QUAD/GRAPHICS, INC. The following discussion of the financial condition and results of operations of Quad should be read together with (1) the condensed consolidated financial statements for the three months endedMarch 31, 2022 and 2021, including the notes thereto, included in Item 1, "Condensed Consolidated Financial Statements (Unaudited)," of this Quarterly Report on Form 10-Q; and (2) the audited consolidated annual financial statements as of and for the year endedDecember 31, 2021 , and notes thereto included in the Company's Annual Report on Form 10-K, filed with theSEC onFebruary 23, 2022 . Management's discussion and analysis of financial condition and results of operations is provided as a supplement to the Company's condensed consolidated financial statements and accompanying notes to help provide an understanding of the Company's financial condition, the changes in the Company's financial condition and the Company's results of operations. This discussion and analysis is organized as follows:
•Cautionary Statement Regarding Forward-Looking Statements.
•Overview. This section includes a general description of the Company's business and segments, an overview of key performance metrics the Company's management measures and utilizes to evaluate business performance, and an overview of trends affecting the Company, including management's actions related to the trends. •Results of Operations. This section contains an analysis of the Company's results of operations by comparing the results for (1) the three months endedMarch 31, 2022 , to the three months endedMarch 31, 2021 . The comparability of the Company's results of operations between periods was impacted by the divestiture of the Company's third-party logistics business onJune 30, 2021 . The results of operations of the divestiture are included in the Company's condensed consolidated results until the date of disposition. Forward-looking statements providing a general description of recent and projected industry and Company developments that are important to understanding the Company's results of operations are included in this section. This section also provides a discussion of EBITDA and EBITDA margin, financial measures that the Company uses to assess the performance of its business that are not prepared in accordance with GAAP. •Liquidity and Capital Resources. This section provides an analysis of the Company's capitalization, cash flows, a statement about off-balance sheet arrangements and a discussion of outstanding debt and commitments. Forward-looking statements important to understanding the Company's financial condition are included in this section. This section also provides a discussion of Free Cash Flow and Debt Leverage Ratio, non-GAAP financial measures that the Company uses to assess liquidity and capital allocation and deployment. 29 -------------------------------------------------------------------------------- Table of Contents Cautionary Statement Regarding Forward-Looking Statements To the extent any statements in this Quarterly Report on Form 10-Q contain information that is not historical, these statements are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements relate to, among other things, the objectives, goals, strategies, beliefs, intentions, plans, estimates, prospects, projections and outlook of the Company, and can generally be identified by the use of words such as "may," "will," "expect," "intend," "estimate," "anticipate," "plan," "foresee," "believe" or "continue" or the negatives of these terms, variations on them and other similar expressions. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond the control of the Company. These risks, uncertainties and other factors could cause actual results to differ materially from those expressed or implied by those forward-looking statements. Among risks, uncertainties and other factors that may impact Quad are those described in Part I, Item 1A, "Risk Factors," of the Company's 2021 Annual Report on Form 10-K, filed with theSEC onFebruary 23, 2022 , as such may be amended or supplemented in Part II, Item 1A, "Risk Factors," of the Company's subsequently filed Quarterly Reports on Form 10-Q (including this report), and the following: •The impact of fluctuations in costs (including labor and labor-related costs, energy costs, freight rates and raw materials, including paper and the materials to manufacture ink) and the impact of fluctuations in the availability of raw materials, including paper and the materials to manufacture ink;
•The impact of inflationary cost pressures and supply chain shortages;
•The impact of decreasing demand for printed materials and significant overcapacity in a highly competitive environment creates downward pricing pressures and potential under-utilization of assets;
•The negative impacts the COVID-19 pandemic has had and will continue to have on the Company's business, financial condition, cash flows, results of operations and supply chain, including rising inflationary cost pressures on raw materials, distribution and labor, and future uncertain impacts;
•The failure to attract and retain qualified talent across the enterprise;
•The impact of increased business complexity as a result of the Company's transformation to a marketing experience company;
•The impact of digital media and similar technological changes, including digital substitution by consumers;
•The inability of the Company to reduce costs and improve operating efficiency rapidly enough to meet market conditions;
•The impact of changes in postal rates, service levels or regulations, including delivery delays due to ongoing COVID-19 impacts on daily operational staffing at theUnited States Postal Service ;
•The impact of a data-breach of sensitive information, ransomware attack or other cyber incident on the Company;
•The impact negative publicity could have on our business;
•The impact of changing future economic conditions;
•The failure of clients to perform under contracts or to renew contracts with clients on favorable terms or at all;
•The fragility and decline in overall distribution channels;
•The failure to successfully identify, manage, complete and integrate acquisitions, investment opportunities or other significant transactions, as well as the successful identification and execution of strategic divestitures;
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Table of Contents •The impact of an other than temporary decline in operating results and enterprise value that could lead to non-cash impairment charges due to the impairment of property, plant and equipment and other intangible assets;
•The impact of risks associated with the operations outside of
•Significant investments may be needed to maintain the Company's platforms, processes, systems, client and product technology and marketing and to remain technologically and economically competitive;
•The impact of the various restrictive covenants in the Company's debt facilities on the Company's ability to operate its business, as well as the uncertain negative impacts COVID-19 may have on the Company's ability to continue to be in compliance with these restrictive covenants;
•The impact of regulatory matters and legislative developments or changes in laws, including changes in cyber-security, privacy and environmental laws; and
•The impact on the holders of Quad's class A common stock of a limited active market for such shares and the inability to independently elect directors or control decisions due to the voting power of the class B common stock. Quad cautions that the foregoing list of risks, uncertainties and other factors is not exhaustive, and you should carefully consider the other factors detailed from time to time in Quad's filings with theSEC and other uncertainties and potential events when reviewing the Company's forward-looking statements. Because forward-looking statements are subject to assumptions and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. You are cautioned not to place undue reliance on such statements, which speak only as of the date of this Quarterly Report on Form 10-Q. Except to the extent required by the federal securities laws, Quad undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. 31
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Table of Contents Overview Business Overview Quad is a global marketing experience company that helps brands reimagine their marketing to be more streamlined, impactful, flexible and frictionless. Quad's strategic priorities are powered by three key competitive advantages that include integrated marketing platform excellence, innovation, and culture and social purpose. The Company's integrated marketing platform is powered by a set of core specialties including business strategy, insights and analytics, technology solutions, managed services, agency and studio solutions, media, print, in-store and packaging. Serving over 4,600 clients, Quad has more than 15,000 people working in 14 countries around the world.
Quad's overarching business strategy and singular vision as a global marketing experience company is achieved through the execution of the following five consistent strategic priorities:
Walk in the Shoes of Clients
The Company encourages all employees, regardless of job title, to walk in the shoes of clients by putting a priority on listening to clients' needs and challenges, doing what they can to make it easy to work with Quad, and making the client experience enjoyable and inclusive at every touchpoint. With a focus on solving problems and removing friction wherever a client experiences it in the marketing process, Quad seeks to become an invaluable strategic marketing partner for its clients, helping them successfully navigate today's constantly evolving media landscape through innovative data-driven solutions, produced and deployed efficiently across multiple media channels. A key component of Quad's client-facing strategy is to strengthen relationships at higher levels within a client's organization so the Company can better understand, anticipate and satisfy the organization's requirements, including their diversity, equity and inclusion goals, and broader environmental, social and governance objectives. The Company also believes its proactive thought leadership in the key issues facing its clients, including data-driven marketing, mar-tech and postal reform, will foster loyalty to the Quad brand.
Grow the Business Profitably
This strategic priority centers on Quad's ability to defend against significant
media disruption, deploy balanced use of capital, including disciplined and
compelling investments, and grow the business as a marketing experience company.
Key components of this priority are:
•Acquire new and expand existing account relationships by introducing clients to
the Company's complete through-the-line marketing offering - from strategy and
creative through production, execution and analytics - that helps them market
more efficiently and effectively. To this end, Quad is focused on ensuring it
has the right talent in the right positions to facilitate strategic marketing
conversations and tailored solutions based on a better understanding of their
needs.
•Expand in key vertical industries with growth opportunities, such as consumer
technology, consumer-packaged goods, financial services, insurance, healthcare
and direct-to-consumer, while continuing to capitalize on the Company's
established expertise in retail and publishing. Through existing and new
offerings, Quad delivers solutions dedicated to solving client marketing and
process challenges.
•Make disciplined and compelling investments that take many different forms. The
Company intends to continue to pursue growth investments that help expand and
strengthen its integrated marketing platform. In addition, the Company intends
to continue making long-term investments in its talent, such as hiring business
professionals with client-side marketing experience and consulting expertise to
enhance its position as a marketing experience company, as well as investments
to attract new employees and increase existing employee engagement, retention
and productivity.
32-------------------------------------------------------------------------------- Table of Contents Bolster Platform Strength The Company operates what it believes to be a superior and unparalleled integrated marketing platform, which it has consciously built to remove friction in the marketing process and speed the overall marketing journey through reduced complexity, increased efficiencies and enhanced marketing spend effectiveness across channels. Through this unique platform, the Company offers a complete through-the-line marketing offering featuring agency, consulting and implementation solutions encompassing marketing strategy, including consumer insights and data analytics; creative solutions for producing quality content at scale; and media deployment and optimization for all channels, including print, broadcast, digital, in-store, out-of-home and packaging supported by 24/7 global production, including industry-leading print manufacturing and mail-distribution capabilities. Quad uses a disciplined return on capital framework to make regular, strategic investments in this platform, resulting in what it believes is the most integrated, automated, efficient, innovative and modern marketing platform of its kind. The Company's long-standing, disciplined culture of holistic Continuous Improvement and commitment to Lean Enterprise methodologies, along with ongoing, strategic investments in talent, technology, products and services to accelerate its position as a marketing experience company. To strengthen its offering, the Company continually seeks to enhance its product portfolio, especially in the direct marketing, in-store and packaging spaces, with innovations that support clients' ability to stand out in a consumer's mailbox or front doorstep, or on the store shelf. These innovations include proprietary solutions unavailable anywhere else in the marketing, communications or printing industries. Additionally, Quad has chosen to strategically divest of those businesses that cannot be easily leveraged as part of its greater integrated marketing platform, such as the QuadExpress third-party logistics business Quad sold in 2021. Through these types of optimization efforts, Quad maintains a superior, unparalleled platform that delivers value to clients and, ultimately, their customers.
Empower Employees
Quad's strategic priority to empower employees throughout their career journey builds on the key aspects of the Company's distinct corporate culture, which the Company views as a competitive advantage. These aspects include the Company's enduring values, which are centered on trust, innovation, growth, believing in people and doing the right thing. The Company understands that its employees perform better at work when they can simply be themselves - confident in their abilities, comfortable sharing their ideas, opinions and beliefs, and able to bring their truest and best selves to the workplace - all of which leads to a more inclusive environment and better engagement, decision-making and business outcomes. The Company embraces forward-thinking workplace practices, such as flexible work models for the long-term future of work; implements innovative talent acquisition strategies to meet its labor and business needs; and provides training and reward programs to engage, develop and retain its employees. Employees are encouraged to take advantage of the Company's continuous growth environment, which not only teaches critical on-the-job and leadership skills, but also helps them respond to rapid change, cultivate effective networks, and create high-quality relationships necessary for personal, professional and company growth. The Company believes its approach to continuous growth for each employee is advantageously distinct from other employers. With the Company's encouragement to do things differently, to be something greater and to create a better way, employees are more fully engaged in their day-to-day activities, producing better results for clients and advancing the Company's strategic priorities. Additionally, the Company engages employees and fosters corporate pride by supporting community activities, initiatives and organizations that improve the quality of life near Quad's operations.
Enhance Financial Strength and Create Shareholder Value
Quad follows a disciplined approach to maintaining and enhancing financial
strength to create shareholder value, which is essential given ongoing media
disruption, including printing industry challenges. This strategy is centered on
the Company's ability to drive profitable growth, and maximize net earnings,
Free Cash Flow and operating margins; maintain consistent financial policies to
ensure a strong balance sheet, liquidity level and access to capital; and retain
the financial flexibility needed to strategically allocate and deploy capital as
circumstances change. The priorities for capital allocation and deployment are
balanced according to prevailing circumstances and what the Company thinks is
best for shareholder value creation at any particular point in time. Those
priorities currently include: deleveraging the Company's balance sheet through
debt and pension liability reductions; making compelling investments that drive
profitable organic growth and productivity in the Company's print manufacturing
and distribution operations, as well as expansion into higher-growth marketing
services; and paying dividends and stock buybacks over the long term.
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To provide ongoing improvement in manufacturing productivity and, ultimately,
maximize operating margins, the Company applies holistic Continuous Improvement
and Lean Enterprise methodologies to simplify and streamline processes. These
same methodologies are applied to its selling, general and administrative
functions to create a truly Lean Enterprise. The Company continually works to
lower its cost structure by consolidating its manufacturing operations into its
most efficient facilities, as well as realizing purchasing, mailing and
logistics efficiencies by centralizing and consolidating print manufacturing
volumes, and eliminating redundancies in its administrative and corporate
operations. Quad believes that its focused efforts to be the high-quality,
low-cost producer generates increased Free Cash Flow and allows the Company to
maintain a strong balance sheet through debt and pension liability reduction.
The Company's disciplined financial approach also allows it to maintain
sufficient liquidity and to reduce refinancing risk, with the nearest
significant debt maturity of $91.5 million occurring in January 2024 . The
Company had total liquidity of $535.0 million as of March 31, 2022 , which
consisted of up to $396.7 million of unused capacity under its revolving credit
arrangement, net of $35.8 million of issued letters of credit, and cash and cash
equivalents of $138.3 million . On May 2, 2022 , the Company used liquidity
available under its revolving credit facility and available cash on hand to fund
the repayment on maturity of all $209.1 million aggregate principal amount of
its Senior Unsecured Notes. In addition, the Company completed the amendment of
its $1 billion bank debt agreement during the fourth quarter of 2021, extending
the maturity to November 2026 . Quad is proud of its strong and trusted banking
relationships, which provide the Company with increased financial flexibility to
continue to pay down debt and to make strategic investments to accelerate its
position as a marketing experience company.
Segments
The Company's operating and reportable segments are aligned with how the chief operating decision maker of the Company currently manages the business. The Company's operating and reportable segments, including their product and service offerings, and a "Corporate" category are summarized below. •The United States Print and Related Services segment is predominantly comprised of the Company'sUnited States printing operations and is managed as one integrated platform. This includes retail inserts, publications, catalogs, special interest publications, journals, direct mail, directories, in-store marketing and promotion, packaging, newspapers, custom print products, other commercial and specialty printed products and global paper procurement, together with marketing and other complementary services, including consumer insights, audience targeting, personalization, media planning and placement, process optimization, campaign planning and creation, pre-media production, videography, photography, digital execution, print execution and logistics. This segment also includes the manufacture of ink. The United States Print and Related Services segment accounted for approximately 87% of the Company's consolidated net sales during the three months endedMarch 31, 2022 . •The International segment consists of the Company's printing operations inEurope andLatin America , including operations inEngland ,France ,Germany ,Poland ,Argentina ,Colombia ,Mexico andPeru , as well as investments in printing operations inIndia . This segment provides printed products and marketing and other complementary services consistent with the United States Print and Related Services segment. The International segment accounted for approximately 13% of the Company's consolidated net sales during the three months endedMarch 31, 2022 . •Corporate consists of unallocated general and administrative activities and associated expenses including, in part, executive, legal and finance, as well as certain expenses and income from frozen employee retirement plans, such as pension benefit plans.
Key Performance Metrics Overview
The Company's management believes the ability to generate net sales growth, profit increases and positive cash flow, while maintaining the appropriate level of debt, are key indicators of the successful execution of the Company's business strategy and will increase shareholder value. The Company uses period-over-period net sales growth, EBITDA, EBITDA margin, net cash provided by (used in) operating activities, Free Cash Flow and Debt Leverage Ratio as metrics to measure operating performance, financial condition and liquidity. EBITDA, EBITDA margin, Free Cash Flow and Debt Leverage Ratio are non-GAAP financial measures (see the definitions of EBITDA, EBITDA margin and the reconciliation of net earnings (loss) to EBITDA in the "Results of Operations" section below, and see the definitions of Free Cash Flow and Debt LeverageRatio , the reconciliation of net cash provided by (used in) operating activities to Free Cash Flow, and the calculation of Debt Leverage Ratio in the "Liquidity and Capital Resources" section below). 34 -------------------------------------------------------------------------------- Table of Contents Net sales growth. The Company uses period-over-period net sales growth as a key performance metric. The Company's management assesses net sales growth based on the ability to generate increased net sales through increased sales to existing clients, sales to new clients, sales of new or expanded solutions to existing and new clients and opportunities to expand sales through strategic investments, including acquisitions. EBITDA and EBITDA margin. The Company uses EBITDA and EBITDA margin as metrics to assess operating performance. The Company's management assesses EBITDA and EBITDA margin based on the ability to increase revenues while controlling variable expense growth. Net cash provided by (used in) operating activities. The Company uses net cash provided by (used in) operating activities as a metric to assess liquidity. The Company's management assesses net cash provided by (used in) operating activities based on the ability to meet recurring cash obligations while increasing available cash to fund debt service requirements, capital expenditures, acquisitions and other investments in future growth, cash restructuring requirements related to cost reduction activities, shareholder dividends and share repurchases. Net cash provided by (used in) operating activities can be significantly impacted by the timing of non-recurring or infrequent receipts or expenditures. Free Cash Flow. The Company uses Free Cash Flow as a metric to assess liquidity and capital deployment. The Company's management assesses Free Cash Flow as a measure to quantify cash available for strengthening the balance sheet (debt and pension liability reduction), for strategic capital allocation and deployment through investments in the business (acquisitions and strategic investments) and for returning capital to the shareholders (dividends and share repurchases). The Company's priorities for capital allocation and deployment will change as circumstances dictate for the business, and Free Cash Flow can be significantly impacted by the Company's restructuring activities and other unusual items. Debt Leverage Ratio. The Company uses the Debt Leverage Ratio as a metric to assess liquidity and the flexibility of its balance sheet. Consistent with other liquidity metrics, the Company monitors the Debt Leverage Ratio as a measure to determine the appropriate level of debt the Company believes is optimal to operate its business, and accordingly, to quantify debt capacity available for strengthening the balance sheet (debt and pension liability reduction), for strategic capital allocation and deployment through investments in the business (capital expenditures, acquisitions and strategic investments), and for returning capital to the shareholders (dividends and share repurchases). The priorities for capital allocation and deployment will change as circumstances dictate for the business, and the Debt Leverage Ratio can be significantly impacted by the amount and timing of large expenditures requiring debt financing, as well as changes in profitability. The Company remains disciplined with its debt leverage. The Company's consolidated debt and finance lease obligations decreased by$2 million during the three months endedMarch 31, 2022 . Since the Company completed theWorld Color Press acquisition inJuly 2010 , the Company has reduced debt and finance lease obligations by$937 million and has reduced the obligations for pension, postretirement and MEPPs by$515 million , for a total obligation reduction since July of 2010 of$1.4 billion . The Company is subject to seasonality in its quarterly results as net sales and operating income are typically higher in the third and fourth quarters of the calendar year as compared to the first and second quarters. The fourth quarter is typically the highest seasonal quarter for cash flows provided by operating activities and Free Cash Flow due to the reduction of working capital requirements that reach peak levels during the third quarter. Seasonality is driven by increased retail inserts and catalogs primarily due to back-to-school and holiday-related advertising and promotions. Due to the impacts from supply chain disruptions in 2022, the Company expects to reach higher than typical levels of working capital requirements during the first and second quarters. The Company expects seasonality impacts to continue in future years.
Overview of Trends Affecting Quad
As consumer media consumption habits change, marketing services providers face
increased demand to offer end-to-end marketing services, from strategy and
creative through execution, across all channels, traditional and digital. As new
marketing and advertising channels emerge, marketing services providers must
expand their services beyond traditional channels, such as for television,
newspapers, print publications and radio, to digital channels, such as mobile,
internet search, internet display and video, to create effective multichannel
campaigns for their clients. This trend greatly influences Quad's ongoing
efforts to redefine the future of integrated marketing and create greater value
for its clients who are looking for less complexity, greater transparency and
accountability from their business partners.
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The Company leverages its data-driven print expertise as part of an integrated
marketing platform that helps its clients not only plan and produce marketing
programs, but also deploy, manage and measure them across all media channels.
Competition in the printing industry remains highly fragmented and intense, and
the Company believes that there are indicators of heightened competitive
pressures. The industry has excess manufacturing capacity created by continued
declines in industry volumes, compounded by the COVID-19 pandemic, which, in
turn, have created accelerated downward pricing pressures. The Company faces
competition due to the increased accessibility and quality of digital
alternatives to traditional delivery of printed documents through the online
distribution and hosting of media content, and the digital distribution of
documents and data. The Company faces competition from print management and
marketing consulting firms that look to streamline processes and reduce the
overall print spend of the Company's clients.
The Company believes that a disciplined approach for capital management and a
strong balance sheet are critical to be able to invest in profitable growth
opportunities and technological advances, thereby providing the highest return
for shareholders. Management balances the use of cash between deleveraging the
Company's balance sheet (through reduction in debt and pension obligations),
compelling investment opportunities (through capital expenditures, acquisitions
and strategic investments) and returns to shareholders (through dividends and
share repurchases).
The Company continues to make progress on integrating and streamlining all
aspects of its business, thereby lowering its cost structure by consolidating
its manufacturing platform into its most efficient facilities, as well as
realizing purchasing, mailing and logistics efficiencies by centralizing and
consolidating print manufacturing volumes and eliminating redundancies in its
administrative and corporate operations. The Company has continued to evolve its
manufacturing platform, equipping facilities to be product line agnostic, which
enables the Company to maximize equipment utilization. Quad believes that the
large plant size of certain of its key printing facilities allows the Company to
drive savings in certain product lines (such as publications and catalogs) due
to economies of scale and from investments in automation and technology. The
Company continues to focus on proactively aligning its cost structure to the
realities of the top-line pressures it faces in the printing industry through
Lean Manufacturing and sustainable continuous improvement programs.
The Company believes it will continue to drive productivity improvements and
sustainable cost reduction initiatives into the future through an engaged
workforce and ongoing adoption of the latest manufacturing automation and
technology. Through this strategy, the Company believes it can maintain the
strongest, most efficient print manufacturing platform to remain a high-quality,
low-cost producer.
Integrated distribution with the United States Postal Service ("USPS") is an
important component of the Company's business. Any material change in the
current service levels provided by the postal service could impact the demand
that clients have for print services. The USPS continues to experience financial
problems. The passing of the Postal Service Reform Act of 2022, signed in April
2022 , gives the USPS considerable financial relief as well as significant cost
relief over the next ten years. While the legislative postal reform helps
considerably, without decreased operational cost structures, increased
efficiencies or increased volumes and revenues, these losses will potentially
continue into the future. As a result of these financial difficulties, the USPS
has continued to adjust its postal rates and service levels. Additional price
increases may result in clients reducing mail volumes and exploring the use of
alternative methods for delivering a larger portion of their products, such as
continued diversion to the internet and other alternative media channels in
order to ensure that they stay within their expected postage budgets.
Federal statute requires the Postal Regulatory Commission ("PRC") to conduct
reviews of the overall rate-making structure for the USPS to ensure funding
stability. As a result of those reviews, the PRC authorized a five year
rate-making structure that provides the USPS with additional pricing flexibility
over the Consumer Price Index cap, which may result in a substantially altered
rate structure for mailers. The revised rate authority that is effective as a
result of the rules issued by the PRC includes a higher overall rate cap on the
USPS' ability to increase rates from year to year. This has led to price spikes
for mailers and may also reduce the incentive for the USPS to continue to take
out costs and instead continue to rely on postage to cover the costs of an
outdated postal service that does not reflect the industry's ability or
willingness to pay. The uncertainty as to how much of the authority the USPS
will use also creates potential volume declines as rate predictability with
respect to cost is no longer known for mailers. The result may be reduced demand
for printed products as clients may move more aggressively into other delivery
methods, such as the many digital and mobile options now available to consumers.
36-------------------------------------------------------------------------------- Table of Contents The Company has invested significantly in its mail preparation and distribution capabilities to mitigate the impact of increases in postage costs, and to help clients successfully navigate the ever-changing postal environment. Through its data analytics, unique software to merge mail streams on a large scale, advanced finishing capabilities and technology, and in-house transportation and logistics operations, the Company manages the mail preparation and distribution of most of its clients' products to maximize efficiency, to enable on-time and consistent delivery and to partially reduce these costs; however, the net impact of increasing postal costs may create a decrease in client demand for print and mail products. The Company's results of operations have been adversely impacted as a result of the COVID-19 pandemic and the emergence of new variants. Through the Company's Crisis Management Team, including executive and operations leadership, the Company has been executing business continuity plans focused on protecting the health and well-being of our employees, while also continuing to service clients, and protect the long-term financial health of the Company as the COVID-19 pandemic continues. With ongoing advancements against the COVID-19 pandemic, the effects on the Company have lessened from previous periods. The Company is continuing to evaluate the impact and may implement additional cost reduction measures as necessary. The ultimate impact of COVID-19 on the Company's business, financial condition, cash flows, results of operations and supply chain will depend on future developments, including the continuing duration of the pandemic and the related length of its impact on the global economy, all of which are still uncertain. Additionally, the increasing cost and availability of raw materials, such as paper, ink, supplies, distribution and labor, have been and are expected to continue to adversely impact the Company's results of operation. The Company is dependent on its production personnel to print the Company's products in a cost-effective and efficient manner that allows the Company to obtain new clients and to drive sales from existing clients. The nationwide shortage of available production personnel may put a strain on the Company's ability to accept new work from client requests, including the Company's seasonally higher third and fourth quarters. The ongoing labor shortage is also placing upward price pressure on freight, as the number of available drivers have been reduced, and may have an adverse effect on our operations. Due to the reduced number of freight drivers available, the Company may not be able to meet rising customer demand and could fail to meet our clients' expectations. The Company has also experienced and anticipates it will continue to experience certain distribution challenges, including, but not limited to, the above-noted delivery delays at theUSPS and recent volume restrictions at the United Parcel Service, Federal Express and certain local couriers. As the labor shortages, supply chain and distribution challenges continue to evolve, the Company is unable to predict the duration of the shortages and challenges and the extent of the impact on the Company's business, financial condition, cash flows and results of operations. As a result of the rising inflationary cost pressures within our raw materials, distribution and labor, the Company has and will continue to pass along price increases to our clients. The Company expects inflationary cost pressures and supply chain shortages to potentially continue through fiscal year 2022. The Company is unable to predict the future impact of the labor and supply chain shortages as well as cost inflation, and the resulting impact on the Company's business, financial condition, cash flows and results of operations. 37
-------------------------------------------------------------------------------- Table of Contents Results of Operations for the Three Months EndedMarch 31, 2022 , Compared to the Three Months EndedMarch 31, 2021
Summary Results
The Company's operating income, operating margin, net earnings (loss) (computed using a 25% normalized tax rate for all items subject to tax) and diluted earnings (loss) per share for the three months endedMarch 31, 2022 , changed from the three months endedMarch 31, 2021 , as follows (dollars in millions, except margin and per share data): Operating Net Earnings Diluted Earnings Income Operating Margin (Loss) (Loss) Per Share For the three months ended March 31, 2021$ 21.0 3.0 %$ 10.2 $ 0.19 Restructuring, impairment and transaction-related charges (1) (1.0) (0.1) % (0.8) (0.01) Other operating income elements (2) (14.6) (2.2) % (10.8) (0.21) Operating Income 5.4 0.7 % (1.4) (0.03) Interest expense (3) N/A N/A 3.9 0.07 Net pension income (4) N/A N/A (0.7) (0.01) Income taxes (5) N/A N/A (2.7) (0.05) Investments in unconsolidated entity, net of tax (6) N/A N/A (0.1) - For the three months ended March 31, 2022$ 5.4 0.7 %$ (1.0) $ (0.02)
______________________________
(1)Restructuring, impairment and transaction-related charges increased
a.A
b.A$0.7 million decrease in impairment charges from$0.8 million during the three months endedMarch 31, 2021 , to$0.1 million during the three months endedMarch 31, 2022 ;
c.Transaction-related charges of
d.A
The Company expects to incur additional restructuring costs in future reporting periods in connection with eliminating excess manufacturing capacity and properly aligning its cost structure in conjunction with the Company's acquisitions and strategic investments, and other cost reduction programs.
(2)Other operating income elements decreased$14.6 million ($10.8 million , net of tax impact) during the three months endedMarch 31, 2022 , primarily due to net cost increases from supply chain disruptions, cost inflation in materials and freight and labor shortages. These cost increases were partially offset by the following: (1) an$8.5 million increase in paper byproduct recoveries; (2) a$5.4 million decrease in depreciation and amortization expense; and (3) savings from other cost reduction initiatives. (3)Interest expense decreased$5.2 million ($3.9 million , net of tax) during the three months endedMarch 31, 2022 , to$9.3 million . This change was due to a$3.0 million decrease in interest expense related to the interest rate swaps and lower average debt levels in the three months endedMarch 31, 2022 , as compared to the three months endedMarch 31, 2021 . (4)Net pension income decreased$0.9 million ($0.7 million , net of tax) during the three months endedMarch 31, 2022 , to$3.2 million . This was due to a$0.6 million decrease from the expected long-term return on pension plan assets and a$0.3 million increase from interest cost on pension plan liabilities. 38
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Table of Contents (5)The$2.7 million decrease in income tax benefit as calculated in the following table is primarily due to a$2.8 million decrease in valuation allowance reserves. Three Months Ended March 31, 2022 2021 $ Change Earnings (loss) before income taxes and equity in earnings of unconsolidated entity$ (0.7) $ 10.6 $ (11.3) Normalized tax rate 25.0 % 25.0 % Income tax expense (benefit) at normalized tax rate (0.2) 2.7 (2.9) Income tax expense from the condensed consolidated statements of operations 0.3 0.5 (0.2) Impact of income taxes$ (0.5) $ 2.2 $ (2.7) (6)The decrease in investments in unconsolidated entity, net of tax, of$0.1 million during the three months endedMarch 31, 2022 , was due to a$0.1 million decrease in earnings at the Company's investment in Plural Industria Grafica Ltda., the Company's Brazilian joint venture. InJanuary 2022 , the Company sold its investment in Plural.
Operating Results
The following table sets forth certain information from the Company's condensed
consolidated statements of operations on an absolute dollar basis and as a
relative percentage of total net sales for each noted period, together with the
relative percentage change in such information between the periods set forth
below:
Three Months Ended March 31,
2022 2021
(dollars in millions)
% of % of %
Amount Sales Amount Sales $ Change Change
Net sales:
Products $ 580.9 78.1 % $ 526.0 74.5 % $ 54.9 10.4 %
Services 163.3 21.9 % 179.8 25.5 % (16.5) (9.2) %
Total net sales 744.2 100.0 % 705.8 100.0 % 38.4 5.4 %
Cost of sales:
Products 503.1 67.6 % 428.3 60.7 % 74.8 17.5 %
Services 116.5 15.7 % 131.5 18.6 % (15.0) (11.4) %
Total cost of sales 619.6 83.3 % 559.8 79.3 % 59.8 10.7 %
Selling, general & administrative expenses 79.1 10.6 % 80.5 11.4 % (1.4) (1.7) %
Depreciation and amortization 36.5 4.9 % 41.9 5.9 % (5.4) (12.9) % Restructuring, impairment and transaction-related charges 3.6 0.5 % 2.6 0.4 % 1.0 38.5 % Total operating expenses 738.8 99.3 % 684.8 97.0 % 54.0 7.9 % Operating income $ 5.4 0.7 %$ 21.0 3.0 %$ (15.6) (74.3) % Net Sales Product sales increased$54.9 million , or 10.4%, for the three months endedMarch 31, 2022 , compared to the three months endedMarch 31, 2021 , primarily due to a$47.5 million increase from pass-through paper sales and a$10.6 million increase in sales in the Company's print product lines, primarily due to increased print volume. These decreases were partially offset by$3.2 million in unfavorable foreign exchange impacts. Service sales, which primarily consist of logistics, distribution, marketing services, imaging and medical services, decreased$16.5 million , or 9.2%, for the three months endedMarch 31, 2022 , compared to the three months endedMarch 31, 2021 , primarily due to a$28.1 million decrease in sales due to the divestiture of the Company's third-party logistics business, partially offset by a$6.6 million increase in logistics sales and a$5.0 million increase in marketing services and medical services. 39 -------------------------------------------------------------------------------- Table of Contents Cost of Sales Cost of product sales increased$74.8 million , or 17.5%, for the three months endedMarch 31, 2022 , compared to the three months endedMarch 31, 2021 , primarily due to the following: (1) a increase in pass-through paper costs; (2) the impacts from rising costs of materials, labor and other costs of production; and (3) higher print volumes. These increases were partially offset by an$8.5 million increase in paper byproduct recoveries and other cost reduction initiatives. Cost of service sales decreased$15.0 million , or 11.4%, for the three months endedMarch 31, 2022 , compared to the three months endedMarch 31, 2021 , primarily due to the impact from the divestiture of the Company's third-party logistics business, partially offset by increased freight costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased$1.4 million , or 1.7%, for the three months endedMarch 31, 2022 , compared to the three months endedMarch 31, 2021 , primarily due to a$2.0 million decrease from foreign translations impacts. Selling, general and administrative expenses as a percentage of net sales decreased to 10.6% for the three months endedMarch 31, 2022 , compared to 11.4% for the three months endedMarch 31, 2021 .
Depreciation and Amortization
Depreciation and amortization decreased$5.4 million , or 12.9%, for the three months endedMarch 31, 2022 , compared to the three months endedMarch 31, 2021 , due to a$3.9 million decrease in depreciation expense, primarily from property, plant and equipment becoming fully depreciated over the past year and a decrease in purchases of property, plant and equipment, and a$1.5 million decrease in amortization expense.
Restructuring, Impairment and Transaction-Related Charges
Restructuring, impairment and transaction-related charges increased
Three Months Ended
March 31,
2022 2021 $ Change
Employee termination charges $ 1.1 $ 4.7 $ (3.6)
Impairment charges (a) 0.1 0.8 (0.7)
Transaction-related charges 0.2 0.2 -
Other restructuring charges (income)
Vacant facility carrying costs and lease exit charges 1.0 3.9 (2.9)
Equipment and infrastructure removal costs - 0.8 (0.8)
Gains on the sale of facilities (b) - (7.8) 7.8
Other restructuring activities (c) 1.2 - 1.2
Other restructuring charges (income) 2.2 (3.1) 5.3
Total restructuring, impairment and transaction-related charges
$
3.6
______________________________
(a)Includes$0.1 million and$0.8 million of impairment charges for machinery and equipment no longer being utilized in production as a result of facility consolidations, as well as other capacity reduction and strategic divestiture activities, during the three months endedMarch 31, 2022 and 2021, respectively.
(b)Includes a
(c)Includes $0.8 million in charges from foreign currency losses as a result of the economy inArgentina being classified as highly inflationary during the three months endedMarch 31, 2022 . The Company has considered the economy inArgentina to be highly inflationary sinceJune 30, 2018 . 40 -------------------------------------------------------------------------------- Table of Contents EBITDA and EBITDA Margin-Consolidated
EBITDA and EBITDA margin for the three months ended
Three Months Ended March 31,
2022 2021
Amount % of Net Sales Amount % of Net Sales
(dollars in millions)
EBITDA and EBITDA margin (non-GAAP) $ 45.1 6.1 % $ 67.1 9.5 %
EBITDA decreased $22.0 million for the three months ended March 31, 2022 ,
compared to the three months ended March 31, 2021 , primarily due to net cost
increases from supply chain disruptions, cost inflation in materials and freight
and labor shortages and $1.0 million of increased restructuring, impairment and
transaction-related charges. These cost increases were partially offset by an
$8.5 million increase in paper byproduct recoveries and savings from other cost
reduction initiatives.
EBITDA is defined as net earnings (loss), excluding (1) interest expense,
(2) income tax expense and (3) depreciation and amortization. EBITDA margin
represents EBITDA as a percentage of net sales. EBITDA and EBITDA margin are
presented to provide additional information regarding Quad's performance. Both
are important measures by which Quad gauges the profitability and assesses the
performance of its business. EBITDA and EBITDA margin are non-GAAP financial
measures and should not be considered alternatives to net earnings (loss) as a
measure of operating performance, or to cash flows provided by (used in)
operating activities as a measure of liquidity. Quad's calculation of EBITDA and
EBITDA margin may be different from the calculations used by other companies,
and therefore, comparability may be limited.
A reconciliation of EBITDA to net earnings (loss) for the three months ended
Three Months Ended March 31,
2022 2021
(dollars in millions)
Net earnings (loss) (1) $ (1.0) $ 10.2
Interest expense 9.3 14.5
Income tax expense 0.3 0.5
Depreciation and amortization 36.5 41.9
EBITDA (non-GAAP) $ 45.1 $ 67.1 ______________________________
(1)Net earnings (loss) included the following:
a.Restructuring, impairment and transaction-related charges of
b.Net pension income of
c.Equity in earnings of unconsolidated entity of
41
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Table of Contents
United States Print and Related Services
The following table summarizes net sales, operating income, operating margin and
certain items impacting comparability within the United States Print and Related
Services segment:
Three Months Ended March 31,
2022 2021
(dollars in millions)
Amount Amount $ Change % Change
Net sales:
Products $ 493.3 $ 459.9 $ 33.4 7.3 %
Services 157.8 174.7 (16.9) (9.7) %
Operating income (including restructuring,
impairment and transaction-related charges) 11.8 32.5 (20.7) (63.7) %
Operating margin 1.8 % 5.1 % N/A N/A
Restructuring, impairment and
transaction-related charges $ 1.7 $ 1.1 $ 0.6 54.5 %
Net Sales
Product sales for the United States Print and Related Services segment increased
$33.4 million , or 7.3%, for the three months ended March 31, 2022 , compared to
the three months ended March 31, 2021 , primarily due to a $34.0 million increase
from pass-through paper sales, partially offset by a $0.6 million decrease in
sales in the Company's print product lines, primarily due to decreased print
volume.
Service sales for the United States Print and Related Services segment decreased
$16.9 million , or 9.7%, for the three months ended March 31, 2022 , compared to
the three months ended March 31, 2021 , primarily due to a $28.1 million decrease
in sales due to the divestiture of the Company's third-party logistics business,
partially offset by a $6.4 million increase in logistics sales and a $4.8
million increase in marketing services and medical services.
Operating Income
Operating income for the United States Print and Related Services segment
decreased $20.7 million , or 63.7%, for the three months ended March 31, 2022 ,
compared to the three months ended March 31, 2021 , primarily due to net cost
increases from supply chain disruptions, cost inflation in materials and freight
and labor shortages and a $0.6 million increase in restructuring, impairment and
transaction-related charges. These cost increases were partially offset by the
following: (1) a $8.5 million increase in paper byproduct recoveries; (2) a $4.7
million decrease in depreciation and amortization expense; and (3) savings from
other cost reduction initiatives.
Operating margin for the United States Print and Related Services segment
decreased to 1.8% for the three months ended March 31, 2022 , compared to 5.1%
for the three months ended March 31, 2021 , primarily due to the reasons provided
above.
42-------------------------------------------------------------------------------- Table of Contents Restructuring, Impairment and Transaction-Related Charges Restructuring, impairment and transaction-related charges forthe United States Print and Related Services segment increased$0.6 million for the three months endedMarch 31, 2022 , compared to the three months endedMarch 31, 2021 , primarily due to the following: Three Months Ended March 31, 2022 2021 $ Change Employee termination charges$ 0.5 $ 3.7 $ (3.2) Impairment charges (a) 0.1 0.8 (0.7) Other restructuring charges (income) (b) 1.1 (3.4) 4.5
Total restructuring, impairment and transaction-related charges
$
1.7
______________________________
(a)Includes$0.1 million and$0.8 million of impairment charges for machinery and equipment no longer being utilized in production as a result of facility consolidations, as well as other capacity reduction and strategic divestiture activities, during the three months endedMarch 31, 2022 and 2021, respectively.
(b)Includes a
International
The following table summarizes net sales, operating income, operating margin,
certain items impacting comparability and equity in earnings of unconsolidated
entity within the International segment:
Three Months Ended March 31,
2022 2021
(dollars in millions)
Amount Amount $ Change % Change
Net sales:
Products $ 87.6 $ 66.1 $ 21.5 32.5 %
Services 5.5 5.1 0.4 7.8 %
Operating income (including
restructuring, impairment and
transaction-related charges) 3.7 1.5 2.2 146.7 %
Operating margin 4.0 % 2.1 % N/A N/A
Restructuring, impairment and
transaction-related charges $ 1.6 $ 0.8 $ 0.8 100.0 %
Equity in earnings of unconsolidated entity - (0.1) (0.1) nm
Net Sales
Product sales for the International segment increased $21.5 million , or 32.5%,
for the three months ended March 31, 2022 , compared to the three months ended
March 31, 2021 , due to a $13.5 million increase in pass-through paper sales and
a $11.2 million increase in print volume, primarily in Mexico and Europe ,
partially offset by $3.2 million in unfavorable foreign exchange impacts,
primarily in Europe and Argentina .
Service sales for the International segment increased $0.4 million , or 7.8%, for
the three months ended March 31, 2022 , compared to the three months ended
March 31, 2021 , primarily due to an increase in logistics sales and marketing
services in Europe .
43-------------------------------------------------------------------------------- Table of Contents Operating Income Operating income for the International segment increased$2.2 million , or 146.7%, for the three months endedMarch 31, 2022 , compared to the three months endedMarch 31, 2021 , primarily due to a$3.0 million increase in operating income from increased print volume and cost saving initiatives, partially offset by a$0.8 million increase in restructuring, impairment and transaction-related charges.
Restructuring, Impairment and Transaction-Related Charges
Restructuring, impairment and transaction-related charges for the International segment increased$0.8 million , or 100.0%, for the three months endedMarch 31, 2022 , compared to the three months endedMarch 31, 2021 , primarily due to the following: Three Months Ended March 31, 2022 2021 $ Change Employee termination charges$ 0.6 $ 0.5 $ 0.1 Other restructuring charges (a) 1.0 0.3 0.7
Total restructuring, impairment and transaction-related charges
$
1.6
______________________________
(a)Includes
Equity in Earnings of Unconsolidated Entity
Investments in entities where Quad has the ability to exert significant influence, but not control, are accounted for using the equity method of accounting. The Company held a 49% ownership interest in Plural Industria Gráfica Ltda., a commercial printer based inSão Paulo, Brazil until the investment was sold inJanuary 2022 . The equity in earnings of unconsolidated entity in the International segment was$0.1 million for the three months endedMarch 31, 2021 . Unrestricted Subsidiaries
As of
Corporate
The following table summarizes unallocated operating expenses presented as
Corporate:
Three Months Ended March 31,
2022 2021
(dollars in millions)
Amount Amount $ Change % Change
Operating expenses (including
restructuring, impairment and transaction-related
charges) $ 10.1 $ 13.0 $ (2.9) (22.3) %
Restructuring, impairment and transaction-related
charges 0.3 0.7 (0.4) (57.1) %
Operating Expenses
Corporate operating expenses decreased $2.9 million , or 22.3%, for the three
months ended March 31, 2022 , compared to the three months ended March 31, 2021 ,
primarily due to a $1.8 million decrease in employee-related costs and a $0.4
million decrease in restructuring, impairment and transaction-related charges.
44-------------------------------------------------------------------------------- Table of Contents Restructuring, Impairment and Transaction-Related Charges Corporate restructuring, impairment and transaction-related charges were$0.3 million and$0.7 million for the three months endedMarch 31, 2022 and 2021, respectively. Three Months Ended March 31, 2022 2021 $ Change Employee termination charges $ -$ 0.5 $ (0.5) Transaction-related charges 0.2 0.2 - Other restructuring charges 0.1 - 0.1 Total restructuring, impairment and transaction-related charges$ 0.3 $ 0.7 $ (0.4)
Liquidity and Capital Resources
The Company utilizes cash flows from operating activities and borrowings under its credit facilities to satisfy its liquidity and capital requirements. The Company had total liquidity of$535.0 million as ofMarch 31, 2022 , which consisted of up to$396.7 million of unused capacity under its revolving credit arrangement, net of$35.8 million of issued letters of credit, and cash and cash equivalents of$138.3 million . Total liquidity is reduced to$230.8 million under the Company's most restrictive debt covenants, and consists of$138.3 million in cash and cash equivalents and$92.5 million available under its revolving credit arrangement. There were no borrowings under the$432.5 million revolving credit facility as ofMarch 31, 2022 . The Company believes its expected future cash flows from operating activities and its current liquidity and capital resources, are sufficient to fund ongoing operating requirements and service debt and pension requirements.
Net Cash Provided by (Used in) Operating Activities
Three Months Ended
Net cash used in operating activities increased$89.8 million , from$72.9 million provided by operating activities for the three months endedMarch 31, 2021 , to$16.9 million used in operating activities for the three months endedMarch 31, 2022 . This increase was due to a$78.4 million increase in cash flows used in changes in operating assets and liabilities, primarily due to the payment of other current liabilities and the strategic decision to carry higher inventory levels to serve clients, and a$11.4 million decrease in cash from earnings.
Three Months Ended
Net cash used in investing activities increased$12.7 million , from$6.0 million for the three months endedMarch 31, 2021 , to$18.7 million for the three months endedMarch 31, 2022 . The increase was primarily due to the following: (1) a$10.9 million decrease in proceeds from the sale of property, plant, and equipment; (2) a$2.2 million increase in purchases of property, plant and equipment; and (3) a$1.6 million increase in cost investment in unconsolidated entities. These increases were partially offset by a$2.0 million increase in cash provided by other investing activities.
Three Months Ended
Net cash used in financing activities decreased$35.3 million , from$41.4 million for the three months endedMarch 31, 2021 , to$6.1 million for the three months endedMarch 31, 2022 . The decrease was primarily due to a$33.9 million decrease in net payments of debt and lease obligations and a$2.8 million decrease in cash used in other financing activities. These decreases were partially offset by a$1.4 million increase in equity awards redeemed to pay employees' tax obligations. 45 -------------------------------------------------------------------------------- Table of Contents Free Cash Flow
Free Cash Flow is defined as net cash provided by (used in) operating activities less purchases of property, plant and equipment.
The Company's management assesses Free Cash Flow as a measure to quantify cash available for (1) strengthening the balance sheet (debt reduction), (2) strategic capital allocation and deployment through investments in the business (acquisitions and strategic investments) and (3) returning capital to the shareholders (dividends and share repurchases). The priorities for capital allocation and deployment will change as circumstances dictate for the business, and Free Cash Flow can be significantly impacted by the Company's restructuring activities and other unusual items. Free Cash Flow is a non-GAAP financial measure and should not be considered an alternative to cash flows provided by (used in) operating activities as a measure of liquidity. Quad's calculation of Free Cash Flow may be different from similar calculations used by other companies, and therefore, comparability may be limited.
Free Cash Flow for the three months ended
Three Months Ended
2022 2021
(dollars in millions)
Net cash provided by (used in) operating activities $ (16.9) $ 72.9
Less: purchases of property, plant and equipment (19.1) (16.9)
Free Cash Flow (Non-GAAP) $ (36.0) $ 56.0
Free Cash Flow decreased $92.0 million for the three months ended March 31,
2022 , compared to the three months ended March 31, 2021 , primarily due to a
$89.8 million increase in net cash used in operating activities and a
$2.2 million increase in capital expenditures. See the "Net Cash Provided by
(Used in) Operating Activities" section above for further explanations of the
change in operating cash flows and the "Net Cash Used in Investing Activities"
section above for further explanations of the changes in purchases of property,
plant and equipment.
Debt Leverage Ratio
The Debt Leverage Ratio is defined as total debt and finance lease obligations
less cash and cash equivalents (Net Debt) divided by the trailing twelve months
Adjusted EBITDA, comprised of the sum of the following: (1) the last twelve
months of EBITDA (see the definition of EBITDA and the reconciliation of net
earnings (loss) to EBITDA in the "Results of Operations" section above);
(2) restructuring, impairment and transaction-related charges; (3) gains from
sale and leaseback; (4) loss on debt extinguishment; (5) equity in earnings of
unconsolidated entity; and (6) Adjusted EBITDA for unconsolidated equity method
investments (calculated in a consistent manner with the calculation for Quad).
The Company uses the Debt Leverage Ratio as a metric to assess liquidity and the
flexibility of its balance sheet. Consistent with other liquidity metrics, the
Company monitors the Debt Leverage Ratio as a measure to determine the
appropriate level of debt the Company believes is optimal to operate its
business, and accordingly, to quantify debt capacity available for strengthening
the balance sheet through debt and pension liability reduction, for strategic
capital allocation and deployment through investments in the business, and for
returning capital to the shareholders. The priorities for capital allocation and
deployment will change as circumstances dictate for the business, and the Debt
Leverage Ratio can be significantly impacted by the amount and timing of large
expenditures requiring debt financing, as well as changes in profitability.
The Debt Leverage Ratio is a non-GAAP measure and should not be considered an alternative to cash flows provided by (used in) operating activities as a measure of liquidity. Quad's calculation of the Debt Leverage Ratio may be different from similar calculations used by other companies and, therefore, comparability may be limited.
46
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Table of Contents
The Debt Leverage Ratio calculated below differs from the Total Leverage Ratio,
the Total Net Leverage Ratio and the Senior Secured Leverage Ratio included in
the Company's debt covenant calculations (see Note 9, "Debt," to the condensed
consolidated financial statements in Item 1, "Condensed Consolidated Financial
Statements (Unaudited)," of this Quarterly Report on Form 10-Q for further
information on debt covenants). The Total Leverage Ratio included in the
Company's debt covenants includes interest rate swap liabilities, letters of
credit and surety bonds as debt and excludes non-cash stock-based compensation
expense from EBITDA. The Total Net Leverage Ratio includes and excludes the same
adjustments as the Total Leverage Ratio, in addition to netting domestic
unrestricted cash with debt. Similarly, the Senior Secured Leverage Ratio
includes and excludes the same adjustments as the Total Leverage Ratio, in
addition to the exclusion of the outstanding balance of the Senior Unsecured
Notes and surety bonds from debt and netting domestic unrestricted cash with
debt.
The Debt Leverage Ratio at
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