount and the asset’s residual value, if any. In turn, assessing whether there is an impairment loss requires a determination of recoverability, which is generally estimated by the ability to recover the balance of the assets from expected future operating cash flows on an undiscounted basis. If impairment is determined to exist, any related impairment loss is calculated based on the difference in the fair value and carrying value of the asset.
Goodwill—Goodwill is reviewed annually for impairment as of October 31, or more frequently if events or changes in circumstances indicate that it is more likely than not that the fair value of a reporting unit is below its carrying value. In performing this analysis, the Company compares each reporting unit’s fair value to its carrying value. The fair value is estimated based on comparable company market valuations and/or expected future discounted cash flows to be generated by the reporting unit. If the carrying value exceeds the reporting unit’s fair value, an impairment loss would be charged to operations in the period identified. See Note 6, “Goodwill and Other Intangible Assets,” for further discussion.
Income Taxes—The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of items reported in the financial statements. Under this method, deferred tax assets and liabilities are measured based on the differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the effective date of enactment.
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
The Company records net deferred tax assets to the extent the Company believes these assets will more likely than not be realized. This determination is based upon all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies, and recent financial operations. If the Company determines that a deferred income tax asset will not be fully realized in the future, then a valuation allowance is established or increased to reflect the amount at which the asset will more likely than not be realized, which would increase the Company’s provision for income taxes. In a period after a valuation allowance has been established, if the Company determines the related deferred income tax assets will be realized in the future in excess of their net recorded amount, then an adjustment to reduce the related valuation allowance will be made, which would reduce the Company’s provision for income taxes.
The Company is regularly audited by foreign and domestic tax authorities. These audits occasionally result in proposed assessments where the ultimate resolution might result in the Company owing additional taxes, including in some cases, penalties and interest. The Company recognizes a tax position in its consolidated financial statements when it is more likely than not that the position would be sustained upon examination by tax authorities. This recognized tax position is then measured at the largest amount of benefit that is more likely than not of being recognized upon ultimate settlement. The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense.
The determination of the Company’s worldwide tax provision and related tax assets and liabilities requires the use of significant judgment in estimating the impact of uncertainties in the application of GAAP and the interpretation of complex tax laws. In the ordinary course of business, there are transactions and calculations where the final tax outcome is uncertain. Where fair market value is required to measure a tax asset or liability for GAAP purposes, the Company periodically obtains independent, third party assistance to validate that such value is determined in conformity with Internal Revenue Service fair market value guidelines. While the Company believes it has the appropriate support for the positions taken, certain positions may be successfully challenged by taxing authorities. Resolution of these uncertainties in a manner inconsistent with management’s expectations could have a material impact on the Company’s financial condition and operating results. The Company applies the provisions of the authoritative guidance on accounting for uncertain tax positions to determine the appropriate amount of tax benefits to be recognized with respect to uncertain tax positions. The determination of the Company’s worldwide tax provision includes the impact of any changes to the amount of tax benefits recognized with respect to uncertain tax positions. See Note 14, “Income Taxes,” for further discussion.
Pension Plans—The Company assumed certain frozen underfunded defined benefit pension plans as part of the 2010 World Color Press acquisition. Pension plan costs are determined using actuarial methods and are funded through contributions. The Company records amounts relating to its pension plans based on calculations which include various actuarial assumptions including discount rates, assumed rates of return, and mortality. The Company reviews its actuarial assumptions on an annual basis and modifies the assumptions based on current rates and trends when it is appropriate to do so. The effects of modifications are recognized immediately on the consolidated balance sheets, but are generally amortized into operating income over future periods, with the deferred amount recorded in accumulated other comprehensive loss on the consolidated balance sheets. The Company believes that the assumptions utilized in recording its obligations under its plans are reasonable based on its experience, market conditions and input from its actuaries and investment advisors. For the purposes of calculating the expected return on plan assets, those assets are valued at fair value. When an event gives rise to both a curtailment and a settlement, the curtailment is accounted for prior to the settlement. The Company’s measurement date to measure the defined benefit plan assets and the projected benefit obligation is December 31.
The Company has previously participated in MEPPs as a result of the acquisition of World Color Press. Due to the significant underfunded status of the MEPPs, the Company has withdrawn from all significant MEPPs and replaced these union sponsored “promise to pay in the future” defined benefit plans with a Company sponsored “pay as you go” defined contribution plan, which is the form of retirement benefit provided to Quad’s employees. As a result of the decision to withdraw, the Company recorded an estimated withdrawal liability for the MEPPs as part of the World Color
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
Press purchase price allocation process based on information received from the MEPPs’ trustees. See Note 16, “Employee Retirement Plans,” for further discussion.
Stock-Based Compensation—The Company recognizes stock-based compensation expense over the vesting period for all stock-based awards made to employees and directors based on the fair value of the instrument at the time of grant. Equity awards accounted for as liabilities are recorded at fair value on the initial issuance date and are remeasured to fair value at each reporting period, with the change in fair value being recorded in selling, general and administrative expense in the consolidated statements of operations. See Note 18, “Equity Incentive Programs,” for further discussion.
Accumulated Other Comprehensive Income (Loss)—Accumulated other comprehensive income (loss) consists primarily of unrecognized actuarial gains and losses and prior service costs for pension plans, foreign currency translation adjustments and interest rate swap adjustments, and is presented in the consolidated statements of shareholders’ equity. See Note 20, “Accumulated Other Comprehensive Loss,” for further discussion.
The 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 and supply chain, although the full extent is still uncertain. The Company implemented cost reduction and cash conservation initiatives in response to the impact of the COVID-19 pandemic on its business, including implementing a COVID-19 Temporary Furlough Program through which employees take an unpaid leave of absence – the length of which varies upon business needs; temporary salary reductions for leaders through the end of July 2020, including a 50% salary reduction for the Chief Executive Officer and a 35% salary reduction for named executive officers; a temporary 50% reduction in retainer fees for the Company’s non-employee directors; temporarily suspending use of vacation and vacation payouts through the end of June 2020; temporarily suspending production at several manufacturing facilities where declining client volume or other effects of the pandemic impacted the Company’s ability to operate, all of which resumed operations by the end of September 2020; suspending quarterly dividend payments until further notice; and delaying capital spending projects. The Company also announced the permanent closures of the facilities located in the following locations as a result of ongoing volume declines, particularly in retail, that have been exacerbated by the COVID-19 pandemic during the year ended December 31, 2020: (1) Taunton, Massachusetts; (2) Fernley, Nevada; (3) Nashville, Tennessee; (4) Oklahoma City, Oklahoma; and (5) Charlotte, North Carolina. In addition, the Company amended its Senior Secured Credit Facility during the second quarter of 2020 to provide for certain financial covenant relief through the fiscal quarter ending September 30, 2021. The Company is continuing to evaluate its cost structure and expects to implement additional cost reduction measures as necessary. As the pandemic continues, the extent of the impact on the Company’s business, financial condition, cash flows, results of operations and supply chain will depend on future developments, all of which are still highly uncertain and cannot be predicted.
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
Supplemental Cash Flow Information—The following table summarizes certain supplemental cash flow information for the years ended December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
|
Interest paid, net of amounts capitalized
|
$
|
52.3
|
|
|
$
|
77.1
|
|
|
|
Income taxes paid
|
2.7
|
|
|
9.2
|
|
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
Non-cash finance lease additions
|
1.4
|
|
|
7.7
|
|
|
|
Non-cash operating lease additions
|
15.0
|
|
|
10.1
|
|
|
|
Acquisitions of businesses (see Note 3):
|
|
|
|
|
|
Fair value of assets acquired, net of cash
|
5.0
|
|
|
97.2
|
|
|
|
Liabilities assumed
|
(2.8)
|
|
|
(31.5)
|
|
|
|
Goodwill
|
—
|
|
|
58.5
|
|
|
|
|
|
|
|
|
|
Equity incentive awards
|
—
|
|
|
(3.2)
|
|
|
|
Acquisition of businesses—net of cash acquired
|
$
|
2.2
|
|
|
$
|
121.0
|
|
|
|
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
Note 2. Revenue Recognition
Revenue Disaggregation
The following table provides information about disaggregated revenue by the Company’s operating segments and major products and services offerings for the years ended December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States Print
and Related Services
|
|
International
|
|
Total
|
Year ended December 31, 2020
|
|
|
|
|
|
Catalog, publications, retail inserts and directories
|
$
|
1,402.0
|
|
|
$
|
230.0
|
|
|
$
|
1,632.0
|
|
Direct mail and other printed products
|
538.3
|
|
|
53.3
|
|
|
591.6
|
|
Other
|
3.7
|
|
|
1.4
|
|
|
5.1
|
|
Total Products
|
1,944.0
|
|
|
284.7
|
|
|
2,228.7
|
|
Logistics services
|
357.2
|
|
|
17.2
|
|
|
374.4
|
|
Imaging, marketing services and other services
|
326.4
|
|
|
0.1
|
|
|
326.5
|
|
Total Services
|
683.6
|
|
|
17.3
|
|
|
700.9
|
|
Total Net Sales
|
$
|
2,627.6
|
|
|
$
|
302.0
|
|
|
$
|
2,929.6
|
|
|
|
|
|
|
|
Year ended December 31, 2019
|
|
|
|
|
|
Catalog, publications, retail inserts and directories
|
$
|
2,014.7
|
|
|
$
|
301.0
|
|
|
$
|
2,315.7
|
|
Direct mail and other printed products
|
681.6
|
|
|
83.7
|
|
|
765.3
|
|
Other
|
17.0
|
|
|
0.3
|
|
|
17.3
|
|
Total Products
|
2,713.3
|
|
|
385.0
|
|
|
3,098.3
|
|
Logistics services
|
429.4
|
|
|
17.0
|
|
|
446.4
|
|
Imaging, marketing services and other services
|
378.3
|
|
|
0.4
|
|
|
378.7
|
|
Total Services
|
807.7
|
|
|
17.4
|
|
|
825.1
|
|
Total Net Sales
|
$
|
3,521.0
|
|
|
$
|
402.4
|
|
|
$
|
3,923.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nature of Products and Services
The Company recognizes its products and services revenue based on when the transfer of control passes to the client or when the service is completed and accepted by the client.
The products offering is predominantly comprised of the Company’s print operations which includes retail inserts, publications, catalogs, special interest publications, journals, direct mail, directories, in-store marketing and promotion, packaging, newspapers, custom print products, other commercial and specialty printed products and global paper procurement.
The Company considers its logistic operations as services, which include the delivery of printed material. The services offering also includes revenues related to the Company’s imaging operations, which include digital content management, photography, color services, page production, marketing services, media planning and placement, facilities management and medical services.
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
Performance Obligations
At contract inception, the Company assesses the products and services promised in its contracts with customers and identifies performance obligations for each promise to transfer to the customer a product or service that is distinct. To identify the performance obligations, the Company considers the goods or services promised in the contract regardless of whether they are explicitly stated or are implied by customary business practices. The Company determined that the following distinct products and services represent separate performance obligations:
•Pre-Press Services
•Print
•Other Services
For Pre-Press and Other Services, the Company recognizes revenue at point-in-time upon completion of the performed service and acceptance by the customer. The Company considers transfer of control to occur once the service is performed as the Company has right to payment and the customer has legal title and risk and reward of ownership.
The Company recognizes its Print revenues upon transfer of title and the passage of risk of loss, which is point-in-time upon shipment to the customer, and when there is a reasonable assurance as to collectability. Revenues related to the Company’s logistics operations, which includes the delivery of printed material, are included in the Print performance obligation and are also recognized at point-in-time as services are completed. Under agreements with certain customers, products may be stored by the Company for future delivery. In these situations, the Company may receive warehouse management fees for the services it provides. Revenue from warehouse management fees was immaterial for the years ended December 31, 2020 and 2019.
Certain revenues earned by the Company require judgment to determine if revenue should be recorded gross as principal or net of related costs as an agent. Billings for third-party shipping and handling costs, primarily in the Company’s logistics operations, and out-of-pocket expenses are recorded gross in net sales and cost of sales in the consolidated statements of operations. Many of the Company’s operations process materials, primarily paper, that may be supplied directly by customers or may be purchased by the Company and sold to customers. No revenue is recognized for customer-supplied paper. Revenues for the Company-supplied paper are recognized on a gross basis. In some cases, the Company will print items that are mailed to consumers and bill the customer for postage. In these cases, the Company is acting as an agent and billings are recorded on a net basis in net sales.
Significant Payment Terms
Payment terms and conditions for contracts with customers vary. The Company typically offers standard terms of net 30 days. It is not the Company’s standard business practice to offer extended payment terms longer than one year. The Company may offer cash discounts or prepayment and extended terms depending on certain facts and circumstances. As such, when the timing of the Company’s delivery of products and services differs from the timing of payment, the Company will record either a contract asset or a contract liability.
Variable Consideration
When evaluating the transaction price, the Company analyzes on a contract by contract basis all applicable variable considerations and non-cash consideration and also performs a constraint analysis. The nature of the Company’s contracts give rise to variable consideration, including, volume rebates, credits, discounts, and other similar items that generally decrease the transaction price. These variable amounts generally are credited to the customer, based on achieving certain levels of sales activity, when contracts are signed, or making payments within specific terms.
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
Product returns are not significant because the products are customized; however, the Company accrues for the estimated amount of customer allowances at the time of sale based on historical experience and known trends.
When the transaction price requires allocation to multiple performance obligations, the Company uses the estimated stand-alone selling prices using the adjusted market assessment approach.
Costs to Obtain Contracts
In accordance with ASC 606 — Revenue from Contracts with Customers (“ASC 606”), the Company capitalizes certain sales incentives of the sales compensation packages for costs that are directly attributed to being awarded a customer 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 customer at contract inception. Costs to obtain contracts with a duration of less than one year are expensed as incurred. For all contract costs with contracts over one year, the Company amortizes the costs to obtain contracts on a straight-line basis over the estimated life of the contract and reviews quarterly for impairment. Activity impacting costs to obtain contracts for the year ended December 31, 2020, was as follows:
|
|
|
|
|
|
|
Costs to Obtain Contracts
|
Balance at January 1, 2020
|
$
|
12.7
|
|
Costs to obtain contracts
|
1.0
|
|
Amortization of costs to obtain contracts
|
(5.0)
|
|
Balance at December 31, 2020
|
$
|
8.7
|
|
Practical Expedients
The Company has elected to apply the following practical expedients allowed under ASC 606:
•For certain performance obligations related to print contracts, the Company has elected not to disclose the value of unsatisfied performance obligations for the following: (1) contracts that have an original expected length of one year or less; (2) contracts where revenue is recognized as invoiced; or (3) contracts with variable consideration related to unsatisfied performance obligations. The Company had zero volume commitments in contracts that extend beyond one year as of December 31, 2020.
•The Company expenses costs to obtain contracts as incurred when the contract duration is less than one year.
•The transaction amount is not adjusted for a significant financing component as the period between transfer of the products or services and payment is less than one year.
•The Company accounts for shipping and handling activities, which includes postage, that occur after control of the related products or services transfers to the customer as fulfillment activities and are therefore recognized at time of shipping.
•The Company excludes from its transaction price any amounts collected from customers for sales taxes.
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
Note 3. Acquisitions and Strategic Investments
2020 Change of Ownership in Rise Interactive
On June 15, 2020, the Company purchased units of equity in Rise from a previous holder in the form of a $15.9 million note payable paid in full on October 1, 2020, and $1.0 million cash paid on June 15, 2020. In addition, on June 15, 2020, Rise purchased and retired units of equity from previous holders of Rise for $5.4 million in cash. These transactions resulted in the Company’s ownership interest changing from 57% to 99%. The Company began consolidating the results of Rise in the Company’s consolidated financial statements when its equity ownership increased to 57% on March 14, 2018. The portion of Rise’s operating results not owned by the Company of 43% through June 15, 2020 and of 1% after June 15, 2020 is recorded as net earnings (loss) attributable to noncontrolling interests on the consolidated statement of operations. The portion of net assets not owned by the Company is recorded as noncontrolling interests as of the respective dates shown on the consolidated balance sheets.
2019 Acquisition of Periscope
On January 3, 2019, the Company completed the acquisition of Periscope, a creative agency headquartered in Minneapolis, Minnesota, for $121.0 million cash paid. Periscope provides a comprehensive service offering, including media buying and analytics, creative and account management. Periscope also has packaging design and premedia services that complement Quad’s print-production capabilities. The purchase price of $134.0 million includes $9.8 million of acquired cash and non-cash equity incentive awards with a grant date fair value of $3.2 million. Included in the purchase price allocation are $69.8 million of identifiable other intangible assets, which are amortized over their estimated useful lives, ranging from five to six years, and $58.5 million of goodwill, of which $52.7 million is deductible for tax purposes. The final allocation of the purchase price was based on valuations performed to determine the fair value of the net assets as of the acquisition date. The net assets acquired, excluding acquired cash, were classified as Level 3 in the valuation hierarchy (see Note 15, “Financial Instruments and Fair Value Measurements,” for the definition of Level 3 inputs). Periscope’s operations are included in the United States Print and Related Services segment.
Note 4. Discontinued Operations
During the third quarter of 2019, the Company made a decision to sell its United States Book business as a part of an ongoing process to review its business portfolio and divest assets not core to the Company’s transformation strategy. Accordingly, the Company has classified the Book business as a discontinued operation, as required by ASC 205-20 — Discontinued Operations. The Book business primarily consists of three facilities: Versailles, Kentucky; Fairfield, Pennsylvania; and Martinsburg, West Virginia. The Company’s Book business has historically been included within the United States Print and Related Services segment and the Core Print and Related Services reporting unit.
On July 1, 2020, the Company completed the sale of its Versailles, Kentucky book manufacturing plant to CJK Group, Inc., which serves book, magazine, catalog and journal publishers, for $7.0 million in cash and the assumption of approximately $3.0 million in finance lease obligation, resulting in a $10.1 million impairment charge related to property, plant and equipment and a $3.0 million gain on the sale of the business during the year ended December 31, 2020. Working capital was finalized during the third quarter of 2020. The Company used the proceeds from the sale to reduce debt.
On October 31, 2020, the Company completed the sale of its Fairfield, Pennsylvania and Martinsburg, West Virginia book manufacturing plants to Berryville Graphics, a division of Bertelsmann Printing Group USA, a media, services and education company, for $14.2 million in cash, resulting in a loss on the sale of the business of $3.5 million and a $1.4 million impairment charge related to property plant and equipment during the year ended December 31, 2020. Working capital was finalized during the fourth quarter of 2020. The Company used the proceeds from the sale to
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
reduce debt. This sale was the final step in the previously announced strategic decision to divest the Company’s Book business to optimize its product portfolio.
The following table summarizes the results of operations of the Company’s Book business, which are included in the loss from discontinued operations in the consolidated statements of operations for the years ended December 31, 2020 and 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Year Ended December 31,
|
|
|
|
2020
|
|
2019
|
|
|
Total net sales
|
$
|
79.4
|
|
|
$
|
213.8
|
|
|
|
Total cost of sales, excluding depreciation and amortization
|
80.4
|
|
|
226.8
|
|
|
|
Selling, general and administrative expenses
|
4.2
|
|
|
5.5
|
|
|
|
Depreciation and amortization
|
—
|
|
|
13.6
|
|
|
|
Restructuring, impairment and transaction-related charges (1)
|
16.4
|
|
|
92.1
|
|
|
|
Goodwill impairment (2)
|
—
|
|
|
10.1
|
|
|
|
Other expenses, net
|
0.3
|
|
|
0.1
|
|
|
|
Loss from discontinued operations before income taxes
|
(21.9)
|
|
|
(134.4)
|
|
|
|
Income tax benefit
|
—
|
|
|
(33.8)
|
|
|
|
Loss from discontinued operations, net of tax
|
$
|
(21.9)
|
|
|
$
|
(100.6)
|
|
|
|
______________________________
(1)The Company recognized $11.5 million of impairment charges for tangible property, plant and equipment during the year ended December 31, 2020, to reduce the carrying value of the Book business to its fair value, and recognized $2.2 million in employee termination charges and $2.7 million in other restructuring charges during the year ended December 31, 2020. Impairment charges recognized to reduce the carrying value of the Book business to its fair value during during the year ended December 31, 2019 included: $86.5 million of impairment charges for tangible property, plant and equipment and $5.6 million of impairment charges for contract assets.
(2)The Book business was included in the Core Print and Related Services reporting unit. The amount of goodwill allocated to the Book business was determined based on the relative fair value of the Book business and the portion of the reporting unit that will be retained. Due to the decision to sell the Book business, the Company must determine whether any of the assets of the Book business were impaired. Therefore, management performed an interim goodwill impairment test. Due to the carrying value of the Book business net assets exceeding the estimated fair value, the Company recorded a $10.1 million goodwill impairment charge.
The consolidated statements of cash flows for all periods have not been adjusted to separately disclose cash flows related to discontinued operations. Cash flows related to the Book business during the years ended December 31, 2020 and 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Year Ended December 31,
|
|
2020
|
|
2019
|
Cash flows used in operating activities
|
$
|
(3.9)
|
|
|
$
|
(8.0)
|
|
Cash flows provided by (used in) investing activities
|
19.6
|
|
|
(17.2)
|
|
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
The following table summarizes the current and long-term assets and liabilities of the discontinued Book business that were classified as held for sale in the consolidated balance sheets at December 31, 2020, and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2020
|
|
December 31,
2019
|
Receivables—net
|
$
|
—
|
|
|
$
|
19.6
|
|
Inventories
|
—
|
|
|
14.0
|
|
Prepaid expenses and other current assets (1)
|
—
|
|
|
23.0
|
|
Current assets of discontinued operations
|
—
|
|
|
56.6
|
|
|
|
|
|
Property, plant and equipment—net
|
—
|
|
|
—
|
|
Operating lease right-of-use assets—net
|
—
|
|
|
0.2
|
|
Goodwill
|
—
|
|
|
—
|
|
Other long-term assets
|
—
|
|
|
0.3
|
|
Long-term assets of discontinued operations
|
—
|
|
|
0.5
|
|
|
|
|
|
Accounts payable
|
—
|
|
|
7.0
|
|
Other current liabilities
|
—
|
|
|
8.5
|
|
Current portion of finance lease obligations
|
—
|
|
|
0.1
|
|
Current portion of operating lease obligations
|
—
|
|
|
0.2
|
|
Current liabilities of discontinued operations
|
—
|
|
|
15.8
|
|
|
|
|
|
Finance lease obligations
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Other long-term liabilities
|
—
|
|
|
0.6
|
|
Long-term liabilities of discontinued operations
|
—
|
|
|
0.6
|
|
______________________________
(1)Includes land and building assets that were reclassified to other current assets as of December 31, 2019.
Note 5. Restructuring, Impairment and Transaction-Related Charges
The Company recorded restructuring, impairment and transaction-related charges for the years ended December 31, 2020 and 2019, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
|
Employee termination charges
|
$
|
34.7
|
|
|
$
|
22.2
|
|
|
|
Impairment charges
|
64.1
|
|
|
7.9
|
|
|
|
Transaction-related charges
|
1.4
|
|
|
51.6
|
|
|
|
Integration costs
|
1.9
|
|
|
3.3
|
|
|
|
Other restructuring charges
|
22.0
|
|
|
4.4
|
|
|
|
Total
|
$
|
124.1
|
|
|
$
|
89.4
|
|
|
|
The costs related to these activities have been recorded on the consolidated statements of operations as restructuring, impairment and transaction-related charges. See Note 21, “Segment Information,” for restructuring, impairment and transaction-related charges by segment.
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
Restructuring Charges
The Company began a restructuring program in 2010 related to eliminating excess manufacturing capacity and properly aligning its cost structure. The Company has announced a total of 50 plant closures since 2010. The Company announced the closures of the facilities located in Charlotte, North Carolina; Taunton, Massachusetts (retail facility); Fernley, Nevada; Nashville, Tennessee; and Oklahoma City, Oklahoma during the year ended December 31, 2020. The Company classifies the following charges as restructuring:
•Employee termination charges are incurred when the Company reduces its workforce through facility consolidations and separation programs.
•Integration costs are incurred primarily for the integration of acquired companies (see Note 3, “Acquisitions and Strategic Investments,” for descriptions of the Company’s recent acquisitions).
•Other restructuring charges are comprised of the following components and are presented net of any gains on the sale of facilities and businesses. During the year ended December 31, 2020, the Company recognized gains from the sale of the facilities located in Midland, Michigan and Shakopee, Minnesota. During the year ended December 31, 2019, the Company recognized an $8.4 million gain on the sale of a business, as well as gains from the sale of the facilities located in Franklin, Kentucky and Hazleton, Pennsylvania.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
2019
|
|
|
Vacant facility carrying costs and lease exit charges
|
$
|
11.5
|
|
|
$
|
9.5
|
|
|
|
Equipment and infrastructure removal costs
|
1.1
|
|
|
0.4
|
|
|
|
Gains on the sale of facilities
|
(1.6)
|
|
|
(6.1)
|
|
|
|
Other restructuring activities
|
11.0
|
|
|
0.6
|
|
|
|
Other restructuring charges
|
$
|
22.0
|
|
|
$
|
4.4
|
|
|
|
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 $64.1 million during the year ended December 31, 2020, which consisted of $22.1 million, for machinery and equipment no longer being utilized in production as a result of facility consolidations, as well as other capacity reduction restructuring activities; and $42.0 million of land and building impairment charges.
The Company recognized impairment charges of $7.9 million during the year ended December 31, 2019, which consisted of $7.6 million of impairment charges primarily for machinery and equipment no longer being utilized in production as a result of facility consolidations, as well as other capacity reduction restructuring activities; and $0.3 million of land and building impairment charges. Additional impairment charges were recorded related to the Book business during the year ended December 31, 2019, which are disclosed in Note 4, “Discontinued Operations”.
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
The fair values of the impaired assets were determined by the Company to be Level 3 under the fair value hierarchy (see Note 15, “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. The Company recognized transaction-related charges of $1.4 million and $51.6 million during the years ended December 31, 2020 and 2019, respectively. Transaction-related charges included a $45 million reverse termination fee paid during the year ended December 31, 2019, in connection with the termination of the definitive agreement pursuant to which Quad would have acquired LSC Communications, Inc. (“LSC”). The transaction-related charges were expensed as incurred in accordance with the applicable accounting guidance on business combinations.
Restructuring Reserves
Activity impacting the Company’s restructuring reserves for the years ended December 31, 2020 and 2019, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
Termination
Charges
|
|
Impairment
Charges
|
|
Transaction-Related
Charges (Income)
|
|
Integration
Costs
|
|
Other
Restructuring
Charges
|
|
Total
|
Balance at January 1, 2019
|
$
|
9.3
|
|
|
$
|
—
|
|
|
$
|
1.2
|
|
|
$
|
0.2
|
|
|
$
|
17.1
|
|
|
$
|
27.8
|
|
Expense, net
|
22.2
|
|
|
7.9
|
|
|
51.6
|
|
|
3.3
|
|
|
4.4
|
|
|
89.4
|
|
Cash payments, net
|
(20.0)
|
|
|
—
|
|
|
(52.6)
|
|
|
(3.2)
|
|
|
(1.8)
|
|
|
(77.6)
|
|
Non-cash adjustments/reclassifications
|
(1.6)
|
|
|
(7.9)
|
|
|
0.6
|
|
|
(0.1)
|
|
|
(6.1)
|
|
|
(15.1)
|
|
Balance at December 31, 2019
|
$
|
9.9
|
|
|
$
|
—
|
|
|
$
|
0.8
|
|
|
$
|
0.2
|
|
|
$
|
13.6
|
|
|
$
|
24.5
|
|
Expense, net
|
34.7
|
|
|
64.1
|
|
|
1.4
|
|
|
1.9
|
|
|
22.0
|
|
|
124.1
|
|
Cash payments, net
|
(29.7)
|
|
|
—
|
|
|
(1.7)
|
|
|
(2.1)
|
|
|
(10.5)
|
|
|
(44.0)
|
|
Non-cash adjustments/reclassifications
|
(0.3)
|
|
|
(64.1)
|
|
|
—
|
|
|
—
|
|
|
0.7
|
|
|
(63.7)
|
|
Balance at December 31, 2020
|
$
|
14.6
|
|
|
$
|
—
|
|
|
$
|
0.5
|
|
|
$
|
—
|
|
|
$
|
25.8
|
|
|
$
|
40.9
|
|
The Company’s restructuring reserves at December 31, 2020, included a short-term and a long-term component. The short-term portion included $33.1 million in other current liabilities (see Note 10, “Other Current and Long-Term Liabilities”) and $0.6 million in accounts payable in the consolidated balance sheets as the Company expects these reserves to be paid within the next twelve months. The long-term portion of $7.2 million was included in other long-term liabilities (see Note 10, “Other Current and Long-Term Liabilities”) in the consolidated balance sheets.
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
Note 6. Goodwill and Other Intangible Assets
Goodwill
Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired in a business combination. Goodwill is assigned to specific reporting units and is tested annually for impairment as of October 31, or more frequently if events or changes in circumstances indicate that it is more likely than not that the fair value of a reporting unit is below its carrying value.
Due to the decline in the Company’s stock price and the uncertainty and impacts of the COVID-19 pandemic on the Company and the global economy, an interim goodwill impairment test was completed on the goodwill in the Core Print and Related Services reporting unit during the first quarter of 2020. As a result, the Company determined the fair value of the Core Print and Related Services reporting unit exceeded the carrying value, and therefore no impairment was recorded. The Company completed its annual impairment test as of October 31, 2020, and identified no indicators of impairment in any of the Company's reporting units during the year ended December 31, 2020.
Due to the Company’s decision to sell its Book business, an interim goodwill impairment test was completed on the remaining goodwill in the Core Print and Related Services reporting unit during the third quarter of 2019. Due to the carrying value of the Book business net assets exceeding the estimated fair value, the Company recorded a $10.1 million goodwill impairment charge related to the Book business during the third quarter of 2019 (see Note 4, “Discontinued Operations”). In addition, the remaining goodwill that is not allocated to a business to be sold must be tested for impairment. No goodwill impairment was recorded on the remaining $103.0 million related to the retained portion of the Core Print and Related Services reporting unit during the year ended December 31, 2019.
Fair value was determined using an equal weighting of both the income and market approaches. Under the income approach, the Company determined fair value based on estimated future cash flows discounted by an estimated weighted-average cost of capital, which reflects the overall level of inherent risk and the rate of return an outside investor would expect to earn. Under the market approach, the Company derived the fair value of the reporting units based on market multiples of comparable publicly-traded companies. This fair value determination was categorized as Level 3 in the fair value hierarchy (see Note 15, “Financial Instruments and Fair Value Measurements,” for the definition of Level 3 inputs).
No goodwill impairment charges were recorded related to the Company’s continuing operations during the years ended December 31, 2020 or 2019. The accumulated goodwill impairment losses and the carrying value of goodwill from continuing operations at December 31, 2020 and 2019, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States Print and Related Services
|
|
International
|
|
Total
|
|
|
|
|
|
|
Goodwill
|
$
|
881.3
|
|
|
$
|
30.0
|
|
|
$
|
911.3
|
|
|
|
|
|
|
|
Accumulated goodwill impairment loss
|
(778.3)
|
|
|
(30.0)
|
|
|
(808.3)
|
|
|
|
|
|
|
|
Goodwill, net of accumulated goodwill impairment loss
|
$
|
103.0
|
|
|
$
|
—
|
|
|
$
|
103.0
|
|
|
|
|
|
|
|
There was no activity impacting goodwill for the year ended December 31, 2020. Activity impacting goodwill for the year ended December 31, 2019, was as follows:
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States Print and Related
Services
|
|
International
|
|
Total
|
Balance at January 1, 2019
|
$
|
44.5
|
|
|
$
|
—
|
|
|
$
|
44.5
|
|
Acquisition of Periscope (see Note 3)
|
58.5
|
|
|
—
|
|
|
58.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2019
|
$
|
103.0
|
|
|
$
|
—
|
|
|
$
|
103.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Intangible Assets
The components of other intangible assets at December 31, 2020 and 2019, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
|
|
December 31, 2019
|
|
Weighted
Average
Amortization
Period (Years)
|
|
Gross
Carrying
Amount
|
|
Accumulated Amortization
|
|
Net Book
Value
|
|
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Book
Value
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks, patents, licenses and agreements
|
6
|
|
$
|
69.6
|
|
|
$
|
(44.3)
|
|
|
$
|
25.3
|
|
|
|
|
$
|
68.6
|
|
|
$
|
(33.6)
|
|
|
$
|
35.0
|
|
Capitalized software
|
5
|
|
17.3
|
|
|
(11.7)
|
|
|
5.6
|
|
|
|
|
16.1
|
|
|
(8.5)
|
|
|
7.6
|
|
Acquired technology
|
5
|
|
3.0
|
|
|
(0.5)
|
|
|
2.5
|
|
|
|
|
2.0
|
|
|
(2.0)
|
|
|
—
|
|
Customer relationships
|
6
|
|
561.9
|
|
|
(491.0)
|
|
|
70.9
|
|
|
|
|
562.1
|
|
|
(467.5)
|
|
|
94.6
|
|
Total finite-lived intangible assets
|
|
$
|
651.8
|
|
|
$
|
(547.5)
|
|
|
$
|
104.3
|
|
|
|
|
$
|
648.8
|
|
|
$
|
(511.6)
|
|
|
$
|
137.2
|
|
Other intangible assets are evaluated for potential impairment whenever events or circumstances indicate that the carrying value may not be recoverable. There were no impairment charges recorded on finite-lived intangible assets for the years ended December 31, 2020 and 2019.
Amortization expense for other intangible assets was $39.1 million and $44.8 million for the years ended December 31, 2020 and 2019, respectively. The following table outlines the estimated future amortization expense related to other intangible assets as of December 31, 2020:
|
|
|
|
|
|
|
Amortization Expense
|
2021
|
$
|
31.6
|
|
2022
|
29.8
|
|
2023
|
25.5
|
|
2024
|
14.7
|
|
2025
|
2.4
|
|
2026
|
0.3
|
|
Total
|
$
|
104.3
|
|
Note 7. Receivables
The Company adopted ASU 2016-13 as of January 1, 2020, using a modified retrospective transition approach and has recorded a cumulative-effect transition adjustment to accumulated deficit as of January 1, 2020. The transition adjustment of $6.3 million to accumulated deficit included an $8.4 million increase in the allowance for credit losses, partially offset by a $2.1 million increase in deferred tax benefit. The transition had no impact to the consolidated statement of operations.
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
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 a credit loss expense of $9.1 million and $5.6 million during the years ended December 31, 2020 and 2019, respectively, which is included in selling, general and administrative expenses in the consolidated statements of operations.
Receivables are stated net of allowances for credit losses in the consolidated balance sheets. Based on the clients’ account reviews and the continued uncertainty of the global economy, the Company has established an allowance for credit losses of $33.8 million as of December 31, 2020, and $25.0 million as of December 31, 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
|
Balance at beginning of year
|
$
|
25.0
|
|
|
$
|
27.4
|
|
|
|
Transition adjustment for adoption of ASU 2016-13
|
8.4
|
|
|
—
|
|
|
|
Balance at beginning of year, including transition adjustment
|
33.4
|
|
|
27.4
|
|
|
|
Provisions
|
9.1
|
|
|
5.6
|
|
|
|
Write-offs
|
(8.8)
|
|
|
(7.8)
|
|
|
|
|
|
|
|
|
|
Translation and other
|
0.1
|
|
|
(0.2)
|
|
|
|
Balance at end of year
|
$
|
33.8
|
|
|
$
|
25.0
|
|
|
|
Note 8. Inventories
The components of inventories at December 31, 2020 and 2019, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Raw materials and manufacturing supplies
|
$
|
90.9
|
|
|
$
|
112.2
|
|
Work in process
|
33.4
|
|
|
41.2
|
|
Finished goods
|
45.9
|
|
|
57.1
|
|
Total
|
$
|
170.2
|
|
|
$
|
210.5
|
|
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
Note 9. Property, Plant and Equipment
The components of property, plant and equipment at December 31, 2020 and 2019, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Land
|
$
|
97.6
|
|
|
$
|
102.5
|
|
Buildings
|
780.3
|
|
|
846.1
|
|
Machinery and equipment
|
3,094.1
|
|
|
3,337.1
|
|
Other(1)
|
183.2
|
|
|
175.7
|
|
Construction in progress
|
33.0
|
|
|
35.0
|
|
Property, plant and equipment—gross
|
4,188.2
|
|
|
4,496.4
|
|
Less: accumulated depreciation
|
(3,304.0)
|
|
|
(3,459.9)
|
|
Property, plant and equipment—net
|
$
|
884.2
|
|
|
$
|
1,036.5
|
|
______________________________
(1)Other consists of computer equipment, vehicles, furniture and fixtures, leasehold improvements and communication related equipment.
The Company recorded impairment charges of $64.1 million and $7.9 million during the years ended December 31, 2020 and 2019, respectively, to reduce the carrying amounts of certain property, plant and equipment no longer utilized in production, or due to other capacity and strategic reduction restructuring initiatives, to fair value (see Note 5, “Restructuring, Impairment and Transaction-Related Charges,” for further discussion on impairment charges).
The Company recognized depreciation expense for continuing operations of $142.5 million and $164.7 million for the years ended December 31, 2020 and 2019, respectively.
Assets Held for Sale from Continuing Operations
The Company considered certain closed facilities for held for sale classification in the consolidated balance sheets. Assets held for sale are carried at the lesser of original cost or fair value, less the estimated costs to sell. Assets held for sale from continuing operations were $4.9 million as of December 31, 2020, and $59.3 million as of December 31, 2019, including the Omaha, Nebraska packaging plant that was sold on January 31, 2020. The fair values were determined by the Company to be Level 3 under the fair value hierarchy (see Note 15, “Financial Instruments and Fair Value Measurements,” for the definition of Level 3 inputs) and were estimated based on quoted market prices where available and independent appraisals, as appropriate. Assets held for sale were included in prepaid expenses and other current assets in the consolidated balance sheets.
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
Note 10. Other Current and Long-Term Liabilities
The components of other current and long-term liabilities at December 31, 2020 and 2019, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
|
Other Current Liabilities
|
|
Other
Long-Term Liabilities
|
|
Total
|
|
Other Current Liabilities
|
|
Other
Long-Term Liabilities
|
|
Total
|
Employee-related liabilities(1)
|
$
|
130.2
|
|
|
$
|
67.4
|
|
|
$
|
197.6
|
|
|
$
|
129.4
|
|
|
$
|
61.9
|
|
|
$
|
191.3
|
|
Single employer pension plan obligations
|
1.7
|
|
|
54.9
|
|
|
56.6
|
|
|
1.8
|
|
|
77.1
|
|
|
78.9
|
|
Multiemployer pension plans – withdrawal liability
|
3.5
|
|
|
32.2
|
|
|
35.7
|
|
|
8.4
|
|
|
35.7
|
|
|
44.1
|
|
Tax-related liabilities
|
25.3
|
|
|
5.3
|
|
|
30.6
|
|
|
24.6
|
|
|
10.7
|
|
|
35.3
|
|
Restructuring liabilities
|
33.1
|
|
|
7.2
|
|
|
40.3
|
|
|
15.8
|
|
|
7.4
|
|
|
23.2
|
|
Interest and rent liabilities
|
3.6
|
|
|
—
|
|
|
3.6
|
|
|
4.9
|
|
|
0.2
|
|
|
5.1
|
|
Interest rate swap liabilities
|
—
|
|
|
14.4
|
|
|
14.4
|
|
|
—
|
|
|
6.4
|
|
|
6.4
|
|
Liabilities held for sale from continuing operations(2)
|
—
|
|
|
—
|
|
|
—
|
|
|
17.9
|
|
|
—
|
|
|
17.9
|
|
Other
|
113.4
|
|
|
15.4
|
|
|
128.8
|
|
|
100.2
|
|
|
21.7
|
|
|
121.9
|
|
Total
|
$
|
310.8
|
|
|
$
|
196.8
|
|
|
$
|
507.6
|
|
|
$
|
303.0
|
|
|
$
|
221.1
|
|
|
$
|
524.1
|
|
______________________________
(1)Employee-related liabilities consist primarily of payroll, bonus, vacation, health and workers’ compensation.
(2)The Omaha, Nebraska packaging plant was considered held for sale in the consolidated balance sheets as of December 31, 2019. The Company completed the sale on January 31, 2020.
Note 11. Commitments and Contingencies
Commitments
The Company had firm commitments of $8.7 million as of December 31, 2020, to purchase press and finishing equipment.
Litigation
The Company is named as a defendant in various lawsuits in which claims are asserted against the Company in the normal course of business. The liabilities, if any, which ultimately result from such lawsuits are not expected by management to have a material impact on the consolidated financial statements of the Company.
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
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 environment protection in general. The Company provides for expenses associated with environmental remediation obligations when such amounts are probable and can be reasonably estimated. Such reserves are adjusted as new information develops or as circumstances change. The environmental reserves are not discounted. The Company believes it is in compliance with such laws, regulations and government policies in all material respects. Furthermore, the Company does not anticipate that maintaining compliance with such environmental statutes will have a material impact upon the Company’s consolidated financial position.
Note 12. Debt
The components of long-term debt at December 31, 2020 and 2019, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Interest Rate
|
|
2020
|
|
2019
|
Master note and security agreement
|
7.78
|
%
|
|
$
|
15.6
|
|
|
$
|
70.7
|
|
Term loan A
|
3.44
|
%
|
|
657.6
|
|
|
768.3
|
|
|
|
|
|
|
|
Revolving credit facility
|
3.24
|
%
|
|
—
|
|
|
—
|
|
Senior unsecured notes
|
7.00
|
%
|
|
238.7
|
|
|
243.5
|
|
International term loans
|
1.91
|
%
|
|
10.7
|
|
|
16.5
|
|
International revolving credit facilities
|
1.37
|
%
|
|
4.9
|
|
|
5.7
|
|
Other
|
13.42
|
%
|
|
2.8
|
|
|
3.1
|
|
Debt issuance costs
|
|
|
(6.9)
|
|
|
(9.3)
|
|
Total debt
|
|
|
$
|
923.4
|
|
|
$
|
1,098.5
|
|
Less: short-term debt and current portion of long-term debt
|
|
|
(20.7)
|
|
|
(40.0)
|
|
Long-term debt
|
|
|
$
|
902.7
|
|
|
$
|
1,058.5
|
|
Description of Debt Obligations
Master Note and Security Agreement
On September 1, 1995, and as last amended on November 24, 2014, Quad entered into its Master Note and Security Agreement. As of December 31, 2020, the borrowings outstanding under the Master Note and Security Agreement were $15.6 million. The senior notes under the Master Note and Security Agreement had a weighted average interest rate of 7.78% at December 31, 2020, which is fixed to maturity, with interest payable semiannually. Principal payments commenced September 1997 and extend through April 2026 in various tranches. The notes are collateralized by certain United States press equipment under the terms of the Master Note and Security Agreement.
The Company redeemed $37.6 million of its senior notes under the Master Note and Security Agreement, at par (the outstanding principal balance as of the date of payment), during the year ended December 31, 2020. There was no direct gain or loss recognized as a result of the tender as all notes were redeemed at par; however, $0.2 million of unamortized debt issuance costs related to the tendered notes were recognized as a loss on debt extinguishment during the year ended December 31, 2020. All tendered senior notes under the Master Note and Security Agreement were canceled. The Company used cash flows from operating activities and borrowings under its revolving credit facility to
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
fund the tender. The tender was primarily completed to reallocate debt to the lower interest rate revolving credit facility and thereby reduce interest expense based on current LIBOR rates.
Senior Secured Credit Facility
On April 28, 2014, the Company entered into its Senior Secured Credit Facility, which included a revolving credit facility, Term Loan A and Term Loan B. The Company completed the third amendment to the Senior Secured Credit Facility on January 31, 2019. This third amendment was completed to provide Quad with the liquidity and structural flexibility to consummate the proposed, but now terminated, acquisition of LSC and to extend existing maturities by (a) increasing the aggregate amount of the existing revolving credit facility from $725.0 million to $800.0 million with a term of five years, maturing on January 31, 2024; (b) increasing the aggregate amount of the existing Term Loan A from $375.0 million to $825.0 million with a delayed draw feature and term of five years, maturing on January 31, 2024; and (c) increasing the aggregate amount of the existing Term Loan B from $300.0 million to $500.0 million with a term of seven years, maturing on January 31, 2026. The Company intended that the loans available under the amended revolving credit facility would be used to repay, refinance, repurchase, redeem, exchange or otherwise terminate LSC’s existing indebtedness in connection with the consummation of the merger, and to pay transaction expenses. On July 26, 2019, following the termination of the proposed acquisition of LSC, Quad fully funded the $825.0 million delayed draw Term Loan A to retire the entire amount outstanding on the $500.0 million Term Loan B and reduced the borrowings under the revolving credit facility.
The Company completed the fourth amendment to the Senior Secured Credit Facility on June 29, 2020. The Senior Secured Credit Facility was amended to (a) provide for certain financial covenant relief through the fiscal quarter ending September 30, 2021 (the Covenant Relief Period); (b) reduce the aggregate amount of the existing revolving credit facility from $800.0 million to $500.0 million; (c) make certain adjustments to pricing such as the addition of a 0.75% LIBOR floor; and (d) prohibit repurchases of capital stock and payments of cash dividends during the Covenant Relief Period. Certain amendments were also made to the quarterly financial covenants to which the Company is subject, which are further described below.
At December 31, 2020, the Company had no outstanding borrowings on the revolving credit facility, and had $38.6 million of issued letters of credit, leaving $461.4 million available for future borrowings. Borrowings under the revolving credit facility and delayed draw Term Loan A made under the Senior Secured Credit Facility at December 31, 2020, bear interest at 2.50% in excess of reserve adjusted LIBOR, with a LIBOR floor of 0.75%, or 1.50% in excess of an alternate base rate. The Senior Secured Credit Facility is secured by substantially all of the unencumbered assets of the Company. The Senior Secured Credit Facility also requires the Company to provide additional collateral to the lenders in certain limited circumstances.
Senior Unsecured Notes
The Company issued $300.0 million aggregate principal amount of its Senior Unsecured Notes due May 1, 2022, on April 28, 2014. The Senior Unsecured Notes bear interest at 7.0%, and interest is payable semi-annually. The Senior Unsecured Notes were issued to extend and stagger the Company’s debt maturity profile, further diversify its capital structure and provide more borrowing capacity to better position the Company to execute on its strategic goals. The Company received $294.8 million in net proceeds from the sale of the Senior Unsecured Notes, after deducting the initial purchasers’ discounts and commissions. The proceeds from the Senior Unsecured Notes were used for the same purposes detailed above for the Senior Secured Credit Facility.
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
The Company repurchased $4.7 million of its outstanding Senior Unsecured Notes in the open market, resulting in a net gain on debt extinguishment of $0.8 million during the year ended December 31, 2020. All repurchased Senior Unsecured Notes were canceled. The Company used cash flows from operating activities and borrowings under its revolving credit facility to fund the repurchases. These repurchases were primarily completed to reallocate debt to the lower interest rate revolving credit facility and thereby reduce interest expense based on current LIBOR rates.
Each of the Company’s existing and future domestic subsidiaries that is a borrower or guarantees indebtedness under the Company’s Senior Secured Credit Facility or that guarantees certain of the Company’s other indebtedness or indebtedness of the Company’s restricted subsidiaries (other than intercompany indebtedness) fully and unconditionally guarantee or, in the case of future subsidiaries, will guarantee, on a joint and several basis, the Senior Unsecured Notes (the “Guarantor Subsidiaries”). All of the Guarantor Subsidiaries are 100% owned by the Company. Guarantor Subsidiaries will be automatically released from these guarantees upon the occurrence of certain events.
International Debt Obligations
The Company has two fixed rate, Euro denominated, international term loans for purposes of financing certain capital expenditures and general business needs. The first international term loan in the amount of $21.7 million was entered into on December 28, 2015, was fully funded during 2016 and has a term of six years, maturing December 28, 2021. As of December 31, 2020, $2.2 million remained outstanding on the first international term loan at a weighted average interest rate of 1.72%. The second international term loan in the amount of $12.8 million was entered into on December 21, 2018, bears interest at 1.96% and has a term of five years, maturing on December 31, 2023. As of December 31, 2020, $8.5 million remained outstanding on the second international term loan.
The Company has two multicurrency international revolving credit facilities that are used for financing working capital and general business needs. The Company had $4.9 million of borrowings outstanding at a weighted average interest rate of 1.37% on the international revolving credit facilities as of December 31, 2020, leaving $11.2 million available for future borrowing. The terms of the international revolving credit facilities includes certain financial covenants, a guarantee of the international revolving credit facilities by the Company and a security agreement that includes collateralizing substantially all of the Quad Europe Sp. z.o.o. assets. The first multicurrency international revolving credit facility expires on October 31, 2021, and bears interest at the aggregate of the Warsaw Interbank Offered Rate (“WIBOR”) plus 1.40% for any Polish Zloty denominated borrowings, the aggregate of Euro Interbank Offered Rate (“EURIBOR”) plus 1.45% for any Euro denominated borrowings or the aggregate of British pound sterling LIBOR plus 1.45% for any British pound sterling denominate borrowings. The second multicurrency international revolving credit facility expires on November 20, 2021, and bears interest at the aggregate of WIBOR plus 1.00% for any Polish Zloty denominated borrowings or the aggregate of EURIBOR plus 1.00% for any Euro denominated borrowings.
Fair Value of Debt
Based upon the interest rates available to the Company for borrowings with similar terms and maturities, the fair value of the Company’s total debt was approximately $0.9 billion and $1.1 billion at December 31, 2020 and 2019, respectively. The fair value determination of the Company’s total debt was categorized as Level 2 in the fair value hierarchy (see Note 15, “Financial Instruments and Fair Value Measurements,” for the definition of Level 2 inputs). As of December 31, 2020, approximately $1.6 billion of the Company’s assets were pledged as security under various loans and other agreements.
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
Debt Issuance Costs and Original Issue Discount
The debt issuance costs and original issue discount are amortized on a straight-line basis over the four, seven and eight year lives of the related debt instruments. Activity impacting the Company’s capitalized debt issuance costs and original issue discount for the years ended December 31, 2020 and 2019, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized Debt
Issuance Costs
|
|
Original Issue Discount
|
Balance at January 1, 2019
|
$
|
7.2
|
|
|
$
|
1.0
|
|
Impacts from January 31, 2019 debt financing arrangement
|
6.0
|
|
|
15.0
|
|
Loss on debt extinguishment from February 10, 2017 debt financing arrangement
|
(0.7)
|
|
|
(1.0)
|
|
Loss on debt extinguishment from July 26, 2019 delayed draw Term Loan A funding and retirement of Term Loan B
|
(0.5)
|
|
|
(14.1)
|
|
Amortization expense
|
(2.7)
|
|
|
(0.9)
|
|
Balance at December 31, 2019
|
9.3
|
|
|
—
|
|
Debt issuance costs from June 29, 2020 debt financing arrangement
|
2.6
|
|
|
—
|
|
Loss on debt extinguishment from January 31, 2019 debt financing arrangement
|
(2.3)
|
|
|
—
|
|
Loss on debt extinguishment from Master Note and Security Tender
|
(0.2)
|
|
|
—
|
|
Amortization expense
|
(2.5)
|
|
|
—
|
|
Balance at December 31, 2020
|
$
|
6.9
|
|
|
$
|
—
|
|
Loss on Debt Extinguishment
2020 Loss on Debt Extinguishment
The loss on debt extinguishment recorded during the year ended December 31, 2020, was comprised of the following:
|
|
|
|
|
|
|
2020 Loss on Debt Extinguishment
|
Debt issuance costs from January 31, 2019 debt financing arrangement
|
$
|
2.3
|
|
Debt issuance costs from June 29, 2020 debt financing arrangement
|
0.1
|
|
Loss on debt extinguishment from Master Note and Security Tender
|
0.2
|
|
Gain on debt extinguishment from Senior Unsecured Note Repurchases
|
(0.8)
|
|
Total
|
$
|
1.8
|
|
2019 Loss on Debt Extinguishment
In conjunction with the third amendment to the Company’s Senior Secured Credit Facility completed on January 31, 2019, the Company incurred $20.2 million in debt issuance costs. In accordance with the accounting guidance for the treatment of debt issuance costs in a debt extinguishment, of the $20.2 million in new debt issuance costs, $6.0 million was classified as a reduction of long-term debt in the consolidated balance sheets and $14.2 million was expensed and was classified as loss on debt extinguishment in the consolidated statements of operations at the time of the refinancing.
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
The loss on debt extinguishment recorded during the year ended December 31, 2019, was comprised of the following:
|
|
|
|
|
|
|
Loss on Debt Extinguishment
|
Debt issuance costs:
|
|
Debt issuance costs from February 10, 2017 debt financing arrangement
|
$
|
0.7
|
|
Debt issuance costs from January 31, 2019 debt financing arrangement
|
14.2
|
|
Debt issuance costs from July 26, 2019 delayed draw Term Loan A funding and retirement of Term Loan B
|
0.5
|
|
Original issue discount:
|
|
Original issue discount from February 10, 2017 debt financing arrangement
|
1.0
|
|
Original issue discount from July 26, 2019 delayed draw Term Loan A funding and retirement of Term Loan B
|
14.1
|
|
Total
|
$
|
30.5
|
|
Covenants and Compliance
The Company’s various lending arrangements include certain financial covenants (all financial terms, numbers and ratios are as defined in the Company’s debt agreements). Among these covenants, the Company was required to maintain the following as of December 31, 2020:
•Maximum Total Net Leverage Ratio. On a rolling twelve-month basis, the Maximum Total Net Leverage Ratio, defined as consolidated total indebtedness, net of no more than $75.0 million of unrestricted cash, to consolidated EBITDA, shall not exceed (i) 4.50 to 1.00 for the quarters ending December 31, 2020 and March 31, 2021, (ii) 4.25 to 1.00 for the quarter ending June 30, 2021, and (iii) 4.125 to 1.00 for the quarter ending September 30, 2021 (for the twelve months ended December 31, 2020, the Company’s Maximum Total Net Leverage Ratio was 3.29 to 1.00). After the Covenant Relief Period, the Company will be required to comply with the Total Leverage Ratio covenant, defined as consolidated total indebtedness to consolidated EBITDA which shall not exceed 3.75 to 1.00.
•If there is any amount outstanding on the Revolving Credit Facility or Term Loan A, or if any lender has any revolving credit exposure or Term Loan A credit exposure, the Company is required to maintain the following:
◦Senior Secured Leverage Ratio. On a rolling twelve-month basis, the Senior Secured Leverage Ratio, defined as consolidated senior secured net indebtedness to consolidated EBITDA, shall not exceed 3.50 to 1.00 (for the twelve months ended December 31, 2020, the Company’s Senior Secured Leverage Ratio was 2.41 to 1.00).
•Interest Coverage Ratio. On a rolling twelve-month basis, the Interest Coverage Ratio, defined as consolidated EBITDA to cash consolidated interest expense, shall not be less than 3.00 to 1.00 (for the twelve months ended December 31, 2020, the Company’s Interest Coverage Ratio was 4.64 to 1.00).
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
The indenture underlying the Senior Unsecured Notes contains various covenants, including, but not limited to, covenants that, subject to certain exceptions, limit the Company’s and its restricted subsidiaries’ ability to incur and/or guarantee additional debt; pay dividends, repurchase stock or make certain other restricted payments; enter into agreements limiting dividends and certain other restricted payments; prepay, redeem or repurchase subordinated debt; grant liens on assets; enter into sale and leaseback transactions; merge, consolidate, transfer or dispose of substantially all of the Company’s consolidated assets; sell, transfer or otherwise dispose of property and assets; and engage in transactions with affiliates.
In addition to those covenants, the Senior Secured Credit Facility also includes certain limitations on acquisitions, indebtedness, liens, dividends and repurchases of capital stock. The following limitations utilize a Total Net Leverage Ratio calculation, which, on a rolling twelve-month basis, is defined as consolidated net indebtedness to consolidated EBITDA (for the twelve months ended December 31, 2020, the Company’s Total Net Leverage Ratio was 3.30 to 1.00).
•If the Company’s Total Net Leverage Ratio is greater than 2.75 to 1.00, the Company is prohibited from making greater than $60.0 million of annual dividend payments, capital stock repurchases and certain other payments. If the Total Net Leverage Ratio is less than 2.75 to 1.00, there are no such restrictions, provided, however, that no such restricted payments shall be made during the Covenant Relief Period. As the Company’s Total Net Leverage Ratio as of December 31, 2020, was 3.30 to 1.00, and we are in the Covenant Relief Period, the limitations described above are currently applicable.
•If the Company’s Senior Secured Leverage Ratio is greater than 3.00 to 1.00 or the Company’s Total Net Leverage Ratio is greater than 3.50 to 1.00, the Company is prohibited from voluntarily prepaying any of the Senior Unsecured Notes and from voluntarily prepaying any other unsecured or subordinated indebtedness, with certain exceptions (including any mandatory prepayments on the Senior Unsecured Notes or any other unsecured or subordinated debt). If the Senior Secured Leverage Ratio is less than 3.00 to 1.00 and the Total Net Leverage Ratio is less than 3.50 to 1.00, there are no such restrictions. The limitations described above are currently not applicable, as the Company’s Senior Secured Leverage Ratio was 2.41 to 1.00 and Total Net Leverage Ratio was 3.30 to 1.00, as of December 31, 2020.
Estimated Principal Payments
The approximate annual principal amounts due on long-term debt, excluding $6.9 million for future amortization of debt issuance costs, at December 31, 2020, were as follows:
|
|
|
|
|
|
|
Principal Payments
|
2021
|
$
|
20.7
|
|
2022
|
283.6
|
|
2023
|
87.2
|
|
2024
|
537.3
|
|
2025
|
1.0
|
|
2026
|
0.5
|
|
|
|
Total
|
$
|
930.3
|
|
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
Note 13. Leases
The Company determines if an arrangement is or contains a lease at contract inception. The Company recognizes a right-of-use (“ROU”) asset and a lease liability at the lease commencement date.
For operating and finance leases, the lease liability is initially measured at the present value of the unpaid lease payments at the lease commencement date, and is subsequently measured at amortized cost using the effective interest method.
Key estimates and judgments include how the Company determines the discount rate, lease term and lease payments.
•ASC 842 requires a lessee to discount its unpaid lease payments using the interest rate implicit in the lease or, if that rate cannot be readily determined, its incremental borrowing rate. Generally, the Company cannot determine the implicit interest rate as it does not have access to the lessor’s estimated residual value or the amount of the lessor’s deferred initial direct costs. Therefore, the Company generally uses its incremental borrowing rate as the discount rate for the lease. The Company’s incremental borrowing rate for a lease is the rate of interest it would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms based on the published United States Treasury rates as well as the Company’s credit rating at implementation or at the lease inception date.
•The lease term for all of the Company’s leases includes the non-cancelable period of the lease, plus or minus any additional periods covered by an option to extend or terminate the lease that the Company is reasonably certain to exercise.
•Lease payments included in the lease liability are comprised of fixed payments as well as any exercise price of a Company option to purchase the underlying asset if the Company is reasonably certain to exercise. The Company’s leases do not contain variable lease payments.
ROU assets are initially measured at cost, which comprises the initial amount of the lease liability adjusted for lease payments made at or before the lease commencement date, plus any initial direct costs incurred less any lease incentives received. For operating leases, the ROU asset is subsequently amortized by the straight-line lease expense adjusted by the lease liability accretion over the lease term.
For finance leases, the ROU asset is subsequently amortized on a straight-line basis from the lease commencement date to the earlier of the end of its useful life or the end of the lease term. Amortization of the ROU asset is recognized and presented separately from interest expense on the lease liability.
The Company’s ROU assets for both operating and finance leases are reviewed for impairment losses on a quarterly basis in line with ASC 360-10 — Property, Plant, and Equipment — Overall. The Company has not recognized any impairment losses to date from continuing operations.
The Company also monitors its leases for events or changes in circumstances that require a reassessment of the lease. When a reassessment results in the remeasurement of a lease liability, a corresponding adjustment is made to the carrying amount of the ROU asset.
Operating leases are included in operating lease right-of-use assets—net, current portion of operating lease obligations, and operating lease obligations in the consolidated balance sheets. Finance leases are included in property and equipment—net, current portion of finance lease obligations, and finance lease obligations in the consolidated balance sheets.
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
The Company has elected not to recognize ROU assets and lease liabilities for short-term leases that have an original lease term of twelve months or less. Therefore, the Company recognizes the lease payments associated with these short-term leases as an expense over the lease term in the consolidated statement of operations.
Practical Expedients
The Company has elected to apply the following practical expedients allowed under ASU 842:
•The Company elected the practical expedient package and therefore did not reassess for any existing leases:
◦whether contracts are or contain leases;
◦the lease classification for any existing leases; and
◦any initial direct costs.
•The Company elected the practical expedient related to land easements, allowing to carry forward the accounting treatment for land easements on existing agreements.
•The Company used “hindsight” judgments that impact the lease term.
•The Company elected to combine lease and non-lease components into one lease component for select underlying lease asset categories. Real estate leases are accounted for separately while all other leases, primarily equipment leases, with separate lease and non-lease components are accounted for as a single lease component.
Leases Financial Information
The Company enters into various lease agreements for real estate, such as office space and manufacturing facilities, as well as equipment leases, including press, finishing and transportation equipment. Many of these leases provide the Company with options to renew, terminate, or in the case of equipment leases, purchase the related equipment at the termination value, as defined, and at various early buyout dates during the term of the lease. In general, the Company has determined these options were not reasonably certain to be exercised, and therefore are not included in the determination of the lease term.
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
The following summarizes certain lease information for the years ended December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
Year Ended
|
|
December 31, 2020
|
|
December 31, 2019
|
Lease cost
|
|
|
|
Finance lease cost:
|
|
|
|
Amortization of right-of-use assets
|
$
|
3.6
|
|
|
$
|
5.8
|
|
Interest on lease liabilities
|
0.4
|
|
|
1.0
|
|
Operating lease cost
|
32.6
|
|
|
42.6
|
|
Short-term lease cost
|
0.3
|
|
|
0.5
|
|
Sublease income
|
(2.5)
|
|
|
(3.1)
|
|
Total lease cost
|
$
|
34.4
|
|
|
$
|
46.8
|
|
|
|
|
|
Other information
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
|
|
Operating cash flows from finance leases
|
$
|
—
|
|
|
$
|
—
|
|
Operating cash flows from operating leases
|
33.4
|
|
|
43.0
|
|
Financing cash flows from finance leases
|
6.6
|
|
|
8.7
|
|
Right-of-use assets obtained in exchange for new finance lease liabilities
|
1.4
|
|
|
7.7
|
|
Right-of-use assets obtained in exchange for new operating lease liabilities
|
15.0
|
|
|
18.7
|
|
Weighted-average remaining lease term — finance leases
|
2.0 years
|
|
2.0 years
|
Weighted-average remaining lease term — operating leases
|
4.0 years
|
|
5.1 years
|
Weighted-average discount rate — finance leases
|
5.0
|
%
|
|
6.5
|
%
|
Weighted-average discount rate — operating leases
|
6.3
|
%
|
|
6.7
|
%
|
The components of finance lease assets at December 31, 2020 and 2019, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Leased equipment—gross
|
$
|
26.1
|
|
|
$
|
30.2
|
|
Less: accumulated depreciation
|
(20.5)
|
|
|
(17.8)
|
|
Leased equipment—net
|
$
|
5.6
|
|
|
$
|
12.4
|
|
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
Future maturities of lease liabilities at December 31, 2020, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Future Maturities of Operating Leases
|
|
Future Maturities of Finance Leases
|
2021
|
$
|
31.1
|
|
|
$
|
2.9
|
|
2022
|
23.1
|
|
|
1.6
|
|
2023
|
16.6
|
|
|
0.4
|
|
2024
|
9.6
|
|
|
0.1
|
|
2025
|
6.8
|
|
|
0.1
|
|
2026 and thereafter
|
6.5
|
|
|
—
|
|
Total minimum payments
|
93.7
|
|
|
5.1
|
|
Less: present value discount
|
(10.8)
|
|
|
(0.3)
|
|
Present value of minimum payments
|
82.9
|
|
|
4.8
|
|
Less: current portion
|
(28.4)
|
|
|
(2.8)
|
|
Long-term lease liability
|
$
|
54.5
|
|
|
$
|
2.0
|
|
Note 14. Income Taxes
Income taxes from continuing operations have been based on the following components of earnings (loss) from continuing operations before income taxes and equity in (earnings) loss of unconsolidated entity for the years ended December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
|
United States
|
$
|
(108.8)
|
|
|
$
|
(94.1)
|
|
|
|
Foreign
|
2.7
|
|
|
14.3
|
|
|
|
Total
|
$
|
(106.1)
|
|
|
$
|
(79.8)
|
|
|
|
The components of income tax expense (benefit) from continuing operations for the years ended December 31, 2020, and 2019, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
|
Federal:
|
|
|
|
|
|
Current
|
$
|
(47.3)
|
|
|
$
|
(2.2)
|
|
|
|
Deferred
|
32.3
|
|
|
(21.0)
|
|
|
|
State:
|
|
|
|
|
|
Current
|
(1.5)
|
|
|
0.9
|
|
|
|
Deferred
|
17.0
|
|
|
(4.9)
|
|
|
|
Foreign:
|
|
|
|
|
|
Current
|
0.6
|
|
|
0.1
|
|
|
|
Deferred
|
(0.8)
|
|
|
2.7
|
|
|
|
Total income tax expense (benefit)
|
$
|
0.3
|
|
|
$
|
(24.4)
|
|
|
|
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
The following table outlines the reconciliation of differences between the Federal statutory tax rate and the Company’s income tax expense (benefit) from continuing operations for the years ended December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
|
Federal statutory rate
|
$
|
(22.3)
|
|
|
$
|
(16.8)
|
|
|
|
State taxes, net of federal benefit
|
15.4
|
|
|
(4.1)
|
|
|
|
Adjustment to valuation allowances
|
13.1
|
|
|
(0.2)
|
|
|
|
Benefit of Net Operating Loss Carryback
|
(14.3)
|
|
|
—
|
|
|
|
Impact from foreign branches
|
2.1
|
|
|
2.6
|
|
|
|
Adjustment of deferred tax liabilities
|
2.0
|
|
|
(1.6)
|
|
|
|
Foreign rate differential
|
(1.3)
|
|
|
—
|
|
|
|
Adjustment of uncertain tax positions
|
0.8
|
|
|
(2.5)
|
|
|
|
Other
|
4.8
|
|
|
(1.8)
|
|
|
|
Income tax expense (benefit)
|
$
|
0.3
|
|
|
$
|
(24.4)
|
|
|
|
The $15.4 million effective rate reconciling item for State taxes, net of federal benefit, in 2020 includes a $19.1 million adjustment to valuation allowance primarily related to net operating losses and credits that are not expected to be realized in the future for state income tax purposes. The $13.1 million adjustment to valuation allowance in 2020 primarily relates to net operating losses, credits and the deferred tax asset for interest limitation that are not expected to be realized in the future for federal income tax purposes.
On March 27, 2020, the United States government passed into law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES act”). This legislation includes significant tax provisions and other measures to assist individuals and businesses impacted by the economic effects of the COVID-19 pandemic. The $14.3 million rate reconciling item for Benefit of Net Operating Loss Carryback in 2020, primarily relates to the provision from the CARES act allowing a net operating loss (“NOL”) generated in 2019 and 2020 to be carried back five years to years when the federal statutory tax rate was 35%. The amount of NOL available to be carried back was increased by other provisions in the CARES act that temporarily increases the amount of interest expense businesses are allowed to deduct in 2019 and 2020.
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
Deferred Income Taxes
The significant deferred tax assets and liabilities as of December 31, 2020 and 2019, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Deferred tax assets:
|
|
|
|
Net operating loss and other tax carryforwards
|
$
|
145.9
|
|
|
$
|
125.1
|
|
Pension and workers compensation benefits
|
33.2
|
|
|
43.1
|
|
Accrued liabilities
|
20.5
|
|
|
11.1
|
|
Goodwill and intangible assets
|
19.0
|
|
|
17.4
|
|
Interest limitation
|
18.2
|
|
|
73.7
|
|
Accrued compensation
|
10.1
|
|
|
16.1
|
|
Allowance for doubtful accounts
|
7.2
|
|
|
5.5
|
|
Other
|
9.8
|
|
|
8.0
|
|
Total deferred tax assets
|
263.9
|
|
|
300.0
|
|
Valuation allowance
|
(143.9)
|
|
|
(107.1)
|
|
|
|
|
|
Net deferred tax assets
|
$
|
120.0
|
|
|
$
|
192.9
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
Property, plant and equipment
|
$
|
(103.8)
|
|
|
$
|
(130.6)
|
|
Other
|
(4.2)
|
|
|
(3.9)
|
|
Total deferred tax liabilities
|
(108.0)
|
|
|
(134.5)
|
|
|
|
|
|
Net deferred tax assets (liabilities)
|
$
|
12.0
|
|
|
$
|
58.4
|
|
The Company has recorded deferred income tax liabilities of $4.2 million and $2.8 million as of December 31, 2020 and 2019, respectively, which were included in deferred income taxes in the consolidated balance sheets. The Company has also recorded deferred income tax assets of $16.2 million and $61.2 million as of December 31, 2020 and 2019, respectively, which were included in other long-term assets in the consolidated balance sheets.
At December 31, 2020, the Company had the following gross amounts of tax-related carryforwards:
•Net operating loss carryforwards of $82.2 million, $72.3 million and $638.3 million for federal, foreign and state, respectively. The federal net operating loss carryforward was generated in 2020 and is available without expiration. Of the foreign net operating loss carryforwards, $28.8 million is available without expiration, while the remainder expires through 2040. The state net operating loss carryforwards expire in varying amounts through 2040.
•Capital loss carryforwards of $17.1 million and $8.7 million for federal and state, respectively. The federal and state capital loss carryforwards expire in 2022.
•Various credit carryforwards of $8.9 million, $28.9 million and $44.0 million for federal, foreign and state, respectively. The federal carryforward expires in 2040, the foreign credit carryforward expires in 2026, and the state credit carryforwards include $32.1 million that is available without expiration, while the remainder expires through 2040.
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
As of December 31, 2020, the Company has recorded a valuation allowance of $143.9 million on its consolidated balance sheet primarily related to the tax-affected amounts of the above carryforwards. The valuation allowance includes $22.5 million, $46.0 million and $75.4 million of federal, foreign and state deferred tax assets, respectively, that are not expected to be realized.
Uncertain Tax Positions
The following table summarizes the activity of the Company’s liability for unrecognized tax benefits at December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
|
Balance at beginning of period
|
$
|
17.8
|
|
|
$
|
14.4
|
|
|
|
|
|
|
|
|
|
Additions for tax positions of the current year
|
—
|
|
|
—
|
|
|
|
Additions for tax positions of prior years
|
0.9
|
|
|
7.8
|
|
|
|
Reductions for tax positions of prior years
|
(6.1)
|
|
|
—
|
|
|
|
Lapses of applicable statutes of limitations
|
(1.0)
|
|
|
(4.3)
|
|
|
|
Settlements during the period
|
—
|
|
|
(0.1)
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
$
|
11.6
|
|
|
$
|
17.8
|
|
|
|
As of December 31, 2020, $10.4 million of unrecognized tax benefits would impact the Company’s effective tax rate, if recognized. Of that amount, it is reasonably possible that $0.4 million of the total amount of unrecognized tax benefits will decrease within the next twelve months due to resolution of income tax audits or statute expirations.
The Company classified interest expense (income) and any related penalties (refunds) related to income tax uncertainties as a component of income tax expense (benefit). The following table summarizes the Company’s interest expense (income) related to tax uncertainties and penalties recognized during the years ended December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
|
Interest expense (income)
|
$
|
(0.3)
|
|
|
$
|
0.5
|
|
|
|
Penalties (refunds)
|
—
|
|
|
—
|
|
|
|
Accrued interest and penalties related to income tax uncertainties are reported as components of other current liabilities and other long-term liabilities in the consolidated balance sheets. The following table summarizes the Company’s liabilities for accrued interest and penalties related to income tax uncertainties at December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
|
Accrued interest
|
|
Accrued penalties
|
|
Accrued interest
|
|
Accrued penalties
|
Other current liabilities
|
$
|
0.5
|
|
|
$
|
0.1
|
|
|
$
|
0.5
|
|
|
$
|
0.1
|
|
Other long-term liabilities
|
0.1
|
|
|
—
|
|
|
0.5
|
|
|
—
|
|
Total liabilities
|
$
|
0.6
|
|
|
$
|
0.1
|
|
|
$
|
1.0
|
|
|
$
|
0.1
|
|
The Company has tax years from 2013 through 2020 that remain open and subject to examination by the Internal Revenue Service. Tax years from 2016 through 2020 remain open and subject to examination in the Company’s various major state jurisdictions within the United States.
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
The Company’s practice and intention is to reinvest certain earnings of its non-U.S. subsidiaries in those operations. The Company has analyzed its global working capital and cash requirements and the potential tax liabilities attributable to repatriation of earnings, and has determined not to change its permanent reinvestment assertion. The Company does not have significant prior year untaxed, undistributed earnings from its foreign operations at December 31, 2020, and the Company does not provide for, nor expect to incur, any significant, additional taxes which could become payable upon repatriation of such amounts.
Note 15. Financial Instruments and Fair Value Measurements
Certain assets and liabilities are required to be recorded at fair value on a recurring basis, while other assets and liabilities are recorded at fair value on a nonrecurring basis, generally as a result of acquisitions or impairment charges. Fair value is determined based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. GAAP also classifies the inputs used to measure fair value into the following hierarchy:
Level 1: Quoted prices in active markets for identical assets or liabilities.
Level 2: Quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability.
Level 3: Unobservable inputs for the asset or liability. There were no Level 3 recurring measurements of assets or liabilities as of December 31, 2020.
Interest Rate Swaps
The Company currently holds two interest rate swap contracts. The purpose of entering into the contracts was to reduce the variability of cash flows from interest payments related to a portion of Quad’s variable-rate debt. The interest rate swaps were previously designated as cash flow hedges as they effectively converted the notional value of the Company’s variable rate debt based on one-month LIBOR to a fixed rate, including a spread on underlying debt, and a monthly reset in the variable interest rate. However, the Company amended its Senior Secured Credit Facility during the second quarter of 2020, which added a 0.75% LIBOR floor to the Company’s variable rate debt, changing the critical terms of the hedged instrument. Due to this change in critical terms, the Company has elected to de-designate the swaps as cash flow hedges, resulting in future changes in fair value being recognized in interest expense. The balance of the accumulated other comprehensive loss attributable to the interest rate swaps as of June 30, 2020, will be amortized to interest expense on a straight-line basis over the remaining lives of the swap contracts. The Company expects to reclassify $7.1 million of this balance to interest expense over the next twelve months.
|
|
|
|
|
|
|
|
|
|
|
|
|
March 19, 2019
Interest Rate Swap
|
|
February 7, 2017
Interest Rate Swap
|
Effective date
|
March 29, 2019
|
|
February 28, 2017
|
Termination date
|
March 28, 2024
|
|
February 28, 2022
|
Term
|
5 years
|
|
5 years
|
Notional amount
|
$130.0
|
|
$250.0
|
Fixed swap rate
|
2.43%
|
|
1.89%
|
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
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 values of the interest rate swaps classified as Level 2 as of December 31, 2020 and 2019, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Location
|
|
December 31, 2020
|
|
December 31, 2019
|
|
|
|
|
|
|
Interest rate swap liabilities
|
Other long-term liabilities
|
|
(14.4)
|
|
|
(6.4)
|
|
Prior to the Company’s de-designation of the interest rate swaps as cash flow hedges, the interest rate swaps were considered highly effective, with no amount of ineffectiveness recorded into earnings. The changes in the fair value of the interest rate swaps have been included in other comprehensive loss in the consolidated statements of comprehensive loss through the first quarter of 2020, and have been recorded as an adjustment to interest expense in the consolidated statements of operations in the periods thereafter. The cash flows associated with the interest rate swaps have been recognized as an adjustment to interest expense in the consolidated statements of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
Cash Flow Impacts
|
|
|
|
Net interest paid (received)
|
$
|
5.6
|
|
|
$
|
(0.8)
|
|
|
|
|
|
Impacts with Swaps as Hedging Instruments
|
|
|
|
Loss recognized in other comprehensive loss
|
$
|
11.1
|
|
|
$
|
10.7
|
|
|
|
|
|
Impacts with Swaps as Nonhedging Instruments
|
|
|
|
Income recognized in interest expense excluded from hedge effectiveness assessments
|
$
|
(3.1)
|
|
|
$
|
—
|
|
Amounts reclassified out of accumulated other comprehensive loss to interest expense
|
3.6
|
|
|
—
|
|
Net interest expense
|
5.6
|
|
|
(0.8)
|
|
Total impact of swaps to interest expense
|
$
|
6.1
|
|
|
$
|
(0.8)
|
|
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 December 31, 2020.
Natural Gas Forward Contracts
The Company periodically enters into natural gas forward purchase contracts to hedge against increases in commodity costs. The Company’s commodity contracts qualified for the exception related to normal purchases and sales during the years ended December 31, 2020 and 2019, 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 12, “Debt,” for the fair value of the Company’s debt as of December 31, 2020.
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
Nonrecurring Fair Value Measurements
In addition to assets and liabilities that are recorded at fair value on a recurring basis, the Company is required to record certain assets and liabilities at fair value on a nonrecurring basis, generally as a result of acquisitions or the remeasurement of assets resulting in impairment charges. See Note 3, “Acquisitions and Strategic Investments,” for further discussion on acquisitions. See Note 4, “Discontinued Operations”; Note 5, “Restructuring, Impairment and Transaction-Related Charges”; Note 6, “Goodwill and Other Intangible Assets”; and Note 9, “Property, Plant and Equipment” for further discussion on impairment charges recorded as a result of the remeasurement of certain long-lived assets.
Other Estimated Fair Value Measurements
The Company records the fair value of its forward contracts and pension plan assets on a recurring basis. The fair value of cash and cash equivalents, receivables, inventories, restricted cash, accounts payable and other current liabilities approximate their carrying values as of December 31, 2020 and 2019. See Note 16, “Employee Retirement Plans,” for the details of Level 1 and Level 2 inputs related to employee retirement plans.
Note 16. Employee Retirement Plans
Defined Contribution Plans
The Quad/Graphics, Inc. Diversified Plan is comprised of participant-directed 401(k) contributions, Company match and profit sharing contributions, with total participant assets of $2.2 billion as of December 31, 2020. Company 401(k) matching contributions were $11.7 million and $15.4 million for the years ended December 31, 2020 and 2019, respectively. The Company’s ESOP holds profit sharing contributions of Company stock, which are made at the discretion of the Company’s Board of Directors. There were no profit sharing contributions for the years ended December 31, 2020 and 2019.
Defined Benefit Plans
The Company assumed various funded and unfunded frozen pension plans for a portion of its full-time employees in the United States as part of the acquisition of World Color Press in 2010. Benefits are generally based upon years of service and compensation. These plans are funded in conformity with the applicable government regulations. The Company funds at least the minimum amount required for all qualified plans using actuarial cost methods and assumptions acceptable under government regulations.
The components of net pension income for the years ended December 31, 2020 and 2019, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
|
|
|
2020
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest cost
|
$
|
(13.6)
|
|
|
$
|
(17.5)
|
|
|
|
|
|
|
|
|
|
Expected return on plan assets
|
24.2
|
|
|
23.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit income
|
10.6
|
|
|
6.0
|
|
|
|
|
|
|
|
|
|
Settlement charge
|
(0.1)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net pension income
|
$
|
10.5
|
|
|
$
|
6.0
|
|
|
|
|
|
|
|
|
|
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
The underfunded pension obligations are calculated using generally accepted actuarial methods and are measured annually as of December 31. The following table provides a reconciliation of the projected benefit obligation, fair value of plan assets and the funded status of the pension plans as of December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
|
2020
|
|
2019
|
|
|
|
|
Changes in benefit obligation
|
|
|
|
|
|
|
|
Projected benefit obligation, beginning of year
|
$
|
(515.7)
|
|
|
$
|
(476.4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest cost
|
(13.6)
|
|
|
(17.5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial loss
|
(40.5)
|
|
|
(64.6)
|
|
|
|
|
|
Benefits paid
|
43.6
|
|
|
42.8
|
|
|
|
|
|
Liability benefit from settlement
|
0.6
|
|
|
—
|
|
|
|
|
|
Projected benefit obligation, end of year
|
(525.6)
|
|
|
(515.7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in plan assets
|
|
|
|
|
|
|
|
Fair value of plan assets, beginning of year
|
436.8
|
|
|
393.8
|
|
|
|
|
|
Actual return on plan assets
|
68.0
|
|
|
80.0
|
|
|
|
|
|
Employer contributions
|
7.8
|
|
|
5.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits paid
|
(43.6)
|
|
|
(42.8)
|
|
|
|
|
|
Fair value of plan assets, end of year
|
469.0
|
|
|
436.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status
|
$
|
(56.6)
|
|
|
$
|
(78.9)
|
|
|
|
|
|
The net underfunded defined benefit plan obligations decreased by $22.3 million during the year ended December 31, 2020. This decrease was primarily due to an actual return on pension plan assets of 17.0% during the year ended December 31, 2020, which was above the expected return on plan assets assumption of 5.75% and $7.8 million of employer contributions. The asset increase was partially offset by an 83 basis point decrease in the pension discount rate from 3.20% at December 31, 2019, to 2.37% at December 31, 2020.
Amounts recognized on the consolidated balance sheets as of December 31, 2020 and 2019, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
|
2020
|
|
2019
|
|
|
|
|
Current liabilities
|
$
|
(1.7)
|
|
|
$
|
(1.8)
|
|
|
|
|
|
Noncurrent liabilities
|
(54.9)
|
|
|
(77.1)
|
|
|
|
|
|
Total amount recognized
|
$
|
(56.6)
|
|
|
$
|
(78.9)
|
|
|
|
|
|
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
The following table provides a reconciliation of the Company’s accumulated other comprehensive loss prior to any deferred tax effects at December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial Gain / (Loss), net
|
|
|
|
|
|
|
Balance at January 1, 2019
|
$
|
(33.3)
|
|
|
|
|
|
|
|
Amount arising during the period
|
(8.1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2019
|
(41.4)
|
|
|
|
|
|
|
|
Amount arising during the period
|
3.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of pension plan settlement charge included in net loss
|
0.1
|
|
|
|
|
|
|
|
Balance at December 31, 2020
|
$
|
(38.1)
|
|
|
|
|
|
|
|
Actuarial gains and losses in excess of 10% of the greater of the projected benefit obligation or the market-related value of plan assets are recognized as a component of net periodic benefit costs over the average remaining service period of a plan’s active employees. Unrecognized prior service costs or credits are also recognized as a component of net periodic benefit cost over the average remaining service period of a plan’s active employees.
The weighted average assumptions used to determine net periodic benefit costs for the years ended December 31, 2020 and 2019, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
|
2020
|
|
2019
|
|
|
|
|
|
|
|
|
Discount rate
|
3.20
|
%
|
|
4.22
|
%
|
|
|
|
|
|
|
|
|
Expected long-term return on plan assets
|
5.75
|
%
|
|
6.25
|
%
|
|
|
|
|
|
|
|
|
The weighted average assumptions used to determine pension benefit obligations at December 31, 2020 and 2019, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
|
2020
|
|
2019
|
|
|
|
|
Discount rate (end of year rate)
|
2.37
|
%
|
|
3.20
|
%
|
|
|
|
|
The Company determines its assumed discount rate based on an index of high-quality corporate bond yields and matched-funding yield curve analysis as of the measurement date.
Estimated Company Contributions and Benefit Payments
In 2021, the Company expects to make cash contributions of $4.1 million to its qualified defined benefit pension plans and expects to make estimated benefit payments of $1.7 million to its non-qualified defined benefit pension plans. The actual pension contributions may differ based on the funding calculations, and the Company may choose to make additional discretionary contributions. The estimated benefit payments may differ based on actual experience.
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
Estimated Future Benefit Payments by the Plans to or on Behalf of Plan Participants
An estimate of the Plans’ present value of future benefit payments to be made from funded qualified plans and unfunded non-qualified plans to plan participants at December 31, 2020, were as follows:
|
|
|
|
|
|
|
Future Pension
Benefit Payments
|
2021
|
$
|
38.0
|
|
2022
|
36.1
|
|
2023
|
35.1
|
|
2024
|
34.1
|
|
2025
|
33.4
|
|
2026 - 2030
|
149.6
|
|
Thereafter
|
199.3
|
|
Total
|
$
|
525.6
|
|
Plan Assets and Investment Strategy
The Company follows a disciplined investment strategy, which provides diversification of investments by asset class, foreign currency, sector and company. The Pension Committee has an approved investment policy for the pension plan that establishes long-term asset mix targets based on several factors including the following: the funded status, historical returns achieved by worldwide investment markets, the time horizon of the pension plan’s obligations, and the investment risk. An allocation range by asset class is developed whereby a mix of equity securities and debt securities are used to provide an appropriate risk-adjusted long-term return on plan assets. Third-party investment managers are employed to invest assets in both passively-indexed and actively-managed strategies and investment returns and risks are monitored on an ongoing basis. Derivatives are used at certain times to hedge foreign currency exposure. Gains or losses on the derivatives are offset by a corresponding change in the value of the hedged assets. Derivatives are strictly used for hedging purposes and not speculative purposes.
The current target allocations for plan assets on a weighted average basis are 30% equity securities and 70% debt securities, including cash and cash equivalents. The actual asset allocation as of December 31, 2020, and as of December 31, 2019, was approximately 30% equity securities and 70% debt securities. Equity investments are diversified by country, issuer and industry sector. Debt securities primarily consist of government bonds and corporate bonds from diversified industries.
The expected long-term rate of return on assets assumption is selected by first identifying the expected range of long-term rates of return for each major asset class. Expected long-term rates of return are developed based on long-term historical averages, current expectations of future returns and anticipated inflation rates. The expected long-term rate of return on plan assets is then calculated by weighting each asset class.
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
The fair values of the Company’s pension plan assets at December 31, 2020 and 2019, by asset category were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
Asset Category
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Cash and cash equivalents
|
|
$
|
5.3
|
|
|
$
|
5.3
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1.9
|
|
|
$
|
1.9
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Debt securities
|
|
125.7
|
|
|
—
|
|
|
125.7
|
|
|
—
|
|
|
118.0
|
|
|
—
|
|
|
118.0
|
|
|
—
|
|
Equity securities
|
|
28.9
|
|
|
—
|
|
|
28.9
|
|
|
—
|
|
|
27.0
|
|
|
—
|
|
|
27.0
|
|
|
—
|
|
Total pension plan assets, excluding those measured at net asset value (“NAV”)
|
|
159.9
|
|
|
$
|
5.3
|
|
|
$
|
154.6
|
|
|
$
|
—
|
|
|
146.9
|
|
|
$
|
1.9
|
|
|
$
|
145.0
|
|
|
$
|
—
|
|
Investments measured at NAV (1)
|
|
309.1
|
|
|
|
|
|
|
|
|
289.9
|
|
|
|
|
|
|
|
Total pension plan assets
|
|
$
|
469.0
|
|
|
|
|
|
|
|
|
$
|
436.8
|
|
|
|
|
|
|
|
______________________________
(1)These investments consist of privately placed funds that are valued based on NAV. NAV of the funds is based on the fair value of each fund’s underlying investments. In accordance with ASC Subtopic 820-10, certain investments that are measured at fair value using the NAV per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy.
There were no Level 3 assets as of December 31, 2020 and 2019. See Note 15, “ Financial Instruments and Fair Value Measurements,” for definitions of fair value levels.
The Company segregated its plan assets by the following major categories and levels for determining their fair value as of December 31, 2020:
Cash and cash equivalents. Carrying value approximates fair value and these assets are classified as Level 1.
Debt Securities. This category consists of bonds, short-term fixed income securities and fixed income pooled funds fair valued based on a compilation of primarily observable market information or broker quotes in over-the-counter markets and are classified as Level 2.
Equity Securities. This category consists of equity pooled funds that are classified as Level 2 in the fair value hierarchy. Level 2 assets are valued using quoted prices in markets that are not active, broker dealer quotations, and other methods by which all significant input was observable at the measurement date.
The valuation methodologies described above may generate a fair value calculation that may not be indicative of net realizable value or future fair values. While the Company believes the valuation methodologies used are appropriate, the use of different methodologies or assumptions in calculating fair value could result in different amounts. The Company invests in various assets in which valuation is determined by NAV. The Company believes that NAV is representative of fair value at the reporting date, as there are no significant restrictions on redemption on these investments or other reasons to indicate that the investment would be redeemed at an amount different than NAV.
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
The fair value measurements in common/collective trusts, calculated using a NAV and their redemption restrictions, for the years ended December 31, 2020 and 2019, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
Redemption Frequency (If Currently Eligible)
|
|
Redemption Notice Period
|
|
2020
|
|
2019
|
|
JP Morgan Chase Bank Strategic Property Fund
|
$
|
12.8
|
|
|
$
|
12.6
|
|
|
Quarterly
|
|
30 days
|
Pyramis Long Corporate A or Better
|
98.5
|
|
|
93.3
|
|
|
Daily
|
|
15 days
|
Pyramis Long Duration
|
98.8
|
|
|
92.2
|
|
|
Daily
|
|
15 days
|
Russell 3000 Index NL
|
99.0
|
|
|
91.8
|
|
|
Daily
|
|
1 day
|
|
|
|
|
|
|
|
|
Total value of investments measured at NAV
|
$
|
309.1
|
|
|
$
|
289.9
|
|
|
|
|
|
Risk Management
For all directly invested funds, the concentration risk is monitored through specific guidelines in the investment manager mandates. The investment manager mandates were developed by the Company’s external investment advisor, and specify diversification standards such as the maximum exposure per issuer, and concentration limits per type of security, industry and country when applicable.
For the investments made through pooled funds, the investment mandates of the funds were again reviewed by the Company’s external investment advisor, to determine that the investment objectives and guidelines were consistent with the Company’s overall pension plan risk management objectives. In managing the plan assets, management reviews and manages risk associated with funded status risk, interest rate risk, market risk, counterparty risk, liquidity risk and operational risk. Liability management and asset class diversification are central to the Company’s risk management approach and are integral to the overall investment strategy.
Given the process in place to ensure a proper diversification of the portfolio, management believes that the Company pension plan assets are not exposed to significant concentration risk.
Multiemployer Pension Plans
The Company has previously participated in a number of MEPPs under terms of collective bargaining agreements that cover a number of its employees. The risks of participating in these MEPPs are different from single employer plans in the following aspects:
•Assets contributed to the MEPPs by one company may be used to provide benefits to employees of other participating companies.
•If a participating company stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating companies.
•If the Company stops participating in some or all of its MEPPs, and continues in business, the Company would be required to pay an amount, referred to as a withdrawal liability, based on the unfunded status of the plan.
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
The Company has withdrawn from all significant MEPPs and replaced these union sponsored “promise to pay in the future” defined benefit plans with a Company sponsored “pay as you go” defined contribution plan. The two MEPPs, the GCIU and GCC, are significantly underfunded, and will require the Company to pay a withdrawal liability to fund its pro rata share of the underfunding as of the plan year the full withdrawal was completed. As a result of the decision to withdraw, the Company accrued the estimated withdrawal liability based on information provided by each plan’s trustee, as part of the purchase price allocation for World Color Press.
The GCIU Plan is a defined benefit plan that provides retirement benefits, total and permanent disability benefits, and pre-retirement death benefits for the participating union employees of the Company. The funded status of the GCIU Plan is classified as critical and declining based on the GCIU Plan’s 2020 certification to the United States Department of Labor, as the funded percentage for the plan is less than 65%, and the plan is projected to become insolvent in 2031. As a result, the GCIU Plan implemented a rehabilitation plan to improve the plan’s funded status. In 2019, the Company and the GCIU reached a settlement agreement for all claims, with scheduled payments until April 2032.
The GCC Plan is a defined benefit plan that provides retirement benefits, disability benefits, and early retirement benefits for the participating union employees of the Company. The funded status of the GCC Plan is classified as critical and declining based on the GCC Plan’s 2020 certification to the United States Department of Labor, as the funded percentage for the plan is less than 65%, and the plan is projected to become insolvent by 2023. As a result, the GCC Plan implemented a rehabilitation plan to improve the plan’s funded status. In 2016, the Company and the GCC reached a settlement agreement for all claims, with scheduled payments until February 2024.
The Company made payments totaling $11.4 million and $10.4 million for the years ended December 31, 2020 and 2019, respectively. The Company has reserved $35.7 million as its estimate of the total MEPPs withdrawal liability as of December 31, 2020, of which $32.2 million was recorded in other long-term liabilities and $3.5 million was recorded in other current liabilities in the consolidated balance sheets.
Note 17. Loss Per Share Attributable to Quad Common Shareholders
Basic earnings (loss) per share attributable to Quad common shareholders is computed as net earnings (loss) attributable to Quad common shareholders, divided by the basic weighted average common shares outstanding. The calculation of diluted earnings (loss) per share attributable to Quad common shareholders 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 attributed 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 years ended December 31, 2020 and 2019, the assumed exercise of all equity incentive instruments was anti-dilutive and therefore, not included in the diluted loss per share calculation.
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
Reconciliations of the numerator and the denominator of the basic and diluted per share computations for the Company’s common stock for the years ended December 31, 2020 and 2019, are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
|
Numerator:
|
|
|
|
|
|
Net loss from continuing operations
|
$
|
(106.6)
|
|
|
$
|
(55.7)
|
|
|
|
Less: net loss attributable to noncontrolling interests
|
(0.2)
|
|
|
—
|
|
|
|
Net loss from continuing operations attributable to Quad common shareholders
|
(106.4)
|
|
|
(55.7)
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations, net of tax
|
(21.9)
|
|
|
(100.6)
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Quad common shareholders
|
$
|
(128.3)
|
|
|
$
|
(156.3)
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
Basic weighted average number of common shares outstanding for all classes of common stock
|
50.6
|
|
|
50.0
|
|
|
|
Plus: effect of dilutive equity incentive instruments
|
—
|
|
|
—
|
|
|
|
Diluted weighted average number of common shares outstanding for all classes of common shares
|
50.6
|
|
|
50.0
|
|
|
|
|
|
|
|
|
|
Loss per share attributable to Quad common shareholders:
|
|
|
|
|
|
Basic and diluted:
|
|
|
|
|
|
Continuing operations
|
$
|
(2.10)
|
|
|
$
|
(1.11)
|
|
|
|
Discontinued operations
|
(0.43)
|
|
|
(2.01)
|
|
|
|
Basic and diluted loss per share attributable to Quad common shareholders
|
$
|
(2.53)
|
|
|
$
|
(3.12)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends paid per common share for all classes of common shares
|
$
|
0.15
|
|
|
$
|
1.05
|
|
|
|
Note 18. 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, (the “Annual Meeting”) for two complementary purposes: (1) to attract and retain outstanding individuals to serve as directors, officers and employees; and (2) to increase shareholder value. The Company’s previous plan, the Quad/Graphics, Inc. 2010 Omnibus Plan (the “2010 Plan”), was terminated on the date of approval of the 2020 Plan, and no new awards will be granted under the 2010 Plan. All awards that were granted under the 2010 Plan that were outstanding as of May 18, 2020, will remain outstanding and will continue to be governed by the 2010 Plan.
The 2020 Plan provides for an aggregate 3,000,000 shares of class A common stock reserved for issuance, plus shares still available for issuance or re-credited under the 2010 Plan. Awards under the 2020 Plan may consist of incentive awards, stock options, stock appreciation rights, performance shares, performance share units, shares of class A common stock, restricted stock (“RS”), restricted stock units (“RSU”), deferred stock units (“DSU”) or other stock-based awards as determined by the Company’s Board of Directors. Each stock option granted has an exercise price of no less than 100% of the fair market value of the class A common stock on the date of grant. There were 3,580,483 shares of class A common stock reserved for issuance under the 2020 Plan as of December 31, 2020, including 3,000,000 shares of class A common stock that were approved for issuance at the Annual Meeting and 580,483 shares of class A common stock that were remaining and available for issuance that transferred from the 2010 Plan. Authorized unissued shares or treasury shares may be used for issuance under the Company’s equity incentive programs. The Company plans to either
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
use treasury shares of its class A common stock or issue shares of class A common stock to meet the stock requirements of its awards in the future.
The Company recognizes compensation expense based on estimated grant date fair values for all share-based awards issued to employees and non-employee directors, including stock options, performance shares, performance share units, restricted stock, restricted stock units and deferred stock units. The Company recognizes these compensation costs for only those awards expected to vest, on a straight-line basis over the requisite three to four year service period of the awards, except DSU awards, which are fully vested and expensed on the grant date. The Company estimated the number of awards expected to vest based, in part, on historical forfeiture rates and also based on management’s expectations of employee turnover within the specific employee groups receiving each type of award. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods, if actual forfeitures differ from those estimates.
Equity Incentive Compensation Expense
Equity incentive compensation expense was recorded primarily in selling, general and administrative expenses in the consolidated statements of operations and includes expense (income) recognized for liability awards that are remeasured on a quarterly basis. The total compensation expense recognized related to all equity incentive programs for the years ended December 31, 2020 and 2019, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2020
|
|
2019
|
RS and RSU equity awards expense
|
$
|
9.7
|
|
|
$
|
13.8
|
|
RSU liability awards income
|
(0.1)
|
|
|
(1.1)
|
|
DSU awards expense
|
1.0
|
|
|
0.9
|
|
Total equity incentive compensation expense
|
$
|
10.6
|
|
|
$
|
13.6
|
|
Total future compensation expense related to all equity incentive programs granted as of December 31, 2020, is estimated to be $9.3 million, which consists entirely of expense for RS and RSU awards. Estimated future compensation expense is $6.8 million for 2021, $2.3 million for 2022 and $0.2 million for 2023.
Stock Options
Options vest over four years, with no vesting in the first year and one-third vesting upon the second, third and fourth anniversary dates. As defined in the individual grant agreements, acceleration of vesting may occur under a change in control, death, disability or normal retirement of the grantee. Options expire no later than the tenth anniversary of the grant date, 24 months after termination for death, 36 months after termination for normal retirement or disability and 90 days after termination of employment for any other reason. Options are not credited with dividend declarations, except for the November 18, 2011 grants. Stock options are only to be granted to employees.
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
There were no stock options granted during the years ended December 31, 2020 and 2019. There was no compensation expense recognized related to stock options for the years ended December 31, 2020 and 2019. There is no future compensation expense for stock options granted as of December 31, 2020. The following table is a summary of the stock option activity for the year ended December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
Under
Option
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Term
(years)
|
|
Aggregate
Intrinsic
Value
(millions)
|
Outstanding and exercisable at December 31, 2019
|
790,237
|
|
|
$
|
25.27
|
|
|
1.1
|
|
$
|
—
|
|
Granted
|
—
|
|
|
—
|
|
|
|
|
|
Exercised
|
—
|
|
|
—
|
|
|
|
|
|
Canceled/forfeited/expired
|
(275,361)
|
|
|
21.11
|
|
|
|
|
|
Outstanding and exercisable at December 31, 2020
|
514,876
|
|
|
$
|
27.49
|
|
|
0.5
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The intrinsic value of options outstanding and exercisable as of December 31, 2020 and 2019, was based on the fair value of the stock price. All outstanding options are vested as of December 31, 2020. There were no stock options exercised for the years ended December 31, 2020 and 2019.
Restricted Stock and Restricted Stock Units
Restricted stock and restricted stock unit awards consist of shares or the rights to shares of the Company’s class A stock which are awarded to employees of the Company. The awards are restricted such that they are subject to substantial risk of forfeiture and to restrictions on their sale or other transfer by the employee. RSU awards are typically granted to eligible employees outside of the United States. As defined in the individual grant agreements, acceleration of vesting may occur under a change in control, death, disability or normal retirement of the grantee. Grantees receiving RS grants are able to exercise full voting rights and receive full credit for dividends during the vesting period. All such dividends will be paid to the RS grantee within 45 days of full vesting. Grantees receiving RSUs are not entitled to vote but do earn dividends. Upon vesting, RSUs will be settled either through cash payment equal to the fair market value of the RSUs on the vesting date or through issuance of Company class A stock.
The following table is a summary of RS and RSU award activity for the year ended December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2019
|
2,623,971
|
|
|
$
|
17.82
|
|
|
1.5
|
|
230,621
|
|
|
$
|
14.75
|
|
|
1.9
|
Granted
|
1,111,141
|
|
|
4.65
|
|
|
|
|
45,353
|
|
|
4.67
|
|
|
|
Vested
|
(550,516)
|
|
|
26.84
|
|
|
|
|
(25,228)
|
|
|
26.88
|
|
|
|
Forfeited
|
(222,846)
|
|
|
13.22
|
|
|
|
|
(1,208)
|
|
|
12.32
|
|
|
|
Nonvested at December 31, 2020
|
2,961,750
|
|
|
$
|
11.55
|
|
|
1.3
|
|
249,538
|
|
|
$
|
11.70
|
|
|
1.3
|
In the first quarter of 2019, the Company issued RSU awards in connection with the acquisition of Periscope that are accounted for as liability awards that will vest on March 1, 2022. The awards were recorded at fair value on the initial issuance date and are remeasured to fair value at each reporting period, with the change in fair value being
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
recorded in selling, general and administrative expense in the consolidated statements of operations. The change in fair value of the awards classified as liabilities resulted in income of $0.1 million for the year ended December 31, 2020. As of December 31, 2020, the fair value of the RSU awards classified as liabilities was $0.5 million and was included in other long-term liabilities on the consolidated balance sheets.
In general, RS and RSU awards will vest on the third anniversary of the grant date, provided the holder of the share is continuously employed by the Company until the vesting date. Compensation expense recognized for RS and RSUs classified as equity was $9.7 million and $13.8 million for the years ended December 31, 2020 and 2019, respectively.
Deferred Stock Units
Deferred stock units are awards of rights to shares of the Company’s class A stock and are awarded to non-employee directors of the Company. The following table is a summary of DSU award activity for the year ended December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Stock Units
|
|
Units
|
|
Weighted Average Grant Date Fair Value Per Share
|
Outstanding at December 31, 2019
|
314,658
|
|
|
$
|
16.22
|
|
Granted
|
204,088
|
|
|
4.67
|
|
Dividend equivalents granted
|
21,145
|
|
|
3.40
|
|
Settled
|
(38,930)
|
|
|
19.81
|
|
|
|
|
|
Outstanding at December 31, 2020
|
500,961
|
|
|
$
|
10.69
|
|
Each DSU award entitles the grantee to receive one share of class A stock upon the earlier of the separation date of the grantee or the second anniversary of the grant date, but could be subject to acceleration for a change in control, death or disability as defined in the individual DSU grant agreement. Grantees of DSU awards may not exercise voting rights, but are credited with dividend equivalents and those dividend equivalents will be converted into additional DSU awards based on the closing price of the class A stock. Compensation expense recognized for DSUs was $1.0 million and $0.9 million for the years ended December 31, 2020 and 2019, respectively. As DSU awards are fully vested on the grant date, all compensation expense was recognized at the date of grant.
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
Note 19. 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)
|
105.0
|
|
|
|
|
|
|
|
December 31, 2020
|
|
|
40.2
|
|
|
0.2
|
|
|
40.4
|
|
December 31, 2019
|
|
|
39.2
|
|
|
1.1
|
|
|
40.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class B stock ($0.025 par value)
|
80.0
|
|
|
|
|
|
|
|
December 31, 2020
|
|
|
13.5
|
|
|
—
|
|
|
13.5
|
|
December 31, 2019
|
|
|
13.5
|
|
|
—
|
|
|
13.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class C stock ($0.025 par value)
|
20.0
|
|
|
|
|
|
|
|
December 31, 2020
|
|
|
—
|
|
|
0.5
|
|
|
0.5
|
|
December 31, 2019
|
|
|
—
|
|
|
0.5
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
In accordance with the Articles of Incorporation, each class A common share has one vote per share and each class B and class C common share has ten votes per share on all matters voted upon by the Company’s shareholders. Liquidation rights are the same for all three classes of stock.
The Company also has 0.5 million shares of $0.01 par value preferred stock authorized, of which none were issued at December 31, 2020 and 2019. 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. Under the authorization, share repurchases may be made at the Company’s discretion, from time to time, in the open market and/or in privately negotiated transactions as permitted by federal securities laws and other legal requirements. The timing, manner, price and amount of any repurchase will depend on economic and market conditions, share price, trading volume, applicable legal requirements and other factors. The program may be suspended or discontinued at any time. The Company is currently prohibited from repurchasing capital stock through the Covenant Relief Period, in accordance with the fourth amendment to the April 28, 2014 Senior Secured Credit Facility, completed on June 29, 2020. There were no shares of the Company’s class A stock repurchased during the years ended December 31, 2020 and 2019. As of December 31, 2020, there were $100.0 million of authorized repurchases remaining under the program.
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
In accordance with the Articles of Incorporation, dividends are paid equally for all three classes of common shares. The following table details the dividend activity related to the then outstanding shares of common stock for the years ended December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Declaration Date
|
|
Record Date
|
|
Payment Date
|
|
Dividend Amount per Share
|
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q1 Dividend
|
February 18, 2020
|
|
February 28, 2020
|
|
March 9, 2020
|
|
$
|
0.15
|
|
2019
|
|
|
|
|
|
|
|
Q4 Dividend
|
October 29, 2019
|
|
November 18, 2019
|
|
December 6, 2019
|
|
0.15
|
|
Q3 Dividend
|
July 30, 2019
|
|
August 19, 2019
|
|
September 6, 2019
|
|
0.30
|
|
Q2 Dividend
|
April 30, 2019
|
|
May 20, 2019
|
|
June 7, 2019
|
|
0.30
|
|
Q1 Dividend
|
February 19, 2019
|
|
February 25, 2019
|
|
March 8, 2019
|
|
0.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 20. Accumulated Other Comprehensive Loss
The changes in accumulated other comprehensive loss by component, net of tax, for the years ended December 31, 2020 and 2019, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation Adjustments
|
|
Interest Rate Swap Adjustments
|
|
Pension Benefit Plan Adjustments
|
|
Total
|
Balance at January 1, 2019
|
$
|
(130.0)
|
|
|
$
|
3.3
|
|
|
$
|
(25.5)
|
|
|
$
|
(152.2)
|
|
Other comprehensive loss before reclassifications
|
(1.0)
|
|
|
(8.0)
|
|
|
(6.0)
|
|
|
(15.0)
|
|
Amounts reclassified from accumulated other comprehensive loss to net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net other comprehensive loss
|
(1.0)
|
|
|
(8.0)
|
|
|
(6.0)
|
|
|
(15.0)
|
|
Balance at December 31, 2019
|
(131.0)
|
|
|
(4.7)
|
|
|
(31.5)
|
|
|
(167.2)
|
|
Other comprehensive income (loss) before reclassifications
|
0.2
|
|
|
(11.2)
|
|
|
3.2
|
|
|
(7.8)
|
|
Amounts reclassified from accumulated other comprehensive loss to net loss
|
—
|
|
|
3.6
|
|
|
0.1
|
|
|
3.7
|
|
Net other comprehensive income (loss)
|
0.2
|
|
|
(7.6)
|
|
|
3.3
|
|
|
(4.1)
|
|
Balance at December 31, 2020
|
$
|
(130.8)
|
|
|
$
|
(12.3)
|
|
|
$
|
(28.2)
|
|
|
$
|
(171.3)
|
|
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
There were no reclassifications from accumulated other comprehensive loss to net loss for the year ended December 31, 2019. The details about the reclassifications from accumulated other comprehensive loss to net loss for the year ended December 31, 2020, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Details about Accumulated Other
Comprehensive Loss Components
|
|
|
|
|
Year Ended
|
|
Consolidated Statements of Operations Presentation
|
|
|
|
|
December 31, 2020
|
|
Amortization of amounts accumulated for interest rate swaps de-designated as cash flow hedges
|
|
|
|
|
$
|
3.6
|
|
|
Interest expense
|
Impact of income taxes
|
|
|
|
|
—
|
|
|
Income tax benefit
|
Amortization of amounts accumulated for interest rate swaps de-designated as cash flow hedges, net of tax
|
|
|
|
|
3.6
|
|
|
|
|
|
|
|
|
|
|
|
Plan settlements on pension benefit plans
|
|
|
|
|
0.1
|
|
|
Pension income
|
Impact of income taxes
|
|
|
|
|
—
|
|
|
Income tax benefit
|
Plan settlements on pension benefit plans, net of tax
|
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
Total reclassifications for the period, net of tax
|
|
|
|
|
$
|
3.7
|
|
|
|
Note 21. Segment Information
As a worldwide marketing solutions partner, Quad leverages its 50-year heritage of platform excellence, innovation, strong culture and social purpose to create a better way for its clients, employees and communities. The Company’s operating and reportable segments are aligned with how the chief operating decision maker of the Company currently manages the business. The Company’s operating and reportable segments, including their product and service offerings, and a “Corporate” category are as follows:
•United States Print and Related Services
•International
•Corporate
United States Print and Related Services
The United States Print and Related Services segment is predominantly comprised of the Company’s United States printing operations and is managed as one integrated platform. This includes retail inserts, publications, catalogs, special interest publications, journals, direct mail, directories, in-store marketing and promotion, packaging, newspapers, custom print products, other commercial and specialty printed products and global paper procurement, together with marketing and other complementary services, including consumer insights, audience targeting, personalization, media planning and placement, process optimization, campaign planning and creation, pre-media production, videography, photography, digital execution, print execution and logistics. This segment also includes the manufacture of ink.
International
The International segment consists of the Company’s printing operations in Europe and Latin America, including operations in England, France, Germany, Poland, Argentina, Colombia, Mexico and Peru, as well as investments in printing operations in Brazil and India. This segment provides printed products and marketing and other complementary services consistent with the United States Print and Related Services segment. As of December 31, 2020, the Company has no unrestricted subsidiaries as defined in the Company’s Senior Unsecured Notes indenture.
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
Corporate
Corporate consists of unallocated general and administrative activities and associated expenses including, in part, executive, legal and finance, as well as certain expenses and income from frozen employee retirement plans, such as pension benefit plans.
The following is a summary of segment information for the years ended December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss) from Continuing Operations
|
|
|
|
|
|
|
|
Restructuring, Impairment and Transaction-Related Charges
|
|
|
|
Net Sales
|
|
|
|
|
Depreciation and Amortization
|
|
Capital Expenditures
|
|
|
|
|
Products
|
|
Services
|
|
|
|
|
|
|
Year ended December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States Print and Related Services
|
$
|
1,944.0
|
|
|
$
|
683.6
|
|
|
$
|
1.7
|
|
|
|
|
$
|
160.8
|
|
|
$
|
58.8
|
|
|
$
|
110.1
|
|
|
|
International
|
284.7
|
|
|
17.3
|
|
|
(0.8)
|
|
|
|
|
18.9
|
|
|
2.1
|
|
|
12.2
|
|
|
|
Total operating segments
|
2,228.7
|
|
|
700.9
|
|
|
0.9
|
|
|
|
|
179.7
|
|
|
60.9
|
|
|
122.3
|
|
|
|
Corporate
|
—
|
|
|
—
|
|
|
(46.9)
|
|
|
|
|
1.9
|
|
|
0.1
|
|
|
1.8
|
|
|
|
Total
|
$
|
2,228.7
|
|
|
$
|
700.9
|
|
|
$
|
(46.0)
|
|
|
|
|
$
|
181.6
|
|
|
$
|
61.0
|
|
|
$
|
124.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States Print and Related Services
|
$
|
2,713.3
|
|
|
$
|
807.7
|
|
|
$
|
130.1
|
|
|
|
|
$
|
188.1
|
|
|
$
|
104.6
|
|
|
$
|
24.6
|
|
|
|
International
|
385.0
|
|
|
17.4
|
|
|
8.6
|
|
|
|
|
20.1
|
|
|
6.4
|
|
|
10.0
|
|
|
|
Total operating segments
|
3,098.3
|
|
|
825.1
|
|
|
138.7
|
|
|
|
|
208.2
|
|
|
111.0
|
|
|
34.6
|
|
|
|
Corporate
|
—
|
|
|
—
|
|
|
(104.0)
|
|
|
|
|
1.3
|
|
|
—
|
|
|
54.8
|
|
|
|
Total
|
$
|
3,098.3
|
|
|
$
|
825.1
|
|
|
$
|
34.7
|
|
|
|
|
$
|
209.5
|
|
|
$
|
111.0
|
|
|
$
|
89.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures shown in the above table includes capital expenditures from discontinued operations for all periods presented. Restructuring, impairment and transaction-related charges for the years ended December 31, 2020 and 2019, are further described in Note 5, “Restructuring, Impairment and Transaction-Related Charges,” and are included in the operating income (loss) results by segment above.
A reconciliation of operating income from continuing operations to loss from continuing operations before income taxes and equity in loss of unconsolidated entity as reported in the consolidated statements of operations for the years ended December 31, 2020 and 2019, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
|
Operating income (loss) from continuing operations
|
$
|
(46.0)
|
|
|
$
|
34.7
|
|
|
|
Less: interest expense
|
68.8
|
|
|
90.0
|
|
|
|
Less: net pension income
|
(10.5)
|
|
|
(6.0)
|
|
|
|
Less: loss on debt extinguishment
|
1.8
|
|
|
30.5
|
|
|
|
Loss from continuing operations before income taxes and equity in loss of unconsolidated entity
|
$
|
(106.1)
|
|
|
$
|
(79.8)
|
|
|
|
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
Total assets by segment at December 31, 2020 and 2019, are shown in the following table. Total assets from discontinued operations are included within the United States Print and Related Services segment for all periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
|
United States Print and Related Services
|
$
|
1,612.3
|
|
|
$
|
2,038.7
|
|
|
|
International
|
265.7
|
|
|
302.5
|
|
|
|
Total operating segments
|
1,878.0
|
|
|
2,341.2
|
|
|
|
Corporate
|
49.7
|
|
|
75.9
|
|
|
|
Total
|
$
|
1,927.7
|
|
|
$
|
2,417.1
|
|
|
|
Note 22. Geographic Area Information
The table below presents the Company’s net sales and long-lived assets as of and for the years ended December 31, 2020 and 2019, by geographic region. The amounts in this table differ from the segment data presented in Note 21, “Segment Information,” because each operating segment includes operations in multiple geographic regions, based on the Company’s management reporting structure.
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|
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|
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|
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|
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|
|
|
|
|
|
|
|
|
United States
|
|
Europe
|
|
Latin America
|
|
Other
|
|
Combined
|
2020
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
|
|
|
|
|
|
|
Products
|
$
|
1,908.2
|
|
|
$
|
156.0
|
|
|
$
|
154.7
|
|
|
$
|
9.8
|
|
|
$
|
2,228.7
|
|
Services
|
683.6
|
|
|
17.3
|
|
|
—
|
|
|
—
|
|
|
700.9
|
|
Property, plant and equipment—net
|
756.9
|
|
|
71.6
|
|
|
49.8
|
|
|
5.9
|
|
|
884.2
|
|
Operating lease right-of-use assets—net
|
74.7
|
|
|
2.1
|
|
|
2.0
|
|
|
2.2
|
|
|
81.0
|
|
Other intangible assets—net
|
99.2
|
|
|
3.0
|
|
|
2.1
|
|
|
—
|
|
|
104.3
|
|
Other long-term assets
|
55.4
|
|
|
7.4
|
|
|
10.2
|
|
|
0.4
|
|
|
73.4
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
|
|
|
|
|
|
|
Products
|
$
|
2,679.1
|
|
|
$
|
178.5
|
|
|
$
|
234.3
|
|
|
$
|
6.4
|
|
|
$
|
3,098.3
|
|
Services
|
807.7
|
|
|
17.4
|
|
|
—
|
|
|
—
|
|
|
825.1
|
|
Property, plant and equipment—net
|
896.3
|
|
|
73.5
|
|
|
60.0
|
|
|
6.7
|
|
|
1,036.5
|
|
Operating lease right-of-use assets—net
|
92.2
|
|
|
1.5
|
|
|
3.3
|
|
|
0.9
|
|
|
97.9
|
|
Other intangible assets—net
|
131.5
|
|
|
5.4
|
|
|
0.3
|
|
|
—
|
|
|
137.2
|
|
Other long-term assets
|
108.2
|
|
|
8.9
|
|
|
9.8
|
|
|
0.6
|
|
|
127.5
|
|
|
|
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Note 23. 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,
QUAD/GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data and unless otherwise indicated)
2020, through December 31, 2022. The Company is evaluating the impact of the adoption of ASU 2020-04 on the consolidated financial statements.
In December 2019, the FASB issued Accounting Standards Update 2019-12 “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” (“ASU 2019-12”), which enhances and simplifies various aspects of the income tax accounting guidance, including requirements such as tax basis step-up in goodwill obtained in a transaction that is not a business combination, ownership changes in investments, accounting for hybrid tax regimes, interim-period accounting for enacted changes in tax law and limitation of tax benefit on year-to-date losses. This guidance is effective for interim and annual periods beginning after December 15, 2020, with early adoption permitted. The Company has adopted this standard as of January 1, 2021. The Company evaluated the impact of the adoption of ASU 2019-12 on the consolidated financial statements and believes there is no material financial impact.
In August 2018, the FASB issued Accounting Standards Update 2018-14 “Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans”, which adds, removes and clarifies year-end disclosure requirements related to defined benefit pension and other postretirement plans. This guidance is effective for annual periods ending after December 15, 2020, with early adoption permitted. This new guidance will require a retrospective adoption approach. The Company has adopted this standard for the year ended December 31, 2020, and has included the required disclosures within Note 16, “Employee Retirement Plans”.