0001481792-23-000026.txt : 20230503 0001481792-23-000026.hdr.sgml : 20230503 20230503133126 ACCESSION NUMBER: 0001481792-23-000026 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 80 CONFORMED PERIOD OF REPORT: 20230331 FILED AS OF DATE: 20230503 DATE AS OF CHANGE: 20230503 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Quad/Graphics, Inc. CENTRAL INDEX KEY: 0001481792 STANDARD INDUSTRIAL CLASSIFICATION: COMMERCIAL PRINTING [2750] IRS NUMBER: 391152983 STATE OF INCORPORATION: WI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-34806 FILM NUMBER: 23882890 BUSINESS ADDRESS: STREET 1: N61 W23044 HARRY'S WAY CITY: SUSSEX STATE: WI ZIP: 53089-3995 BUSINESS PHONE: 414-566-6000 MAIL ADDRESS: STREET 1: N61 W23044 HARRY'S WAY CITY: SUSSEX STATE: WI ZIP: 53089-3995 10-Q 1 quad-20230331.htm FORM 10-Q quad-20230331
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2023
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                    to
Commission File Number 001-34806
Updated Quad Logo 2023.jpg
Quad/Graphics, Inc.
(Exact name of registrant as specified in its charter)
Wisconsin39-1152983
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
N61 W23044 Harry’s Way, Sussex, Wisconsin 53089-3995
(Address of principal executive offices) (Zip Code)
(414) 566-6000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Class A Common Stock,
par value $0.025 per share
QUADThe New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   No 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes   No 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes   No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.
ClassOutstanding as of April 28, 2023
Class A Common Stock39,153,019
Class B Common Stock13,556,858
Class C Common Stock



QUAD/GRAPHICS, INC.
FORM 10-Q INDEX
For the Quarter Ended March 31, 2023
Page No.



2

PART I — FINANCIAL INFORMATION

ITEM 1.    Condensed Consolidated Financial Statements (Unaudited)

QUAD/GRAPHICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data)
(UNAUDITED)
Three Months Ended March 31,
20232022
Net sales
Products$607.9 $580.9 
Services158.6 163.3 
Total net sales766.5 744.2 
Cost of sales
Products516.1 503.1 
Services101.4 116.5 
Total cost of sales617.5 619.6 
Operating expenses
Selling, general and administrative expenses89.2 79.1 
Depreciation and amortization33.7 36.5 
Restructuring, impairment and transaction-related charges26.0 3.6 
Total operating expenses766.4 738.8 
Operating income0.1 5.4 
Interest expense16.3 9.3 
Net pension income(0.4)(3.2)
Loss before income taxes(15.8)(0.7)
Income tax expense 8.8 0.3 
Net loss$(24.6)$(1.0)
Loss per share
Basic and diluted$(0.50)$(0.02)
Weighted average number of common shares outstanding
Basic and diluted49.2 51.5 

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


3

QUAD/GRAPHICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in millions)
(UNAUDITED)
Three Months Ended March 31,
20232022
Net loss$(24.6)$(1.0)
Other comprehensive income
Translation adjustments6.5 0.8 
Interest rate derivatives adjustments0.8 1.4 
Pension benefit plan adjustments0.1  
Other comprehensive income, before tax7.4 2.2 
Income tax impact related to items of other comprehensive income(0.2)(0.3)
Other comprehensive income, net of tax7.2 1.9 
Comprehensive income (loss)$(17.4)$0.9 

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



4

QUAD/GRAPHICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions)
(UNAUDITED)
March 31,
2023
December 31,
2022
ASSETS
Cash and cash equivalents$8.7 $25.2 
Receivables, less allowance for credit losses of $26.8 million at March 31, 2023, and $26.4 million at December 31, 2022
348.6 372.6 
Inventories239.3 260.7 
Prepaid expenses and other current assets45.5 46.0 
Total current assets642.1 704.5 
Property, plant and equipment—net668.8 672.1 
Operating lease right-of-use assets—net104.7 111.1 
Goodwill86.4 86.4 
Other intangible assets—net40.2 46.9 
Other long-term assets84.7 80.8 
Total assets$1,626.9 $1,701.8 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Accounts payable$405.8 $456.6 
Other current liabilities174.0 249.1 
Short-term debt and current portion of long-term debt152.4 61.1 
Current portion of finance lease obligations2.0 0.8 
Current portion of operating lease obligations26.2 27.8 
Total current liabilities760.4 795.4 
Long-term debt478.9 506.7 
Finance lease obligations6.9 1.6 
Operating lease obligations82.3 87.1 
Deferred income taxes22.2 9.3 
Other long-term liabilities121.7 128.8 
Total liabilities1,472.4 1,528.9 
Commitments and contingencies (Note 6)
Shareholders’ equity
Preferred stock  
Common stock, Class A1.0 1.0 
Common stock, Class B0.4 0.4 
Common stock, Class C  
Additional paid-in capital838.5 841.8 
Treasury stock, at cost(21.2)(23.5)
Accumulated deficit(543.1)(518.5)
Accumulated other comprehensive loss(121.1)(128.3)
Total shareholders’ equity154.5 172.9 
Total liabilities and shareholders’ equity$1,626.9 $1,701.8 

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


5

QUAD/GRAPHICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(UNAUDITED)
Three Months Ended March 31,
20232022
OPERATING ACTIVITIES
Net loss$(24.6)$(1.0)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization33.7 36.5 
Impairment charges9.5 0.1 
Amortization of debt issuance costs and original issue discount0.5 0.7 
Stock-based compensation1.0 1.9 
Gain on the sale or disposal of property, plant and equipment(0.1)(0.4)
Deferred income taxes10.3 0.3 
Changes in operating assets and liabilities—net of divestitures(80.9)(55.0)
Net cash used in operating activities(50.6)(16.9)
INVESTING ACTIVITIES
Purchases of property, plant and equipment(28.7)(19.1)
Cost investment in unconsolidated entities(0.3)(1.9)
Proceeds from the sale of property, plant and equipment7.1 0.5 
Other investing activities(4.5)1.8 
Net cash used in investing activities(26.4)(18.7)
FINANCING ACTIVITIES
Payments of current and long-term debt(7.4)(3.7)
Payments of finance lease obligations(0.3)(0.8)
Borrowings on revolving credit facilities413.8 25.5 
Payments on revolving credit facilities(343.5)(23.1)
Purchases of treasury stock(0.3) 
Equity awards redeemed to pay employees’ tax obligations(1.7)(2.5)
Payment of cash dividends(0.1)(1.4)
Other financing activities(0.2)(0.1)
Net cash provided by (used in) financing activities60.3 (6.1)
Effect of exchange rates on cash and cash equivalents0.2 0.1 
Net decrease in cash and cash equivalents(16.5)(41.6)
Cash and cash equivalents at beginning of period25.2 179.9 
Cash and cash equivalents at end of period$8.7 $138.3 

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


6

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

Condensed Consolidated Statement of Shareholders’ Equity For the Three Months Ended March 31, 2023
Common StockAdditional
Paid-in
Capital
Treasury StockAccumulated
Deficit
Accumulated
Other
Comprehensive
Loss
Quad’s
Shareholders’
Equity
SharesAmountSharesAmount
Balance at December 31, 202256.6 $1.4 $841.8 (3.9)$(23.5)$(518.5)$(128.3)$172.9 
Net loss— — — — — (24.6)— (24.6)
Foreign currency translation adjustments— — — — — — 6.5 6.5 
Interest rate derivatives adjustments, net of tax— — — — — — 0.6 0.6 
Pension benefit plan liability adjustments, net of tax— — — — — — 0.1 0.1 
Stock-based compensation— — 1.0 — — — — 1.0 
Purchases of treasury stock— — — (0.1)(0.3)— — (0.3)
Issuance of share-based awards, net of other activity— — (4.3)1.4 4.3 — —  
Equity awards redeemed to pay employees’ tax obligations— — — (0.3)(1.7)— — (1.7)
Balance at March 31, 202356.6 $1.4 $838.5 (2.9)$(21.2)$(543.1)$(121.1)$154.5 

Condensed Consolidated Statement of Shareholders’ Equity For the Three Months Ended March 31, 2022
Common StockAdditional
Paid-in
Capital
Treasury StockAccumulated
Deficit
Accumulated
Other
Comprehensive
Loss
Quad’s
Shareholders’
Equity
SharesAmountSharesAmount
Balance at December 31, 202155.7 $1.4 $839.3 (1.4)$(14.9)$(527.8)$(161.2)$136.8 
Net loss— — — — — (1.0)— (1.0)
Foreign currency translation adjustments— — — — — — 0.8 0.8 
Interest rate derivatives adjustments, net of tax— — — — — — 1.1 1.1 
Stock-based compensation— — 1.7 — — — — 1.7 
Issuance of share-based awards, net of other activity0.9 — (2.4)0.8 2.8 — — 0.4 
Equity awards redeemed to pay employees’ tax obligations— — — (0.4)(2.5)— — (2.5)
Balance at March 31, 202256.6 $1.4 $838.6 (1.0)$(14.6)$(528.8)$(159.3)$137.3 

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


7



QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2023
(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, 2022, and notes thereto included in the Company’s latest Annual Report on Form 10-K filed with the SEC on February 27, 2023.

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

The financial information contained herein reflects all adjustments, in the opinion of management, necessary for a fair presentation of the Company’s results of operations for the three months ended March 31, 2023 and 2022. All of these adjustments are of a normal recurring nature, except as otherwise noted. All intercompany transactions have been eliminated in consolidation. These unaudited condensed consolidated financial statements include estimates and assumptions of management that affect the amounts reported in the condensed consolidated financial statements. Actual results could differ from these estimates.

Economic Impacts and Response - Macroeconomic conditions have weakened demand for the Company’s products and services, disrupted the Company’s supply chain and resulted in rising inflationary cost and labor pressures, distribution challenges, recessionary concerns and other evolving macroeconomic conditions. The Company continues to evaluate the current economic environment and may implement additional cost reduction measures as necessary.


8



QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2023
(In millions, except share and per share data and unless otherwise indicated)
Note 2. Revenue Recognition

Revenue Disaggregation

The following tables provide information about disaggregated revenue by the Company’s operating segments and major products and services offerings for the three months ended March 31, 2023 and 2022:

United States Print
and Related Services
InternationalTotal
Three months ended March 31, 2023
Catalog, publications, retail inserts and directories$360.9 $57.3 $418.2 
Direct mail and other printed products142.0 45.9 187.9 
Other1.6 0.2 1.8 
Total products504.5 103.4 607.9 
Logistics services64.4 5.1 69.5 
Marketing services and medical services88.7 0.4 89.1 
Total services153.1 5.5 158.6 
Total net sales$657.6 $108.9 $766.5 
Three months ended March 31, 2022
Catalog, publications, retail inserts and directories$341.7 $60.5 $402.2 
Direct mail and other printed products149.2 26.9 176.1 
Other2.4 0.2 2.6 
Total products493.3 87.6 580.9 
Logistics services71.0 5.3 76.3 
Marketing services and medical services86.8 0.2 87.0 
Total services157.8 5.5 163.3 
Total net sales$651.1 $93.1 $744.2 

Nature of Products and Services

The Company recognizes its products and services revenue based on when the transfer of control passes to the client or when the service is completed and accepted by the client.
The products offering is predominantly comprised of the Company’s print operations which includes retail inserts, publications, catalogs, special interest publications, journals, direct mail, directories, in-store marketing and promotion, packaging, newspapers, custom print products, other commercial and specialty printed products and global paper procurement.
The Company considers its logistic operations as services, which include the delivery of printed material. The services offering also includes revenues related to the Company’s marketing services operations, which include data and analytics, technology solutions, media services, creative and content solutions, managed services and execution in non-print channels (e.g., digital and broadcast), as well as medical services.



9



QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2023
(In millions, except share and per share data and unless otherwise indicated)
Costs to Obtain Contracts

In accordance with Accounting Standards Codification 606 — Revenue from Contracts with Customers, the Company capitalizes certain sales incentives of the sales compensation packages for costs that are directly attributed to being awarded a client contract or renewal and would not have been incurred had the contract not been obtained. The Company also defers certain contract acquisition costs paid to the client at contract inception. Costs to obtain contracts with a duration of less than one year are expensed as incurred. For all contract costs with contracts over one year, the Company amortizes the costs to obtain contracts on a straight-line basis over the estimated life of the contract and reviews quarterly for impairment. Activity impacting costs to obtain contracts for the three months ended March 31, 2023, was as follows:
Costs to Obtain Contracts
Balance at December 31, 2022$3.3 
Costs to obtain contracts0.5 
Amortization of costs to obtain contracts(0.4)
Balance at March 31, 2023$3.4 

Note 3. Restructuring, Impairment and Transaction-Related Charges

The Company recorded restructuring, impairment and transaction-related charges for the three months ended March 31, 2023 and 2022, as follows:
Three Months Ended March 31,
20232022
Employee termination charges$13.1 $1.1 
Impairment charges9.5 0.1 
Transaction-related charges0.6 0.2 
Integration costs0.5  
Other restructuring charges2.3 2.2 
Total$26.0 $3.6 

The costs related to these activities have been recorded in the condensed consolidated statements of operations as restructuring, impairment and transaction-related charges. See Note 15, “Segment Information,” for restructuring, impairment and transaction-related charges by segment.

Restructuring Charges

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

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

Integration costs are incurred primarily for the integration of acquired companies.



10



QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2023
(In millions, except share and per share data and unless otherwise indicated)
Other restructuring charges consisted of the following during the three months ended March 31, 2023 and 2022:
Three Months Ended March 31,
20232022
Vacant facility carrying costs and lease exit charges$1.9 $1.0 
Equipment and infrastructure removal costs0.3  
Other restructuring activities0.1 1.2 
Other restructuring charges$2.3 $2.2 

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 $9.5 million and $0.1 million during the three months ended March 31, 2023 and 2022, 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 activities.

The fair values of the impaired assets were determined by the Company to be Level 3 under the fair value hierarchy (see Note 9, “Financial Instruments and Fair Value Measurements,” for the definition of Level 3 inputs) and were estimated based on broker quotes, internal expertise related to current marketplace conditions and estimated future discounted cash flows. These assets were adjusted to their estimated fair values at the time of impairment. If estimated fair values subsequently decline, the carrying values of the assets are adjusted accordingly.

Transaction-Related Charges

The Company incurs transaction-related charges primarily consisting of professional service fees related to business acquisition and divestiture activities. Transaction-related charges of $0.6 million and $0.2 million were recorded during the three months ended March 31, 2023 and 2022, respectively.

Restructuring Reserves

Activity impacting the Company’s restructuring reserves for the three months ended March 31, 2023, was as follows:
Employee
Termination
Charges
Impairment
Charges
Transaction-Related
Charges
Integration
Costs
Other
Restructuring
Charges
Total
Balance at December 31, 2022$2.9 $ $1.5 $ $5.2 $9.6 
Expense, net13.1 9.5 0.6 0.5 2.3 26.0 
Cash payments, net(4.3) (1.3)(0.5)(3.6)(9.7)
Non-cash adjustments/reclassifications (9.5)  0.4 (9.1)
Balance at March 31, 2023$11.7 $ $0.8 $ $4.3 $16.8 

The Company’s restructuring reserves at March 31, 2023, included a short-term and a long-term component. The short-term portion included $12.6 million in other current liabilities and $0.6 million in accounts payable in the condensed consolidated balance sheets as the Company expects these reserves to be settled within the next twelve months. The long-term portion of $3.6 million is included in other long-term liabilities in the condensed consolidated balance sheets.


11



QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2023
(In millions, except share and per share data and unless otherwise indicated)
Note 4. 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 $0.9 million and $0.7 million during the three months ended March 31, 2023 and 2022, respectively, which is included in selling, general and administrative expenses in the condensed consolidated statements of operations.

Activity impacting the allowance for credit losses for the three months ended March 31, 2023, was as follows:
Allowance for Credit Losses
Balance at December 31, 2022$26.4 
Provisions0.9 
Write-offs(0.7)
Translation0.2 
Balance at March 31, 2023$26.8 

Note 5. Inventories

The components of inventories at March 31, 2023, and December 31, 2022, were as follows:
March 31,
2023
December 31,
2022
Raw materials and manufacturing supplies$150.6 $173.7 
Work in process44.4 38.3 
Finished goods44.3 48.7 
Total$239.3 $260.7 



12



QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2023
(In millions, except share and per share data and unless otherwise indicated)
Note 6. 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 7. Debt

Senior Secured Credit Facility

The Company completed the seventh amendment to the Senior Secured Credit Facility on January 24, 2023, which transitioned the Company’s reference rate from London Interbank Offered Rate (“LIBOR”) to Secured Overnight Financing Rate (“SOFR”) effective February 1, 2023. The Company elected the practical expedient outlined in Accounting Standards Update (“ASU”) 2020-04 and ASU 2021-01 which allowed the Company to prospectively adjust the effective interest rate after the reference rate change. The transition from LIBOR to SOFR did not have a material impact on the condensed consolidated financial statements.

Senior Unsecured Notes

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

Note 8. Income Taxes

The Company records income tax expense on an interim basis. The estimated annual effective income tax rate is adjusted quarterly. For the three months ended March 31, 2023, the estimated annual effective income tax rate differs from the statutory tax rate primarily due to estimated non-deductible expenses, income from foreign branches, and net increases in valuation allowance reserves. For the three months ended March 31, 2022, the estimated annual effective income tax rate differs from the statutory tax rate primarily from decreases in valuation allowance reserves. The effective income tax rate for the current interim period differs further from the statutory tax rate due to items discrete to the interim period primarily related to an increase in income tax payable for an anticipated audit settlement.

The Company currently has various open tax audits in multiple jurisdictions. From time to time, the Company will receive tax assessments as part of the process. Based on the information available as of March 31, 2023, the Company has recorded its best estimate of the potential settlements of these audits. Actual results could differ from the estimated amounts.



13



QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2023
(In millions, except share and per share data and unless otherwise indicated)
The Company’s liability for unrecognized tax benefits was $11.1 million as of March 31, 2023 and December 31, 2022. The Company anticipates a $0.2 million decrease to its liability for unrecognized tax benefits within the next twelve months due to the resolution of income tax audits or statute expirations.

Note 9. Financial Instruments and Fair Value Measurements

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

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

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

Level 3:    Unobservable inputs for the asset or liability. There were no Level 3 recurring measurements of assets or liabilities as of March 31, 2023.

Interest Rate Swaps

The Company currently holds one active interest rate swap contract. Another previously held interest rate swap, effective on February 28, 2017, terminated on February 28, 2022. The purpose of entering into the contracts was to reduce the variability of cash flows from interest payments related to a portion of Quad’s variable-rate debt. The interest rate 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 had 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 was then amortized to interest expense on a straight-line basis over the remaining lives of the swap contracts. The Company expects to reclassify $2.7 million of this balance, attributable to its active interest rate swap contract, to interest expense over the next twelve months. Due to the Company’s transition from LIBOR to SOFR during the first quarter of 2023, the active interest rate swap’s fixed swap rate was amended to be based on one-month term SOFR.

The key terms of the active interest rate swap is as follows:
March 19, 2019
Interest Rate Swap
Effective dateMarch 29, 2019
Termination dateMarch 28, 2024
Term5 years
Notional amount$130.0
Fixed swap rate2.40%



14



QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2023
(In millions, except share and per share data and unless otherwise indicated)
The Company classifies interest rate swaps as Level 2 because the inputs into the valuation model are observable or can be derived or corroborated utilizing observable market data at commonly quoted intervals. The fair value of the interest rate swaps classified as Level 2 as of March 31, 2023, and December 31, 2022, were as follows:
Balance Sheet LocationMarch 31, 2023December 31, 2022
Interest rate swap assetsPrepaid expenses and other current assets$2.8 $3.8 

Prior to the Company’s de-designation of the interest rate swaps as a cash flow hedge, the interest rate swaps were considered highly effective, with no amount of ineffectiveness recorded into earnings. The change in the fair value of the interest rate swaps are recorded as an adjustment to interest expense in the condensed consolidated statements of operations. The cash flows associated with the interest rate swaps have been recognized as an adjustment to interest expense in the condensed consolidated statements of operations:
Three Months Ended March 31,
20232022
Cash Flow Impacts
Net interest paid$(0.7)$1.5 
Impacts with Swaps as Nonhedging Instruments
Income recognized in interest expense excluded from hedge effectiveness assessments1.0 (5.0)
Amounts reclassified out of accumulated other comprehensive loss to interest expense0.7 1.4 
Net interest expense(0.7)1.5 
Total impact of swaps to interest expense$1.0 $(2.1)

Interest Rate Collars

The Company has entered into two interest rate collar contracts, both effective February 1, 2023. The purpose of entering into the contracts is to reduce the variability of cash flows from interest payments related to a portion of Quad’s variable-rate debt. The interest rate collars have been designated as cash flow hedges as they effectively convert the notional value of the Company’s variable rate debt based on one-month term SOFR to a fixed rate if that month’s interest rate is outside of the collars’ floor and ceiling rates, including a spread on underlying debt, and a monthly reset in the variable interest rate. The key terms of the interest rate collars are as follows:
December 12, 2022
Interest Rate Collar
December 14, 2022
Interest Rate Collar
Effective dateFebruary 1, 2023February 1, 2023
Termination dateOctober 30, 2026October 31, 2025
Term45 Months33 Months
Notional amount$75.0$75.0
Floor Rate2.09%2.25%
Ceiling Rate5.00%5.00%

The Company classifies interest rate collars as Level 2 because the inputs into the valuation model are observable or can be derived or corroborated utilizing observable market data at commonly quoted intervals. The fair value of the interest rate collars classified as Level 2 as of March 31, 2023, and December 31, 2022, were as follows:
Balance Sheet LocationMarch 31, 2023December 31, 2022
Interest rate collar assetsPrepaid expenses and other current assets$0.1 $ 



15



QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2023
(In millions, except share and per share data and unless otherwise indicated)
The interest rate collars were highly effective as of March 31, 2023. No amount of ineffectiveness has been recorded into earnings related to these cash flow hedges. The cash flows associated with the interest rate collars will be recognized as an adjustment to interest expense in the condensed consolidated statements of operations. There has been no interest paid or received related to the interest rate collars during the three months ended March 31, 2023. The changes in the fair value of the interest rate collars have been included in other comprehensive income (loss) in the condensed consolidated statements of comprehensive income (loss):
Three Months Ended March 31,
20232022
Gain recognized in other comprehensive income (loss)$(0.1)$ 

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. As of March 31, 2023, there were four open foreign currency exchange contracts designated as cash flow hedges, with a total notional value of $5.9 million.

Natural Gas Forward Contracts

The Company periodically enters into natural gas forward purchase contracts to hedge against increases in commodity costs. The Company’s commodity contracts qualified for the exception related to normal purchases and sales during the three months ended March 31, 2023 and 2022, 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. 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 $0.6 billion at March 31, 2023 and December 31, 2022.

Nonrecurring Fair Value Measurements

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

Other Estimated Fair Value Measurements

The Company records the fair value of its forward contracts and pension plan assets on a recurring basis. The fair value of cash and cash equivalents, receivables, inventories, accounts payable and other current liabilities approximate their carrying values as of March 31, 2023, and December 31, 2022.



16



QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2023
(In millions, except share and per share data and unless otherwise indicated)
Note 10. Employee Retirement Plans

Defined Contribution Plans

The Quad/Graphics, Inc. Employee Stock Ownership Plan (“ESOP”) holds profit sharing contributions of Company stock, which are made at the discretion of the Company’s Board of Directors. There were no profit sharing contributions during the three months ended March 31, 2023 and 2022.

Pension Plans

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

The components of net pension income for the three months ended March 31, 2023 and 2022, were as follows:
Three Months Ended March 31,
20232022
Interest cost$(4.4)$(2.4)
Expected return on plan assets5.0 5.6 
  Net periodic pension income0.6 3.2 
Amortization of actuarial loss(0.2) 
Net pension income$0.4 $3.2 

The Company made $0.2 million in benefit payments to its non-qualified defined benefit pension plans and made no contributions to its qualified defined benefit pension plans during the three months ended March 31, 2023.

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 $27.3 million for the total MEPPs withdrawal liability as of March 31, 2023, of which $23.5 million was recorded in other long-term liabilities and $3.8 million was recorded in other current liabilities in the condensed consolidated balance sheets. The Company is scheduled to make payments to the GCIU and GCC until April 2032 and February 2024, respectively. The Company made payments totaling $1.5 million for the three months ended March 31, 2023 and 2022.

Note 11. Loss Per Share

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


17



QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2023
(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, and accordingly, the Company excludes them from the calculation. Due to the net loss incurred during the three months ended March 31, 2023 and 2022, 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 for the three months ended March 31, 2023 and 2022, are summarized as follows:
Three Months Ended March 31,
20232022
Numerator
Net loss$(24.6)$(1.0)
Denominator
Basic weighted average number of common shares outstanding for all classes of common stock49.2 51.5 
Plus: effect of dilutive equity incentive instruments  
Diluted weighted average number of common shares outstanding for all classes of common shares49.2 51.5 
Loss per share
Basic and diluted$(0.50)$(0.02)

Note 12. Equity Incentive Programs

Equity Incentive Compensation Expense

Equity incentive compensation expense was recorded primarily in selling, general and administrative expenses in the condensed consolidated statements of operations and includes expense recognized for liability awards that are remeasured on a quarterly basis. The total compensation expense recognized related to all equity incentive programs for the three months ended March 31, 2023 and 2022, was as follows:
Three Months Ended March 31,
20232022
Restricted Stock (“RS”) and Restricted Stock Units (“RSU”) equity awards expense$0.9 $1.7 
RSU liability awards expense 0.2 
Deferred Stock Units (“DSU”) awards expense0.1  
Total equity incentive compensation expense$1.0 $1.9 

Total future compensation expense related to all equity incentive programs granted as of March 31, 2023, was estimated to be $10.7 million, which consists entirely of expense for RS and RSU awards. Estimated future compensation expense is $3.9 million for the remainder of 2023, $4.1 million for 2024, $2.4 million for 2025 and $0.3 million for 2026.




18



QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2023
(In millions, except share and per share data and unless otherwise indicated)
Restricted Stock and Restricted Stock Units

The following table is a summary of RS and RSU award activity for the three months ended March 31, 2023:
Restricted StockRestricted Stock Units
SharesWeighted-
Average
Grant Date
Fair Value
Per Share
Weighted-
Average
Remaining
Contractual
Term (years)
UnitsWeighted-
Average
Grant Date
Fair Value
Per Share
Weighted-
Average
Remaining
Contractual
Term (years)
Nonvested at December 31, 20223,606,295 $4.11 1.4100,943 $4.08 1.5
Granted1,761,308 4.09 66,879 4.08 
Vested(817,768)4.64 (19,842)4.67 
Forfeited(424,371)4.19   
Nonvested at March 31, 20234,125,464 $3.99 2.1147,980 $4.00 2.2

Deferred Stock Units

The following table is a summary of DSU award activity for the three months ended March 31, 2023:
Deferred Stock Units
UnitsWeighted-Average Grant Date Fair Value Per Share
Outstanding at December 31, 2022773,194 $7.25 
Granted8,460 4.88 
Settled(114,592)5.65 
Outstanding at March 31, 2023667,062 $7.49 

Note 13. Shareholders’ Equity

The Company has three classes of common stock as follows (share data in millions):
Issued Common Stock
Authorized SharesOutstandingTreasuryTotal Issued Shares
Class A stock ($0.025 par value)
March 31, 2023105.0 40.1 2.4 42.5 
December 31, 2022105.0 39.2 3.4 42.6 
Class B stock ($0.025 par value)
March 31, 202380.0 13.6  13.6 
December 31, 202280.0 13.6  13.6 
Class C stock ($0.025 par value)
March 31, 202320.0  0.5 0.5 
December 31, 202220.0  0.5 0.5 



19



QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2023
(In millions, except share and per share data and unless otherwise indicated)
In accordance with the Articles of Incorporation, each class A common share has one vote per share and each class B and class C common share has ten votes per share on all matters voted upon by the Company’s shareholders. Liquidation rights are the same for all three classes of common stock.

The Company also has 0.5 million shares of $0.01 par value preferred stock authorized, of which none were issued at March 31, 2023, and December 31, 2022. The Company has no present plans to issue any preferred stock.

On July 30, 2018, the Company’s Board of Directors authorized a share repurchase program of up to $100.0 million of the Company’s outstanding class A common stock. During the three months ended March 31, 2023, the Company repurchased 64,271 shares of its Class A common stock at a weighted average price of $3.98 per share for a total purchase price of $0.3 million. There were no shares repurchased during the three months ended March 31, 2022. As of March 31, 2023, there were $89.8 million of authorized repurchases remaining under the program.

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

Note 14. Accumulated Other Comprehensive Loss

The changes in accumulated other comprehensive loss by component, net of tax, for the three months ended March 31, 2023, were as follows:
Translation AdjustmentsInterest Rate Derivatives AdjustmentsPension Benefit Plan AdjustmentsTotal
Balance at December 31, 2022$(88.6)$(4.1)$(35.6)$(128.3)
Other comprehensive income before reclassifications6.5 0.1  6.6 
Amounts reclassified from accumulated other comprehensive loss to net earnings 0.5 0.1