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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2021
or
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☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the transition period
from
to
Commission File Number 001-34806
Quad/Graphics, Inc.
(Exact name of registrant as specified in its charter)
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Wisconsin |
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39-1152983 |
(State or other jurisdiction of incorporation or
organization) |
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(I.R.S. Employer Identification No.) |
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N61 W23044 Harry’s Way, Sussex, Wisconsin 53089-3995
(Address of principal executive offices) (Zip Code)
(414) 566-6000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
Class A Common Stock,
par value $0.025 per share |
QUAD |
The New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes ☒
No ☐
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T during the preceding 12 months (or
for such shorter period that the registrant was required to submit
and post such files). Yes ☒
No ☐
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, a
smaller reporting company or an emerging growth company. See the
definitions of “large accelerated filer,” “accelerated filer,”
“smaller reporting company” and “emerging growth company” in Rule
12b-2 of the Exchange Act.
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Large accelerated filer |
☐ |
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Accelerated filer |
☒ |
Non-accelerated filer |
☐ |
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Smaller reporting company |
☒ |
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Emerging growth company |
☐ |
If an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange
Act.
☐
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Act).
Yes ☐
No
☒
Indicate the number of shares outstanding of each of the issuer’s
classes of common stock as of the latest practicable date.
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Class |
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Outstanding as of July 30, 2021 |
Class A Common Stock |
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41,067,183 |
Class B Common Stock |
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13,556,858 |
Class C Common Stock |
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— |
QUAD/GRAPHICS, INC.
FORM 10-Q INDEX
For the Quarter Ended June 30, 2021
PART I — FINANCIAL INFORMATION
ITEM 1. Condensed
Consolidated Financial Statements (Unaudited)
QUAD/GRAPHICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data)
(UNAUDITED)
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Three Months Ended June 30, |
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Six Months Ended June 30, |
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2021 |
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2020 |
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2021 |
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2020 |
Net sales |
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Products |
$ |
511.6 |
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$ |
447.7 |
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$ |
1,037.6 |
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$ |
1,092.7 |
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Services |
182.3 |
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136.8 |
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362.1 |
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314.3 |
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Total net sales |
693.9 |
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584.5 |
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1,399.7 |
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1,407.0 |
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Cost of sales |
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Products |
413.7 |
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362.9 |
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842.0 |
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886.6 |
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Services |
140.5 |
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98.0 |
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272.0 |
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222.0 |
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Total cost of sales |
554.2 |
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460.9 |
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1,114.0 |
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1,108.6 |
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Operating expenses |
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Selling, general and administrative expenses |
80.1 |
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63.3 |
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160.6 |
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162.9 |
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Gain from sale and leaseback |
(13.7) |
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— |
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(13.7) |
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— |
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Depreciation and amortization |
38.7 |
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46.7 |
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80.6 |
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94.1 |
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Restructuring, impairment and transaction-related
charges |
(13.4) |
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16.4 |
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(10.8) |
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39.2 |
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Total operating expenses |
645.9 |
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587.3 |
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1,330.7 |
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1,404.8 |
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Operating income (loss) from continuing operations |
48.0 |
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(2.8) |
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69.0 |
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2.2 |
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Interest expense |
15.6 |
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16.2 |
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30.1 |
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34.3 |
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Net pension income |
(3.5) |
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(2.6) |
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(7.6) |
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(5.3) |
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Loss on debt extinguishment |
— |
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2.4 |
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— |
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1.8 |
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Earnings (loss) from continuing operations before income taxes and
equity in loss of unconsolidated entity |
35.9 |
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(18.8) |
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46.5 |
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(28.6) |
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Income tax expense (benefit) |
1.3 |
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(4.3) |
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1.8 |
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(5.5) |
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Earnings (loss) from continuing operations before equity in loss of
unconsolidated entity |
34.6 |
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(14.5) |
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44.7 |
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(23.1) |
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Equity in loss of unconsolidated entity |
0.2 |
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0.5 |
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0.1 |
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0.5 |
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Net earnings (loss) from continuing operations |
34.4 |
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(15.0) |
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44.6 |
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(23.6) |
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Loss from discontinued operations, net of tax |
— |
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(8.7) |
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— |
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(12.5) |
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Net earnings (loss) |
34.4 |
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(23.7) |
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44.6 |
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(36.1) |
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Less: net loss attributable to noncontrolling interests |
— |
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(0.2) |
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— |
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(0.2) |
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Net earnings (loss) attributable to Quad common
shareholders |
$ |
34.4 |
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$ |
(23.5) |
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$ |
44.6 |
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$ |
(35.9) |
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See accompanying Notes to Condensed Consolidated Financial
Statements (Unaudited).
QUAD/GRAPHICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(continued)
(in millions, except per share data)
(UNAUDITED)
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Three Months Ended June 30, |
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Six Months Ended June 30, |
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2021 |
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2020 |
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2021 |
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2020 |
Earnings (loss) per share attributable to Quad common
shareholders |
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Basic: |
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Continuing operations |
$ |
0.67 |
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$ |
(0.29) |
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$ |
0.87 |
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$ |
(0.46) |
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Discontinued operations |
— |
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(0.17) |
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— |
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(0.25) |
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Basic earnings (loss) per share attributable to Quad common
shareholders |
$ |
0.67 |
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$ |
(0.46) |
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$ |
0.87 |
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$ |
(0.71) |
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Diluted: |
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Continuing operations |
$ |
0.66 |
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$ |
(0.29) |
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$ |
0.85 |
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$ |
(0.46) |
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Discontinued operations |
— |
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(0.17) |
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— |
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(0.25) |
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Diluted earnings (loss) per share attributable to Quad common
shareholders |
$ |
0.66 |
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$ |
(0.46) |
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$ |
0.85 |
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$ |
(0.71) |
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Weighted average number of common shares outstanding |
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Basic |
51.3 |
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50.7 |
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51.3 |
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50.6 |
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Diluted |
52.5 |
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50.7 |
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52.7 |
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50.6 |
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See accompanying Notes to Condensed Consolidated Financial
Statements (Unaudited).
QUAD/GRAPHICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(LOSS)
(in millions)
(UNAUDITED)
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Three Months Ended June 30, |
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Six Months Ended June 30, |
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2021 |
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2020 |
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2021 |
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2020 |
Net earnings (loss) |
$ |
34.4 |
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$ |
(23.7) |
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$ |
44.6 |
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$ |
(36.1) |
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Other comprehensive income (loss) |
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Translation adjustments |
2.2 |
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2.1 |
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(3.8) |
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(13.2) |
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Interest rate swap adjustments |
1.8 |
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— |
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3.6 |
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(11.1) |
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Pension benefit plan adjustments |
0.7 |
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— |
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0.7 |
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— |
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Other comprehensive income (loss), before tax |
4.7 |
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2.1 |
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0.5 |
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(24.3) |
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Income tax impact related to items of other comprehensive income
(loss) |
— |
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— |
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— |
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2.8 |
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Other comprehensive income (loss), net of tax |
4.7 |
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2.1 |
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0.5 |
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(21.5) |
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Total comprehensive income (loss) |
39.1 |
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(21.6) |
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45.1 |
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(57.6) |
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Less: comprehensive income (loss) attributable to noncontrolling
interests |
— |
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(0.2) |
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— |
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(0.2) |
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Comprehensive income (loss) attributable to Quad common
shareholders |
$ |
39.1 |
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$ |
(21.4) |
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$ |
45.1 |
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$ |
(57.4) |
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See accompanying Notes to Condensed Consolidated Financial
Statements (Unaudited).
QUAD/GRAPHICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions)
(UNAUDITED)
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June 30,
2021 |
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December 31,
2020 |
ASSETS |
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Cash and cash equivalents |
$ |
98.3 |
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$ |
55.2 |
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Receivables, less allowance for credit
losses of $31.1 million at June 30,
2021, and $33.8 million at December 31,
2020
|
323.8 |
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399.1 |
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Inventories |
168.6 |
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170.2 |
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Prepaid expenses and other current assets |
36.0 |
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54.7 |
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Total current assets |
626.7 |
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679.2 |
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Property, plant and equipment—net |
831.6 |
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884.2 |
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Operating lease right-of-use assets—net |
80.1 |
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81.0 |
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Goodwill |
86.4 |
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103.0 |
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Other intangible assets—net |
88.9 |
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104.3 |
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Equity method investment in unconsolidated entity |
2.6 |
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2.6 |
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Other long-term assets |
72.8 |
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73.4 |
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Total assets |
$ |
1,789.1 |
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$ |
1,927.7 |
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LIABILITIES AND SHAREHOLDERS’ EQUITY |
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Accounts payable |
$ |
313.7 |
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$ |
320.0 |
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Other current liabilities |
226.0 |
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310.8 |
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Short-term debt and current portion of long-term debt |
257.7 |
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20.7 |
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Current portion of finance lease obligations |
2.7 |
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2.8 |
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Current portion of operating lease obligations |
26.6 |
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28.4 |
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Total current liabilities |
826.7 |
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682.7 |
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Long-term debt |
589.0 |
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902.7 |
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Finance lease obligations |
1.7 |
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2.0 |
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Operating lease obligations |
55.5 |
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54.5 |
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Deferred income taxes |
7.4 |
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4.2 |
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Other long-term liabilities |
176.7 |
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196.8 |
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Total liabilities |
1,657.0 |
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1,842.9 |
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Commitments and contingencies (Note 10) |
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Shareholders’ equity |
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Preferred stock |
— |
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— |
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Common stock, Class A |
1.0 |
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1.0 |
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Common stock, Class B |
0.4 |
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0.4 |
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Common stock, Class C |
— |
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— |
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Additional paid-in capital |
836.4 |
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833.1 |
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Treasury stock, at cost |
(13.6) |
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(13.1) |
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Accumulated deficit |
(521.3) |
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(566.0) |
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Accumulated other comprehensive loss |
(170.8) |
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(171.3) |
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Quad’s shareholders’ equity |
132.1 |
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84.1 |
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Noncontrolling interests |
— |
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0.7 |
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Total shareholders’ equity and noncontrolling interests |
132.1 |
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|
84.8 |
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Total liabilities and shareholders’ equity |
$ |
1,789.1 |
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$ |
1,927.7 |
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See accompanying Notes to Condensed Consolidated Financial
Statements (Unaudited).
QUAD/GRAPHICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(UNAUDITED)
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Six Months Ended June 30, |
|
2021 |
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2020 |
OPERATING ACTIVITIES |
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Net earnings (loss) |
$ |
44.6 |
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$ |
(36.1) |
|
Adjustments to reconcile net earnings (loss) to net cash provided
by operating activities: |
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Depreciation and amortization |
80.6 |
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94.1 |
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Impairment charges |
1.7 |
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15.5 |
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Settlement loss on pension plans |
0.6 |
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— |
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Amortization of debt issuance costs and original issue
discount |
1.4 |
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1.3 |
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Loss on debt extinguishment |
— |
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1.8 |
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Stock-based compensation |
4.7 |
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5.6 |
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Gain on the sale or disposal of property, plant and
equipment |
(23.3) |
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(0.9) |
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(Gain) loss on the sale of businesses |
(20.9) |
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2.9 |
|
Deferred income taxes |
2.1 |
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6.8 |
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Equity in loss of unconsolidated entity |
0.1 |
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0.5 |
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Changes in operating assets and liabilities—net of acquisitions and
divestitures |
(2.7) |
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(24.3) |
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Net cash provided by operating activities |
88.9 |
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67.2 |
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INVESTING ACTIVITIES |
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Purchases of property, plant and equipment |
(27.2) |
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(38.0) |
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Cost investment in unconsolidated entities |
(0.7) |
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— |
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Proceeds from the sale of property, plant and equipment |
35.0 |
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4.0 |
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Proceeds from the sale of businesses |
39.0 |
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40.1 |
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Acquisition of businesses—net of cash acquired |
— |
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(1.8) |
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Other investing activities |
(0.2) |
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|
1.8 |
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Net cash provided by investing activities |
45.9 |
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6.1 |
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FINANCING ACTIVITIES |
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Proceeds from issuance of long-term debt |
— |
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|
0.1 |
|
Payments of long-term debt |
(83.0) |
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|
(56.3) |
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Payments of finance lease obligations |
(1.6) |
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|
(5.1) |
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Borrowings on revolving credit facilities |
120.1 |
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|
311.7 |
|
Payments on revolving credit facilities |
(114.5) |
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|
(312.4) |
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Payments of debt issuance costs and financing fees |
— |
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(2.7) |
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Changes in ownership of noncontrolling interests |
(1.9) |
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(6.4) |
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Equity awards redeemed to pay employees’ tax
obligations |
(1.1) |
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(1.0) |
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Payment of cash dividends |
(1.4) |
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|
(9.5) |
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Other financing activities |
(8.1) |
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|
0.1 |
|
Net cash used in financing activities |
(91.5) |
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|
(81.5) |
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Effect of exchange rates on cash and cash equivalents |
(0.2) |
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(0.3) |
|
Net increase (decrease) in cash and cash equivalents |
43.1 |
|
|
(8.5) |
|
Cash and cash equivalents at beginning of period |
55.2 |
|
|
78.7 |
|
Cash and cash equivalents at end of period |
$ |
98.3 |
|
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$ |
70.2 |
|
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|
See accompanying Notes to Condensed Consolidated Financial
Statements (Unaudited).
QUAD/GRAPHICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’
EQUITY
AND NONCONTROLLING INTERESTS
(in millions)
(UNAUDITED)
Condensed Consolidated Statement of Shareholders’ Equity For the
Six Months Ended June 30, 2021
|
|
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|
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|
|
|
|
|
|
|
|
Common Stock |
|
Additional
Paid-in
Capital |
|
Treasury Stock |
|
Accumulated
Deficit |
|
Accumulated
Other
Comprehensive
Loss |
|
Quad’s
Shareholders’
Equity |
|
Noncontrolling
Interests |
|
|
|
|
Shares |
|
Amount |
|
|
Shares |
|
Amount |
|
|
|
|
|
Balance at December 31, 2020 |
|
54.4 |
|
|
$ |
1.4 |
|
|
$ |
833.1 |
|
|
(0.8) |
|
|
$ |
(13.1) |
|
|
$ |
(566.0) |
|
|
$ |
(171.3) |
|
|
$ |
84.1 |
|
|
$ |
0.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
10.2 |
|
|
— |
|
|
10.2 |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(6.0) |
|
|
(6.0) |
|
|
— |
|
|
|
Interest rate swap adjustments, net of tax |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
1.8 |
|
|
1.8 |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation |
|
— |
|
|
— |
|
|
3.0 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
3.0 |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
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|
|
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|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of share-based awards, net of other activity |
|
1.3 |
|
|
— |
|
|
(0.6) |
|
|
— |
|
|
1.0 |
|
|
— |
|
|
— |
|
|
0.4 |
|
|
— |
|
|
|
Awards redeemed to pay employees’ tax obligations |
|
— |
|
|
— |
|
|
— |
|
|
(0.2) |
|
|
(1.1) |
|
|
— |
|
|
— |
|
|
(1.1) |
|
|
— |
|
|
|
Balance at March 31, 2021 |
|
55.7 |
|
|
$ |
1.4 |
|
|
$ |
835.5 |
|
|
(1.0) |
|
|
$ |
(13.2) |
|
|
$ |
(555.8) |
|
|
$ |
(175.5) |
|
|
$ |
92.4 |
|
|
$ |
0.7 |
|
|
|
Net earnings |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
34.4 |
|
|
— |
|
|
34.4 |
|
|
— |
|
|
|
Change in ownership of noncontrolling interests |
|
— |
|
|
— |
|
|
(1.1) |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(1.1) |
|
|
(0.7) |
|
|
|
Foreign currency translation adjustments |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
2.2 |
|
|
2.2 |
|
|
— |
|
|
|
Interest rate swap adjustments, net of tax |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
1.8 |
|
|
1.8 |
|
|
— |
|
|
|
Pension benefit plan liability adjustments, net of tax |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
0.7 |
|
|
0.7 |
|
|
— |
|
|
|
Cash dividends declared |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
0.1 |
|
|
— |
|
|
0.1 |
|
|
— |
|
|
|
Stock-based compensation |
|
— |
|
|
— |
|
|
1.6 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
1.6 |
|
|
— |
|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of share-based awards, net of other activity |
|
— |
|
|
— |
|
|
0.4 |
|
|
(0.1) |
|
|
(0.4) |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2021 |
|
55.7 |
|
|
$ |
1.4 |
|
|
$ |
836.4 |
|
|
(1.1) |
|
|
$ |
(13.6) |
|
|
$ |
(521.3) |
|
|
$ |
(170.8) |
|
|
$ |
132.1 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
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|
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|
|
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidated Statement of Shareholders’ Equity For the
Six Months Ended June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
Additional
Paid-in
Capital |
|
Treasury Stock |
|
Accumulated
Deficit |
|
Accumulated
Other
Comprehensive
Loss |
|
Quad’s
Shareholders’
Equity |
|
Noncontrolling
Interests |
|
|
|
|
Shares |
|
Amount |
|
|
Shares |
|
Amount |
|
|
|
|
|
Balance at December 31, 2019 |
|
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 |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(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 |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(12.4) |
|
|
— |
|
|
(12.4) |
|
|
— |
|
|
|
Change in ownership of noncontrolling interests |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
0.1 |
|
|
|
Foreign currency translation adjustments |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(15.3) |
|
|
(15.3) |
|
|
— |
|
|
|
Interest rate swap adjustments, net of tax |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(8.3) |
|
|
(8.3) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared ($0.15 per common share)
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(7.9) |
|
|
— |
|
|
(7.9) |
|
|
— |
|
|
|
Stock-based compensation |
|
— |
|
|
— |
|
|
3.1 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
3.1 |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of share-based awards, net of other activity |
|
0.1 |
|
|
— |
|
|
(19.8) |
|
|
1.1 |
|
|
19.8 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
Awards redeemed to pay employees’ tax obligations |
|
— |
|
|
— |
|
|
— |
|
|
(0.2) |
|
|
(1.0) |
|
|
— |
|
|
— |
|
|
(1.0) |
|
|
— |
|
|
|
Balance at March 31, 2020 |
|
54.4 |
|
|
$ |
1.4 |
|
|
$ |
830.7 |
|
|
(0.7) |
|
|
$ |
(12.7) |
|
|
$ |
(450.1) |
|
|
$ |
(190.8) |
|
|
$ |
178.5 |
|
|
$ |
17.8 |
|
|
|
Net loss |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(23.5) |
|
|
— |
|
|
(23.5) |
|
|
(0.2) |
|
|
|
Change in ownership of noncontrolling interests |
|
— |
|
|
— |
|
|
(5.4) |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(5.4) |
|
|
(16.9) |
|
|
|
Foreign currency translation adjustments |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
2.1 |
|
|
2.1 |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation |
|
— |
|
|
— |
|
|
2.7 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
2.7 |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of share-based awards, net of other activity |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(0.2) |
|
|
— |
|
|
— |
|
|
(0.2) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2020 |
|
54.4 |
|
|
$ |
1.4 |
|
|
$ |
828.0 |
|
|
(0.7) |
|
|
$ |
(12.9) |
|
|
$ |
(473.6) |
|
|
$ |
(188.7) |
|
|
$ |
154.2 |
|
|
$ |
0.7 |
|
|
|
|
|
|
|
|
|
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|
See accompanying Notes to Condensed Consolidated Financial
Statements (Unaudited).
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30,
2021
(In millions, except share and per share data and unless otherwise
indicated)
Note 1. Basis of Presentation
The accompanying unaudited condensed consolidated financial
statements for Quad/Graphics, Inc. and its subsidiaries (the
“Company” or “Quad”) have been prepared by the Company pursuant to
the rules and regulations for interim financial information of the
United States Securities and Exchange Commission (“SEC”). Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles
generally accepted in the United States of America (“GAAP”) have
been omitted pursuant to such SEC rules and regulations. These
unaudited condensed consolidated financial statements should be
read in conjunction with the audited consolidated annual financial
statements as of and for the year ended December 31, 2020, and
notes thereto included in the Company’s latest Annual Report on
Form 10-K filed with the SEC on February 24,
2021.
The Company is subject to seasonality in its quarterly results as
net sales and operating income are higher in the third and fourth
quarters of the calendar year as compared to the first and second
quarters. The fourth quarter is typically the highest seasonal
quarter for cash flows from operating activities due to the
reduction of working capital requirements that reach peak levels
during the third quarter. Seasonality is driven by increased
magazine advertising page counts, retail inserts and catalogs
primarily due to back-to-school and holiday-related advertising and
promotions. The Company expects this seasonality impact to continue
in future years.
The financial information contained herein reflects all
adjustments, in the opinion of management, necessary for a fair
presentation of the Company’s results of operations for the three
and six months ended June 30, 2021 and 2020. All of these
adjustments are of a normal recurring nature, except as otherwise
noted. All intercompany transactions have been eliminated in
consolidation. These unaudited condensed consolidated financial
statements include estimates and assumptions of management that
affect the amounts reported in the condensed consolidated financial
statements. Actual results could differ from these
estimates.
Discontinued Operations -
The results of operations of the Company’s Book business are
reported as discontinued operations for the three and six months
ended June 30, 2020, in accordance with Accounting Standards
Codification (“ASC”) 205-20 —
Discontinued Operations.
The sale of the Book business was completed during 2020. The
financial information pertaining to discontinued operations has
been excluded from all relevant notes to the consolidated financial
statements, unless otherwise noted. See all required
disclosures and further information in Note 4, “Discontinued
Operations” for information about the Company’s sale of its
Book business.
Coronavirus (“COVID-19”) Pandemic Impacts and Response -
The COVID-19 pandemic has had, 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. The Company also
amended its Senior Secured Credit Facility during the second
quarter of 2020 to provide for certain financial covenant relief
through the fiscal quarter ending September 30, 2021. The
Company is continuing to evaluate its cost structure and may
implement additional cost reduction measures as necessary. As the
pandemic continues, and new variants emerge, 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.
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30,
2021
(In millions, except share and per share data and unless otherwise
indicated)
Note 2.
Revenue Recognition
Revenue Disaggregation
The following table provides information about disaggregated
revenue by the Company’s operating segments and major products and
services offerings for the three and six months ended June 30,
2021 and 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States Print
and Related Services |
|
International |
|
Total |
Three months ended June 30, 2021 |
|
|
|
|
|
Catalog, publications, retail inserts, and directories |
$ |
299.8 |
|
|
$ |
59.0 |
|
|
$ |
358.8 |
|
Direct mail and other printed products |
131.4 |
|
|
19.0 |
|
|
150.4 |
|
Other |
2.1 |
|
|
0.3 |
|
|
2.4 |
|
Total products |
433.3 |
|
|
78.3 |
|
|
511.6 |
|
Logistics services |
93.6 |
|
|
4.3 |
|
|
97.9 |
|
Imaging, marketing services and other services |
84.0 |
|
|
0.4 |
|
|
84.4 |
|
Total services |
177.6 |
|
|
4.7 |
|
|
182.3 |
|
Total net sales |
$ |
610.9 |
|
|
$ |
83.0 |
|
|
$ |
693.9 |
|
|
|
|
|
|
|
Three months ended June 30, 2020 |
|
|
|
|
|
Catalog, publications, retail inserts, and directories |
$ |
285.8 |
|
|
$ |
44.2 |
|
|
$ |
330.0 |
|
Direct mail and other printed products |
106.5 |
|
|
10.3 |
|
|
116.8 |
|
Other |
0.7 |
|
|
0.2 |
|
|
0.9 |
|
Total products |
393.0 |
|
|
54.7 |
|
|
447.7 |
|
Logistics services |
61.7 |
|
|
3.3 |
|
|
65.0 |
|
Imaging, marketing services and other services |
71.8 |
|
|
— |
|
|
71.8 |
|
Total services |
133.5 |
|
|
3.3 |
|
|
136.8 |
|
Total net sales |
$ |
526.5 |
|
|
$ |
58.0 |
|
|
$ |
584.5 |
|
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30,
2021
(In millions, except share and per share data and unless otherwise
indicated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States Print
and Related Services |
|
International |
|
Total |
Six months ended June 30, 2021 |
|
|
|
|
|
Catalog, publications, retail inserts, and directories |
$ |
629.5 |
|
|
$ |
108.0 |
|
|
$ |
737.5 |
|
Direct mail and other printed products |
260.4 |
|
|
35.8 |
|
|
296.2 |
|
Other |
3.3 |
|
|
0.6 |
|
|
3.9 |
|
Total products |
893.2 |
|
|
144.4 |
|
|
1,037.6 |
|
Logistics services |
186.3 |
|
|
9.4 |
|
|
195.7 |
|
Imaging, marketing services and other services |
166.0 |
|
|
0.4 |
|
|
166.4 |
|
Total services |
352.3 |
|
|
9.8 |
|
|
362.1 |
|
Total net sales |
$ |
1,245.5 |
|
|
$ |
154.2 |
|
|
$ |
1,399.7 |
|
|
|
|
|
|
|
Six months ended June 30, 2020 |
|
|
|
|
|
Catalog, publications, retail inserts, and directories |
$ |
697.9 |
|
|
$ |
108.9 |
|
|
$ |
806.8 |
|
Direct mail and other printed products |
256.9 |
|
|
26.7 |
|
|
283.6 |
|
Other |
1.8 |
|
|
0.5 |
|
|
2.3 |
|
Total products |
956.6 |
|
|
136.1 |
|
|
1,092.7 |
|
Logistics services |
151.7 |
|
|
7.7 |
|
|
159.4 |
|
Imaging, marketing services and other services |
154.8 |
|
|
0.1 |
|
|
154.9 |
|
Total services |
306.5 |
|
|
7.8 |
|
|
314.3 |
|
Total net sales |
$ |
1,263.1 |
|
|
$ |
143.9 |
|
|
$ |
1,407.0 |
|
Nature of Products and Services
The Company recognizes its products and services revenue based on
when the transfer of control passes to the client or when the
service is completed and accepted by the client.
The products offering is predominantly comprised of the Company’s
print operations which includes retail inserts, publications,
journals, direct mail, directories, in-store marketing and
promotion, packaging, newspapers, custom print products, other
commercial and specialty printed products and global paper
procurement.
The Company considers its logistic operations as services, which
include the delivery of printed material. The Services offering
also includes revenues related to the Company’s imaging operations,
which include digital content management, photography, color
services, page production, marketing services, media planning and
placement, facilities management and medical services.
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30,
2021
(In millions, except share and per share data and unless otherwise
indicated)
Costs to Obtain Contracts
In accordance with ASC 606 —
Revenue from Contracts with Customers,
the Company capitalizes certain sales incentives of the sales
compensation packages for costs that are directly attributed to
being awarded a client contract or renewal and would not have been
incurred had the contract not been obtained. The Company also
defers certain contract acquisition costs paid to the client at
contract inception. Costs to obtain contracts with a duration of
less than one year are expensed as incurred. For all contract costs
with contracts over one year, the Company amortizes the costs to
obtain contracts on a straight-line basis over the estimated life
of the contract and reviews quarterly for impairment.
Activity impacting costs to obtain contracts for the six months
ended June 30, 2021, was as follows:
|
|
|
|
|
|
|
Costs to Obtain Contracts |
Balance at December 31, 2020 |
$ |
8.7 |
|
Costs to obtain contracts |
— |
|
Amortization of costs to obtain contracts |
(1.7) |
|
Balance at June 30, 2021 |
$ |
7.0 |
|
Note 3.
Strategic Investments
Changes of Ownership in Rise Interactive
On June 15, 2020, the Company purchased units of equity in
Rise Interactive Media & Analytics, LLC (“Rise”) from a
previous holder in the form of a $15.9 million note payable
paid in full on October 1, 2020, and $1.0 million cash
paid on June 15, 2020. In addition, on June 15, 2020, Rise
purchased and retired units of equity from previous holders of Rise
for $5.4 million in cash. These transactions resulted in the
Company’s ownership interest to change from 57% to 99%. On
April 30, 2021, Rise purchased and retired units of equity
from previous holders of Rise for $1.9 million in cash. This
transaction resulted in the Company’s ownership interest to change
from 99% to 100%. The Company began consolidating the results of
Rise in the Company’s condensed consolidated financial statements
when its equity ownership increased to 57% on March 14, 2018.
The portion of Rise’s operating results not owned by the Company of
43% through June 15, 2020 and of 1% from June 15, 2020 through
April 30, 2021, was recorded as net earnings (loss) attributable to
noncontrolling interests on the condensed consolidated statement of
operations. The portion of net assets not owned by the Company was
recorded as noncontrolling interests as of the December 31, 2020
condensed consolidated balance sheet.
Note 4.
Discontinued Operations
During the third quarter of 2019, the Company made a decision to
sell its United States Book business as a part of an ongoing
process to review its business portfolio and divest assets not core
to the Company’s transformation strategy. Accordingly, the Company
has classified the Book business as a discontinued operation, as
required by ASC 205-20 —
Discontinued Operations.
The Book business primarily consists of three facilities:
Versailles, Kentucky; Fairfield, Pennsylvania; and Martinsburg,
West Virginia. The Company’s Book business has historically been
included within the United States Print and Related Services
segment and the Core Print and Related Services reporting
unit.
On July 1, 2020, the Company completed the sale of its
Versailles, Kentucky book manufacturing plant to CJK Group, Inc.,
which serves book, magazine, catalog and journal publishers, for
$7.0 million in cash and the assumption of approximately
$3.0 million in finance lease obligation, resulting in a
$10.1 million impairment charge related to property, plant and
equipment and a $3.0 million gain on the sale of the business
during the year ended December 31, 2020. The Company used the
proceeds from the sale to reduce debt.
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30,
2021
(In millions, except share and per share data and unless otherwise
indicated)
On October 31, 2020, the Company completed the sale of its
Fairfield, Pennsylvania and Martinsburg, West Virginia book
manufacturing plants to Berryville Graphics, a division of
Bertelsmann Printing Group USA, a media, services and education
company, for $14.2 million in cash, resulting in a loss on the
sale of the business of $3.5 million and a $1.4 million
impairment charge related to property plant and equipment during
the year ended December 31, 2020. The Company used the
proceeds from the sale to reduce debt. This sale was the final step
in the previously announced strategic decision to divest the
Company’s Book business to optimize its product
portfolio.
The following table summarizes the results of operations, which are
included in the loss from discontinued operations in the condensed
consolidated statements of operations for the three and six months
ended June 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2020 |
|
|
|
Six Months Ended June 30, 2020 |
Total net sales |
|
|
$ |
21.3 |
|
|
|
|
$ |
61.6 |
|
Total cost of sales, excluding depreciation and
amortization |
|
|
22.0 |
|
|
|
|
63.1 |
|
Selling, general and administrative expenses |
|
|
1.1 |
|
|
|
|
3.0 |
|
|
|
|
|
|
|
|
|
Restructuring, impairment and transaction-related charges
(1)
|
|
|
10.3 |
|
|
|
|
12.5 |
|
|
|
|
|
|
|
|
|
Other expenses, net |
|
|
0.1 |
|
|
|
|
0.1 |
|
Loss from discontinued operations before income taxes |
|
|
(12.2) |
|
|
|
|
(17.1) |
|
Income tax benefit |
|
|
(3.5) |
|
|
|
|
(4.6) |
|
Loss from discontinued operations, net of tax |
|
|
$ |
(8.7) |
|
|
|
|
$ |
(12.5) |
|
______________________________
(1)The
Company recognized $10.0 million and $11.3 million of impairment
charges for tangible property, plant and equipment during the three
and six months ended June 30, 2020, respectively, to reduce
the carrying value of the Book business to its fair
value.
The condensed consolidated statement of cash flows for the six
months ended June 30, 2020 has not been adjusted to separately
disclose cash flows related to discontinued operations. Cash flows
related to the discontinued Book business during the six months
ended June 30, 2020, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2020 |
Cash flows provided by operating activities |
|
|
$ |
0.4 |
|
Cash flows used in investing activities |
|
|
(1.6) |
|
Note 5. Restructuring, Impairment and Transaction-Related
Charges
The Company recorded restructuring, impairment and
transaction-related charges for the three and six months ended
June 30, 2021 and 2020, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
|
2021 |
|
2020 |
|
2021 |
|
2020 |
Employee termination charges |
$ |
2.8 |
|
|
$ |
9.5 |
|
|
$ |
7.5 |
|
|
$ |
22.1 |
|
Impairment charges |
0.9 |
|
|
1.7 |
|
|
1.7 |
|
|
4.2 |
|
Transaction-related charges |
0.2 |
|
|
0.3 |
|
|
0.4 |
|
|
0.8 |
|
Integration costs |
— |
|
|
0.4 |
|
|
— |
|
|
1.1 |
|
Other restructuring charges (income) |
(17.3) |
|
|
4.5 |
|
|
(20.4) |
|
|
11.0 |
|
Total |
$ |
(13.4) |
|
|
$ |
16.4 |
|
|
$ |
(10.8) |
|
|
$ |
39.2 |
|
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30,
2021
(In millions, except share and per share data and unless otherwise
indicated)
The costs related to these activities have been recorded in the
condensed consolidated statements of operations as restructuring,
impairment and transaction-related charges. See Note 20,
“Segment Information,” for restructuring, impairment and
transaction-related charges by segment.
Restructuring Charges
The Company began a restructuring program in 2010 related to
eliminating excess manufacturing capacity and properly aligning its
cost structure and has since announced a total of 50 plant
closures through June 30, 2021. The Company classifies the
following charges as restructuring:
•Employee
termination charges
are incurred when the Company reduces its workforce through
separation programs and facility consolidations.
•Integration
costs
are incurred primarily for the integration of acquired companies
(see Note 3, “Strategic Investments,” for descriptions of the
Company’s recent acquisitions and strategic
investments).
•Other
restructuring charges (income)
are presented net of the gains on the sale of facilities and a
business, including a gain on the sale of the Riverside, California
facility during the first quarter of 2021 and gains on the sale of
other facilities during the second quarter of 2021. A gain on the
sale of the Shakopee, Minnesota facility was recorded during the
first quarter of 2020. The Company also recognized a
$20.9 million gain on the sale of a business during the second
quarter of 2021 and a $2.9 million loss on the sale of a business
during the first quarter of 2020, which are included within other
restructuring activities below. The components of other
restructuring charges (income) consisted of the following during
the three and six months ended June 30, 2021 and
2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
|
2021 |
|
2020 |
|
2021 |
|
2020 |
Vacant facility carrying costs and lease exit charges |
$ |
6.3 |
|
|
$ |
2.4 |
|
|
$ |
10.2 |
|
|
$ |
5.1 |
|
Equipment and infrastructure removal costs |
0.2 |
|
|
0.4 |
|
|
1.0 |
|
|
1.0 |
|
Gains on the sale of facilities |
(2.3) |
|
|
— |
|
|
(10.1) |
|
|
(0.8) |
|
Other restructuring activities |
(21.5) |
|
|
1.7 |
|
|
(21.5) |
|
|
5.7 |
|
Other restructuring charges (income) |
$ |
(17.3) |
|
|
$ |
4.5 |
|
|
$ |
(20.4) |
|
|
$ |
11.0 |
|
The restructuring charges recorded were based on plans that have
been committed to by management and were, in part, based upon
management’s best estimates of future events. Changes to the
estimates may require future restructuring charges and adjustments
to the restructuring liabilities. The Company expects to incur
additional restructuring charges related to these and other
initiatives.
Impairment Charges
The Company recognized impairment charges of $0.9 million and $1.7
million during the three and six months ended June 30, 2021,
respectively, and $1.7 million and $4.2 million during
the three and six months ended June 30, 2020, respectively.
The impairment charges were primarily for machinery and equipment
no longer being utilized in production as a result of facility
consolidations, as well as other capacity reduction restructuring
activities.
The fair values of the impaired assets were determined by the
Company to be Level 3 under the fair value hierarchy (see
Note 13, “Financial Instruments and Fair Value Measurements,”
for the definition of Level 3 inputs) and were estimated based
on broker quotes, internal expertise related to current marketplace
conditions and estimated future discounted cash flows. These assets
were adjusted to their estimated fair values at the time of
impairment. If estimated fair values subsequently decline, the
carrying values of the assets are adjusted
accordingly.
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30,
2021
(In millions, except share and per share data and unless otherwise
indicated)
Transaction-Related Charges
The Company incurs transaction-related charges primarily consisting
of professional service fees related to business acquisition and
divestiture activities. Transaction-related charges of $0.2 million
and $0.4 million were recorded during the three and six months
ended June 30, 2021, respectively, and $0.3 million and
$0.8 million were recorded during the three and six months
ended June 30, 2020, respectively.
Restructuring Reserves
Activity impacting the Company’s restructuring reserves for the six
months ended June 30, 2021, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
Termination
Charges |
|
Impairment
Charges |
|
Transaction-Related
Charges |
|
|
|
Other
Restructuring
Charges |
|
Total |
Balance at December 31, 2020 |
$ |
14.6 |
|
|
$ |
— |
|
|
$ |
0.5 |
|
|
|
|
$ |
25.8 |
|
|
$ |
40.9 |
|
Expense (income), net |
7.5 |
|
|
1.7 |
|
|
0.4 |
|
|
|
|
(20.4) |
|
|
(10.8) |
|
Cash payments, net |
(12.6) |
|
|
— |
|
|
(0.4) |
|
|
|
|
(1.7) |
|
|
(14.7) |
|
Non-cash adjustments/reclassifications and translation |
(0.6) |
|
|
(1.7) |
|
|
— |
|
|
|
|
16.9 |
|
|
14.6 |
|
Balance at June 30, 2021 |
$ |
8.9 |
|
|
$ |
— |
|
|
$ |
0.5 |
|
|
|
|
$ |
20.6 |
|
|
$ |
30.0 |
|
The Company’s restructuring reserves at June 30, 2021,
included a short-term and a long-term component. The short-term
portion included $21.9 million in other current liabilities
(see Note 14, “Other Current and Long-Term Liabilities”) and
$1.2 million in accounts payable in the condensed consolidated
balance sheets as the Company expects these reserves to be paid
within the next twelve months. The long-term portion of
$6.9 million is included in other long-term liabilities (see
Note 14, “Other Current and Long-Term Liabilities”) in the
condensed consolidated balance sheets.
Note 6. Goodwill and Other Intangible Assets
Goodwill
Goodwill represents the excess of the purchase price over the fair
value of identifiable net assets acquired in a business
combination. Goodwill is assigned to specific reporting units and
is tested annually for impairment as of October 31 or more
frequently if events or changes in circumstances indicate that it
is more likely than not that the fair value of a reporting unit is
below its carrying value. Due to the Company’s decision to sell its
third-party logistics business on June 30, 2021, an interim
goodwill impairment test was required to be completed on the
remaining goodwill in the Core Print and Related Services reporting
unit.
Goodwill included in the carrying amount of the third-party
logistics business sold of $16.6 million was based on the relative
fair values of the third-party logistics business and the portion
of the Core Print and Related Services reporting unit retained. In
addition, when only a portion of goodwill is allocated to a
business to be sold, the goodwill remaining in the portion of the
reporting unit to be retained of $86.4 million must be tested for
impairment.
Fair value was determined using an equal weighting of both the
income and market approaches. Under the income approach, the
Company determined fair value based on estimated future cash flows
discounted by an estimated weighted-average cost of capital, which
reflects the overall level of inherent risk and the rate of return
an outside investor would expect to earn. Under the market
approach, the Company derived the fair value of the reporting units
based on market multiples of comparable publicly-traded companies.
This fair value determination was categorized as Level 3 in
the fair value hierarchy (see Note 13, “Financial
Instruments and Fair Value Measurements,” for the definition of
Level 3 inputs).
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30,
2021
(In millions, except share and per share data and unless otherwise
indicated)
No goodwill impairment was recorded related to the retained portion
of the Core Print and Related Services reporting unit during the
three months ended June 30, 2021. No indicators of impairment were
identified in any of the Company’s other reporting units during the
three and six months ended June 30, 2021.
The accumulated goodwill impairment losses and the carrying value
of goodwill at June 30, 2021, and December 31, 2020, were
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2021 |
|
December 31, 2020 |
|
|
|
|
|
|
|
United States Print and Related Services |
|
International |
|
Total |
|
United States Print and Related Services |
|
International |
|
Total |
|
|
|
|
|
|
Goodwill |
$ |
864.7 |
|
|
$ |
30.0 |
|
|
$ |
894.7 |
|
|
$ |
881.3 |
|
|
$ |
30.0 |
|
|
$ |
911.3 |
|
|
|
|
|
|
|
Accumulated goodwill impairment loss |
(778.3) |
|
|
(30.0) |
|
|
(808.3) |
|
|
(778.3) |
|
|
(30.0) |
|
|
(808.3) |
|
|
|
|
|
|
|
Goodwill, net of accumulated goodwill impairment loss |
$ |
86.4 |
|
|
$ |
— |
|
|
$ |
86.4 |
|
|
$ |
103.0 |
|
|
$ |
— |
|
|
$ |
103.0 |
|
|
|
|
|
|
|
Other Intangible Assets
The components of finite-lived intangible assets at June 30,
2021, and December 31, 2020, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2021 |
|
December 31, 2020 |
|
Weighted
Average
Amortization
Period
(Years) |
|
Gross
Carrying
Amount |
|
Accumulated
Amortization |
|
Net Book
Value |
|
Weighted
Average
Amortization
Period
(Years) |
|
Gross
Carrying
Amount |
|
Accumulated
Amortization |
|
Net Book
Value |
Trademarks, patents, licenses and agreements |
6 |
|
$ |
69.0 |
|
|
$ |
(48.0) |
|
|
$ |
21.0 |
|
|
6 |
|
$ |
69.6 |
|
|
$ |
(44.3) |
|
|
25.3 |
|
Capitalized software |
5 |
|
17.8 |
|
|
(13.0) |
|
|
4.8 |
|
|
5 |
|
17.3 |
|
|
(11.7) |
|
|
5.6 |
|
Acquired Technology |
5 |
|
3.6 |
|
|
(0.8) |
|
|
2.8 |
|
|
5 |
|
3.0 |
|
|
(0.5) |
|
|
2.5 |
|
Customer relationships |
6 |
|
561.0 |
|
|
(500.7) |
|
|
60.3 |
|
|
6 |
|
561.9 |
|
|
(491.0) |
|
|
70.9 |
|
Total |
|
|
$ |
651.4 |
|
|
$ |
(562.5) |
|
|
$ |
88.9 |
|
|
|
|
$ |
651.8 |
|
|
$ |
(547.5) |
|
|
$ |
104.3 |
|
The gross carrying amount and accumulated amortization within other
intangible assets—net in the condensed consolidated balance sheets
at June 30, 2021, and December 31, 2020, differs from the
value originally recorded at acquisition due to impairment charges
recorded in prior years and the effects of currency fluctuations
since the purchase date.
Other intangible assets are evaluated for potential impairment
whenever events or circumstances indicate that the carrying value
may not be recoverable. There were no impairment charges recorded
on finite-lived intangible assets for the three and six months
ended June 30, 2021 and 2020.
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30,
2021
(In millions, except share and per share data and unless otherwise
indicated)
Amortization expense for other intangible assets was $7.5 million
and $16.6 million for the three and six months ended June 30,
2021, respectively, and $9.9 million and $19.8 million for the
three and six months ended June 30, 2020, respectively. The
estimated future amortization expense related to other intangible
assets as of June 30, 2021, was as follows:
|
|
|
|
|
|
|
Amortization Expense |
Remainder of 2021 |
$ |
15.4 |
|
2022 |
30.0 |
|
2023 |
25.8 |
|
2024 |
14.9 |
|
2025 |
2.5 |
|
2026 |
0.3 |
|
Total |
$ |
88.9 |
|
Note 7. Receivables
Prior to granting credit, the Company evaluates each client in an
underwriting process, taking into consideration the prospective
client’s financial condition, past payment experience, credit
bureau information and other financial and qualitative factors that
may affect the client’s ability to pay. Specific credit reviews and
standard industry credit scoring models are used in performing this
evaluation. Clients’ financial condition is continuously monitored
as part of the normal course of business. Some of the Company’s
clients are highly leveraged or otherwise subject to their own
operating and regulatory risks.
Specific client provisions are made when a review of significant
outstanding amounts, utilizing information about client
creditworthiness, as well as current and future economic trends
based on reasonable forecasts, indicates that collection is
doubtful. The Company also records a general provision based on the
overall risk profile of the receivables and through the assessment
of reasonable economic forecasts. The risk profile is assessed on a
quarterly basis using various methods, including external resources
and credit scoring models. Accounts that are deemed uncollectible
are written off when all reasonable collection efforts have been
exhausted.
The Company has recorded credit loss expense of $0.2 million and
$0.8 million during the three and six months ended June 30,
2021, respectively, and $1.0 million and $6.0 million during the
three and six months ended June 30, 2020, respectively, which
is included in selling, general and administrative expenses in the
condensed consolidated statements of operations.
Activity impacting the allowance for credit losses for the six
months ended June 30, 2021, was as follows:
|
|
|
|
|
|
|
Allowance for Credit Losses |
|
|
|
|
Balance at December 31, 2020 |
$ |
33.8 |
|
Provisions |
0.8 |
|
Write-offs |
(3.2) |
|
|
|
Translation and other |
(0.3) |
|
Balance at June 30, 2021 |
$ |
31.1 |
|
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30,
2021
(In millions, except share and per share data and unless otherwise
indicated)
Note 8. Inventories
The components of inventories at June 30, 2021, and
December 31, 2020, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2021 |
|
December 31,
2020 |
Raw materials and manufacturing supplies |
$ |
103.7 |
|
|
$ |
90.9 |
|
Work in process |
26.8 |
|
|
33.4 |
|
Finished goods |
38.1 |
|
|
45.9 |
|
Total |
$ |
168.6 |
|
|
$ |
170.2 |
|
Note 9. Property, Plant and Equipment
The components of property, plant and equipment at June 30,
2021, and December 31, 2020, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2021 |
|
December 31,
2020 |
Land |
$ |
90.9 |
|
|
$ |
97.6 |
|
Buildings |
775.8 |
|
|
780.3 |
|
Machinery and equipment |
3,086.1 |
|
|
3,094.1 |
|
Other(1)
|
186.8 |
|
|
183.2 |
|
Construction in progress |
14.6 |
|
|
33.0 |
|
Property, plant and equipment—gross |
$ |
4,154.2 |
|
|
$ |
4,188.2 |
|
Less: accumulated depreciation |
(3,322.6) |
|
|
(3,304.0) |
|
Property, plant and equipment—net |
$ |
831.6 |
|
|
$ |
884.2 |
|
______________________________
(1)Other
consists of computer equipment, vehicles, furniture and fixtures,
leasehold improvements and communication-related
equipment.
The Company recorded impairment charges of $0.9 million and $1.7
million during the three and six months ended June 30, 2021,
respectively, and $1.7 million and $4.2 million during the
three and six months ended June 30, 2020, respectively, to
reduce the carrying amounts of certain property, plant and
equipment no longer utilized in production to fair value (see
Note 5, “Restructuring, Impairment and Transaction-Related
Charges,” for further discussion on impairment
charges).
The Company recognized depreciation expense of $31.2 million and
$64.0 million for the three and six months ended June 30,
2021, respectively, and $36.8 million and $74.3 million for
the three and six months ended June 30, 2020,
respectively.
Assets Held for Sale from Continuing Operations
The Company assessed whether certain closed facilities and
facilities where the Company has received a signed letter of intent
to purchase should be classified as held for sale on the condensed
consolidated balance sheets. Assets held for sale are carried at
the lesser of original cost or fair value, less the estimated costs
to sell. There were no assets held for sale as of June 30,
2021, and assets held for sale were $4.9 million as of
December 31, 2020. The fair values were determined by the
Company to be Level 3 under the fair value hierarchy (see
Note 13, “Financial Instruments and Fair Value Measurements,”
for the definition of Level 3 inputs) and were estimated based on
quoted market prices where available and independent appraisals, as
appropriate. Assets held for sale were included in prepaid expenses
and other current assets in the condensed consolidated balance
sheets.
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30,
2021
(In millions, except share and per share data and unless otherwise
indicated)
Gain from Sale and Leaseback
On June 29, 2021, the Company executed a sale and leaseback of its
Chalfont,
Pennsylvania
facility for net proceeds of $20.0 million, which resulted in
a $13.7 million gain. The leaseback is for a term of seven years
and was determined to be an operating lease. The leaseback resulted
in a $10.1 million asset included in the operating lease right
of use assets - net, current operating lease obligation of
$1.0 million and operating lease obligation of
$9.1 million in the condensed consolidated balance sheet as of
June 30, 2021.
Note 10. Commitments and Contingencies
Litigation
The Company is named as a defendant in various lawsuits in which
claims are asserted against the Company in the normal course of
business. The liabilities, if any, which ultimately result from
such lawsuits are not expected by management to have a material
impact on the condensed consolidated financial statements of the
Company.
Environmental Reserves
The Company is subject to various laws, regulations and government
policies relating to health and safety, to the generation, storage,
transportation, and disposal of hazardous substances, and to
environmental protection in general. The Company provides for
expenses associated with environmental remediation obligations when
such amounts are probable and can be reasonably estimated. Such
reserves are adjusted as new information develops or as
circumstances change. The environmental reserves are not
discounted. The Company believes it is in compliance with such
laws, regulations and government policies in all material respects.
Furthermore, the Company does not anticipate that maintaining
compliance with such environmental statutes will have a material
impact upon the Company’s condensed consolidated financial
position.
Note 11. Debt
The components of long-term debt as of June 30, 2021, and
December 31, 2020, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2021 |
|
December 31,
2020 |
Master note and security agreement |
$ |
8.7 |
|
|
$ |
15.6 |
|
Term Loan A |
585.4 |
|
|
657.6 |
|
|
|
|
|
Revolving credit facility |
— |
|
|
— |
|
Senior unsecured notes |
238.7 |
|
|
238.7 |
|
International term loans |
6.9 |
|
|
10.7 |
|
International revolving credit facilities |
10.3 |
|
|
4.9 |
|
Other |
2.2 |
|
|
2.8 |
|
Debt issuance costs |
(5.5) |
|
|
(6.9) |
|
Total debt |
$ |
846.7 |
|
|
$ |
923.4 |
|
Less: short-term debt and current portion of long-term
debt |
(257.7) |
|
|
(20.7) |
|
Long-term debt |
$ |
589.0 |
|
|
$ |
902.7 |
|
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30,
2021
(In millions, except share and per share data and unless otherwise
indicated)
Fair Value of Debt
Based upon the interest rates available to the Company for
borrowings with similar terms and maturities, the fair value of the
Company’s total debt was approximately $0.8 billion and $0.9
billion at June 30, 2021 and December 31, 2020,
respectively. The fair value determination of the Company’s total
debt was categorized as Level 2 in the fair value hierarchy
(see Note 13, “Financial Instruments and Fair Value
Measurements,” for the definition of Level 2
inputs).
Debt Issuance Costs
Activity impacting the Company’s debt issuance costs for the six
months ended June 30, 2021, was as follows:
|
|
|
|
|
|
|
Capitalized Debt
Issuance Costs |
Balance at December 31, 2020 |
$ |
6.9 |
|
Amortization of debt issuance costs |
(1.4) |
|
Balance at June 30, 2021 |
$ |
5.5 |
|
Loss on Debt Extinguishment
During the six months ended June 30, 2020, the Company
completed the fourth amendment to the April 28, 2014 Senior Secured
Credit Facility, which resulted in a loss on debt extinguishment
recorded. The Senior Secured Credit Facility was amended to (a)
provide for certain financial covenant relief through the fiscal
quarter 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% London
Interbank Offered Rate (“LIBOR”) floor; and (d) prohibit
repurchases of capital stock and payments of cash dividends during
the Covenant Relief Period. In addition, the Company redeemed $37.6
million of its senior notes under the Master Note and Security
Agreement, at par, which resulted in a loss on debt extinguishment
recorded. The Company also repurchased $4.7 million of its
outstanding unsecured 7.0% senior notes due May 1, 2022 (the
“Senior Unsecured Notes”) in the open market, which resulted in a
gain on debt extinguishment recorded. The loss on debt
extinguishment recorded during the six months ended June 30,
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 |
|
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30,
2021
(In millions, except share and per share data and unless otherwise
indicated)
Covenants and Compliance
The Company’s various lending arrangements include certain
financial covenants (all financial terms, numbers and ratios are as
defined in the Company’s debt agreements, as amended to date).
Among these covenants, the Company was required to maintain the
following as of June 30, 2021:
•Maximum
Total Net Leverage Ratio.
On a rolling twelve-month basis, the Maximum Total Net Leverage
Ratio, defined as consolidated total indebtedness, net of no more
than $75.0 million of unrestricted cash, to consolidated EBITDA,
shall not exceed (i) 4.50 to 1.00 for the quarter ended March 31,
2021, (ii) 4.25 to 1.00 for the quarter ended June 30,
2021, and (iii) 4.125 to 1.00 for the quarter ending
September 30, 2021 (for the twelve months ended June 30,
2021, the Company’s Maximum Total Net Leverage Ratio was 3.03 to
1.00). In 2020, the Company amended its Senior Secured Credit
Facility to provide for certain financial covenant relief during
the Covenant Relief Period. After the Covenant Relief Period, the
Company will be required to comply with the Total Leverage Ratio
covenant, defined as consolidated total indebtedness to
consolidated EBITDA which shall not exceed 3.75 to
1.00.
•If
there is any amount outstanding on the Revolving Credit Facility or
Term Loan A, or if any lender has any revolving credit
exposure or Term Loan A credit exposure, the Company is
required to maintain the following:
◦Senior
Secured Leverage Ratio.
On a rolling twelve-month basis, the Senior Secured Leverage Ratio,
defined as consolidated senior secured net indebtedness to
consolidated EBITDA, shall not exceed 3.50 to 1.00 (for the twelve
months ended June 30, 2021, the Company’s Senior Secured
Leverage Ratio was 2.04 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 June 30, 2021, the Company’s Interest Coverage Ratio was
4.97 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.
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30,
2021
(In millions, except share and per share data and unless otherwise
indicated)
In addition to those covenants, the Senior Secured Credit Facility
also includes certain limitations on acquisitions, indebtedness,
liens, dividends and repurchases of capital stock. 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
June 30, 2021, the Company’s Total Net Leverage Ratio was 2.97
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 June 30, 2021, was 2.97 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
2.04 to 1.00 and the Total Net Leverage Ratio was 2.97 to 1.00, as
of June 30, 2021.
Note 12. Income Taxes
The Company records income tax expense (benefit) on an interim
basis. The estimated effective income tax rate is adjusted
quarterly, and items discrete to a specific quarter and adjustments
to valuation allowances that could result in a reduction to tax
expense or benefit are reflected in income tax expense (benefit)
for that interim period. Tax allocable to continuing operations is
calculated without regard to the tax effects of earnings and losses
allocable to discontinued operations under the incremental
approach.
The effective income tax rate for the interim period can differ
from the statutory tax rate, as it reflects discrete items, such as
changes in the liability for unrecognized tax benefits related to
the establishment and settlement of income tax exposures and
benefits related to share-based compensation.
The Company currently has various open tax audits in multiple
jurisdictions. From time to time, the Company will receive tax
assessments as part of the process. Based on the information
available as of June 30, 2021, the Company has recorded its
best estimate of the potential settlements of these audits. Actual
results could differ from the estimated amounts.
The Company’s liability for unrecognized tax benefits as of
June 30, 2021, was $11.3 million, a decrease of $0.3
million from $11.6 million as of December 31, 2020. The
Company anticipates a $0.1 million decrease to its liability
for unrecognized tax benefits within the next twelve months due to
the resolution of income tax audits or statute
expirations.
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30,
2021
(In millions, except share and per share data and unless otherwise
indicated)
Note 13. Financial Instruments and Fair Value
Measurements
Certain assets and liabilities are required to be recorded at fair
value on a recurring basis, while other assets and liabilities are
recorded at fair value on a nonrecurring basis, generally as a
result of acquisitions or impairment charges. Fair value is
determined based on the exchange price that would be received for
an asset or paid to transfer a liability (an exit price) in the
principal or most advantageous market for the asset or liability in
an orderly transaction between market participants. GAAP also
classifies the inputs used to measure fair value into the following
hierarchy:
Level 1: Quoted prices in active markets for
identical assets or liabilities.
Level 2: Quoted prices in active markets for
similar assets or liabilities, quoted prices for identical or
similar assets or liabilities in markets that are not active, or
inputs other than quoted prices that are observable for the asset
or liability.
Level 3: Unobservable inputs for the asset
or liability. There were no recurring Level 3 fair value
measurements of assets or liabilities as of June 30,
2021.
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 $5.7 million of this balance
to interest expense over the next twelve months.
The key terms of the interest rate swaps are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
March 19, 2019
Interest Rate Swap |
|
February 7, 2017
Interest Rate Swap |
Effective date |
March 29, 2019 |
|
February 28, 2017 |
Termination date |
March 28, 2024 |
|
February 28, 2022 |
Term |
5 years |
|
5 years |
Notional amount |
$130.0 |
|
$250.0 |
|
|
|
|
Fixed swap rate |
2.43% |
|
1.89% |
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|
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|
|
The Company classifies the interest rate swaps as Level 2
because the inputs into the valuation model are observable or can
be derived or corroborated utilizing observable market data at
commonly quoted intervals. The fair value of the interest rate
swaps classified as Level 2 as of June 30, 2021, and
December 31, 2020, were as follows:
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Balance Sheet Location |
|
June 30, 2021 |
|
December 31, 2020 |
Interest rate swap liabilities |
Other current liabilities |
|
$ |
(3.0) |
|
|
$ |
— |
|
Interest rate swap liabilities |
Other long-term liabilities |
|
$ |
(7.1) |
|
|
$ |
(14.4) |
|
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30,
2021
(In millions, except share and per share data and unless otherwise
indicated)
Prior to the Company’s de-designation of the interest rate swaps as
cash flow hedges, the interest rate swaps were considered highly
effective, with no amount of ineffectiveness recorded into
earnings. The changes in the fair value of the interest rate swaps
have been included in other comprehensive loss in the condensed
consolidated statements of comprehensive loss through the first
quarter of 2020, and have been recorded as an adjustment to
interest expense in the condensed consolidated statements of
operations in the periods thereafter. The cash flows associated
with the interest rate swaps have been recognized as an adjustment
to interest expense in the condensed consolidated statements of
operations:
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|
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
|
2021 |
|
2020 |
|
2021 |
|
2020 |
Cash Flow Impacts |
|
|
|
|
|
|
|
Net interest paid |
$ |
1.9 |
|
|
$ |
1.5 |
|
|
$ |
3.7 |
|
|
$ |
1.9 |
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|
|
Impacts with Swaps as Hedging Instruments |
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Loss recognized in other comprehensive loss |
— |
|
|
— |
|
|
— |
|
|
11.1 |
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|
|
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Impacts with Swaps as Nonhedging Instruments |
|
|
|
|
|
|
|
(Income) loss recognized in interest expense excluded from hedge
effectiveness assessments |
(1.7) |
|
|
0.1 |
|
|
(4.4) |
|
|
0.1 |
|
Amounts reclassified out of accumulated other comprehensive loss to
interest expense |
1.8 |
|
|
— |
|
|
3.6 |
|
|
— |
|
Net interest expense |
1.9 |
|
|
1.5 |
|
|
3.7 |
|
|
1.9 |
|
Total impact of swaps to interest expense |
$ |
2.0 |
|
|
$ |
1.6 |
|
|
$ |
2.9 |
|
|
$ |
2.0 |
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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 June 30, 2021.
Natural Gas Forward Contracts
The Company periodically enters into natural gas forward purchase
contracts to hedge against increases in commodity costs. The
Company’s commodity contracts qualified for the exception related
to normal purchases and sales during the three and six months ended
June 30, 2021 and 2020, as the Company takes delivery in the
normal course of business.
Debt
The Company measures fair value on its debt instruments using
interest rates available to the Company for borrowings with similar
terms and maturities and is categorized as Level 2. See
Note 11, “Debt,” for the fair value of the Company’s debt as
of June 30, 2021.
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30,
2021
(In millions, except share and per share data and unless otherwise
indicated)
Nonrecurring Fair Value Measurements
In addition to assets and liabilities that are recorded at fair
value on a recurring basis, the Company is required to record
certain assets and liabilities at fair value on a nonrecurring
basis, generally as a result of acquisitions or the remeasurement
of assets resulting in impairment charges. See Note 3,
“Strategic Investments,” for further discussion on acquisitions.
See Note 4, “Discontinued Operations”; Note 5,
“Restructuring, Impairment and Transaction-Related Charges”;
Note 6, “Goodwill and Other Intangible Assets”; and
Note 9, “Property, Plant and Equipment” for further discussion
on impairment charges recorded as a result of the remeasurement of
certain long-lived assets.
Other Estimated Fair Value Measurements
The Company records the fair value of its forward contracts and
pension plan assets on a recurring basis. The fair value of cash
and cash equivalents, receivables, inventories, accounts payable
and other current liabilities approximate their carrying values as
of June 30, 2021, and December 31, 2020.
Note 14. Other Current and Long-Term Liabilities
The components of other current and long-term liabilities as of
June 30, 2021, and December 31, 2020, were as
follows:
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|
June 30, 2021 |
|
December 31, 2020 |
|
Other Current Liabilities |
|
Other
Long-Term Liabilities |
|
Total |
|
Other Current Liabilities |
|
Other
Long-Term Liabilities |
|
Total |
Employee-related liabilities
(1)
|
$ |
103.3 |
|
|
$ |
64.3 |
|
|
$ |
167.6 |
|
|
$ |
130.2 |
|
|
$ |
67.4 |
|
|
$ |
197.6 |
|
Single employer pension plan obligations |
1.7 |
|
|
45.5 |
|
|
47.2 |
|
|
1.7 |
|
|
54.9 |
|
|
56.6 |
|
Multiemployer pension plans – withdrawal liability |
3.7 |
|
|
30.3 |
|
|
34.0 |
|
|
3.5 |
|
|
32.2 |
|
|
35.7 |
|
Deferred revenue |
36.5 |
|
|
2.1 |
|
|
38.6 |
|
|
52.9 |
|
|
2.6 |
|
|
55.5 |
|
Tax-related liabilities |
19.5 |
|
|
5.2 |
|
|
24.7 |
|
|
25.3 |
|
|
5.3 |
|
|
30.6 |
|
Restructuring liabilities |
21.9 |
|
|
6.9 |
|
|
28.8 |
|
|
33.1 |
|
|
7.2 |
|
|
40.3 |
|
Interest and rent liabilities |
3.7 |
|
|
— |
|
|
3.7 |
|
|
3.6 |
|
|
— |
|
|
3.6 |
|
Interest rate swap liabilities |
3.0 |
|
|
7.1 |
|
|
10.1 |
|
|
— |
|
|
14.4 |
|
|
14.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
32.7 |
|
|
15.3 |
|
|
48.0 |
|
|
60.5 |
|
|
12.8 |
|
|
73.3 |
|
Total |
$ |
226.0 |
|
|
$ |
176.7 |
|
|
$ |
402.7 |
|
|
$ |
310.8 |
|
|
$ |
196.8 |
|
|
$ |
507.6 |
|
______________________________
(1)Employee-related
liabilities consist primarily of payroll, bonus, vacation, health
and workers’ compensation.
Note 15. Employee Retirement Plans
Defined Contribution Plans
The Quad/Graphics, Inc. Employee Stock Ownership Plan (“ESOP”)
holds profit sharing contributions of Company stock, which are made
at the discretion of the Company’s Board of Directors. There were
no profit sharing contributions during the three and six months
ended June 30, 2021 and 2020.
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30,
2021
(In millions, except share and per share data and unless otherwise
indicated)
Pension Plans
The Company assumed various funded and unfunded frozen pension
plans for a portion of its full-time employees in the United States
as part of the acquisition of World Color Press Inc. (“World Color
Press”) in 2010. Benefits are generally based upon years of service
and compensation. These plans are funded in conformity with the
applicable government regulations. The Company funds at least the
minimum amount required for all qualified plans using actuarial
cost methods and assumptions acceptable under government
regulations.
The components of net pension income for the three and six months
ended June 30, 2021 and 2020, were as follows:
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|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
|
2021 |
|
2020 |
|
2021 |
|
2020 |
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|
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|
|
Interest cost |
$ |
(2.1) |
|
|
$ |
(3.4) |
|
|
$ |
(4.2) |
|
|
$ |
(6.8) |
|
Expected return on plan assets |
6.2 |
|
|
6.0 |
|
|
12.4 |
|
|
12.1 |
|
|
|
|
|
|
|
|
|
Net periodic pension income |
4.1 |
|
|
2.6 |
|
|
8.2 |
|
|
5.3 |
|
Settlement charge |
(0.6) |
|
|
— |
|
|
(0.6) |
|
|
— |
|
Net pension income |
$ |
3.5 |
|
|
$ |
2.6 |
|
|
$ |
7.6 |
|
|
$ |
5.3 |
|
The Company made $0.4 million in benefit payments to its
non-qualified defined benefit pension plans and made
$0.8 million in contributions to its qualified defined benefit
pension plans during the six months ended June 30,
2021.
The Company incurred a non-cash settlement charge of
$0.6 million during the six months ended June 30, 2021
due to the significance of lump sum payments made in the current
period. The non-cash settlement charge results in accelerated
recognition of actuarial losses on the condensed consolidated
statement of operations.
Multiemployer Pension Plans (“MEPPs”)
The Company has withdrawn from all significant MEPPs and replaced
these union sponsored “promise to pay in the future” defined
benefit plans with a Company sponsored “pay as you go” defined
contribution plan. The two MEPPs, the Graphic Communications
International Union – Employer Retirement Fund (“GCIU”) and the
Graphic Communications Conference of the International Brotherhood
of Teamsters National Pension Fund (“GCC”), are significantly
underfunded, and require the Company to pay a withdrawal liability
to fund its pro rata share of the underfunding as of the plan year
the full withdrawal was completed. As a result of the decision to
withdraw, the Company accrued a withdrawal liability based on
information provided by each plan’s trustee. The Company has
reserved $34.0 million for the total MEPPs withdrawal
liability as of June 30, 2021, of which $30.3 million was
recorded in other long-term liabilities and $3.7 million was
recorded in other current liabilities in the condensed consolidated
balance sheets. The Company is scheduled to make payments to the
GCIU and GCC until April 2032 and February 2024, respectively. The
Company made payments totaling $3.1 million and
$6.8 million for the six months ended June 30, 2021 and
2020, respectively.
Note 16. Earnings (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 attributable to future
services.
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30,
2021
(In millions, except share and per share data and unless otherwise
indicated)
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 from
continuing operations, and accordingly, the Company excludes them
from the calculation. Anti-dilutive equity instruments excluded
from the computation of diluted net earnings per share were 1.1
million and 1.0 million class A common shares for the three and six
months ended June 30, 2021, respectively. Due to the net loss
incurred during the three and six months ended June 30, 2020,
the assumed exercise of all equity incentive instruments was
anti-dilutive and therefore, not included in the diluted loss per
share calculation.
Reconciliations of the numerator and the denominator of the basic
and diluted per share computations for the Company’s common stock,
including the impact of discontinued operations, for the three and
six months ended June 30, 2021 and 2020, are summarized as
follows:
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|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
|
2021 |
|
2020 |
|
2021 |
|
2020 |
Numerator |
|
|
|
|
|
|
|
Net earnings (loss) from continuing operations |
$ |
34.4 |
|
|
$ |
(15.0) |
|
|
$ |
44.6 |
|
|
$ |
(23.6) |
|
Less: net earnings (loss) attributable to noncontrolling
interests |
— |
|
|
(0.2) |
|
|
— |
|
|
(0.2) |
|
Net earnings (loss) from continuing operations attributable to Quad
common shareholders |
34.4 |
|
|
(14.8) |
|
|
44.6 |
|
|
(23.4) |
|
|
|
|
|
|
|
|
|
Loss from discontinued operations, net of tax |
— |
|
|
(8.7) |
|
|
— |
|
|
(12.5) |
|
|
|
|
|
|
|
|
|
Net earnings (loss) attributable to Quad common
shareholders |
$ |
34.4 |
|
|
$ |
(23.5) |
|
|
$ |
44.6 |
|
|
$ |
(35.9) |
|
|
|
|
|
|
|
|
|
Denominator |
|
|
|
|
|
|
|
Basic weighted average number of common shares outstanding for all
classes of common shares |
51.3 |
|
|
50.7 |
|
|
51.3 |
|
|
50.6 |
|
Plus: effect of dilutive equity incentive instruments |
1.2 |
|
|
— |
|
|
1.4 |
|
|
— |
|
Diluted weighted average number of common shares outstanding for
all classes of common shares |
52.5 |
|
|
50.7 |
|
|
52.7 |
|
|
50.6 |
|
|
|
|
|
|
|
|
|
Earnings (loss) per share attributable to Quad common
shareholders |
|
|
|
|
|
|
|
Basic: |
|
|
|
|
|
|
|
Continuing operations |
$ |
0.67 |
|
|
$ |
(0.29) |
|
|
$ |
0.87 |
|
|
$ |
(0.46) |
|
Discontinued operations |
— |
|
|
(0.17) |
|
|
— |
|
|
(0.25) |
|
Basic earnings (loss) per share attributable to Quad common
shareholders |
$ |
0.67 |
|
|
$ |
(0.46) |
|
|
$ |
0.87 |
|
|
$ |
(0.71) |
|
|
|
|
|
|
|
|
|
Diluted: |
|
|
|
|
|
|
|
Continuing operations |
$ |
0.66 |
|
|
$ |
(0.29) |
|
|
$ |
0.85 |
|
|
$ |
(0.46) |
|
Discontinued operations |
— |
|
|
(0.17) |
|
|
— |
|
|
(0.25) |
|
Diluted earnings (loss) per share attributable to Quad common
shareholders |
$ |
0.66 |
|
|
$ |
(0.46) |
|
|
$ |
0.85 |
|
|
$ |
(0.71) |
|
|
|
|
|
|
|
|
|
Cash dividends paid per common share for all classes of common
shares |
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
0.15 |
|
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30,
2021
(In millions, except share and per share data and unless otherwise
indicated)
Note 17. Equity Incentive Programs
The shareholders of the Company approved the
Quad/Graphics, Inc. 2020 Omnibus Incentive Plan (the “2020
Plan”) at the Company’s annual meeting of shareholders held on May
18, 2020 for two complementary purposes: (1) to attract and
retain outstanding individuals to serve as directors, officers and
employees; and (2) to increase shareholder value. The
Company’s previous plan, the Quad/Graphics, Inc. 2010 Omnibus Plan
(the “2010 Plan”), was terminated on May 18, 2020, and no new
awards will be granted under the 2010 Plan. All awards that were
granted under the 2010 Plan that were outstanding as of
May 18, 2020 will remain outstanding and will continue to be
governed by the 2010 Plan.
The 2020 Plan provides for an aggregate 3,000,000 shares of
class A common stock reserved for issuance, plus shares still
available for issuance or re-credited under the 2010 Plan.
Awards under the 2020 Plan may consist of incentive awards, stock
options, stock appreciation rights, performance shares, performance
share units, shares of class A common stock, restricted stock
(“RS”), restricted stock units (“RSU”), deferred stock units
(“DSU”) or other stock-based awards as determined by the Company’s
Board of Directors. Each stock option granted has an exercise price
of no less than 100% of the fair market value of the class A
common stock on the date of grant. There were 2,649,765 shares
of class A common stock reserved for issuance under the 2020
Plan as of June 30, 2021. Authorized unissued shares or
treasury shares may be used for issuance under the Company’s equity
incentive programs. The Company plans to either use treasury shares
of its class A common stock or issue shares of class A
common stock to meet the stock requirements of its awards in the
future.
The Company recognizes compensation expense based on estimated
grant date fair values for all share-based awards issued to
employees and non-employee directors, including stock options,
performance shares, performance share units, RS awards, RSU awards
and DSU awards. The Company recognizes these compensation costs for
only those awards expected to vest, on a straight-line basis over
the requisite
three to four year service period of the awards, except
deferred stock units, which are fully vested and expensed on the
grant date. The Company estimated the number of awards expected to
vest based, in part, on historical forfeiture rates and also based
on management’s expectations of employee turnover within the
specific employee groups receiving each type of award. Forfeitures
are estimated at the time of grant and revised, if necessary, in
subsequent periods, if actual forfeitures differ from those
estimates.
Equity Incentive Compensation Expense