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 and six months endedJune 30, 2021 and 2020, 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, 2020 , and notes thereto included in the Company's Annual Report on Form 10-K, filed with theSEC onFebruary 24, 2021 . 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 endedJune 30, 2021 , to the three months endedJune 30, 2020 ; and (2) the six months endedJune 30, 2021 , to the six months endedJune 30, 2020 . The comparability of the Company's results of operations between periods was impacted by the divestiture of theOmaha, Nebraska packaging plant, which was sold onJanuary 31, 2020 , the additional investment in Rise inJune 2020 , and the gain on the sale 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, and the results of operations of the investment in Rise reflect the Company's ownership interest from the respective dates of change in ownership. The results of the Company's United States Book business have been reported as discontinued operations for the period endedJune 30, 2020 . 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. 36 -------------------------------------------------------------------------------- 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 2020 Annual Report on Form 10-K, filed with theSEC onFebruary 24, 2021 , 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 negative impacts the coronavirus (COVID-19) has had and will continue to have on the Company's business, financial condition, cash flows, results of operations and supply chain, as well as the global economy in general (including future uncertain impacts);
•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 impact of digital media and similar technological changes, including digital substitution by consumers;
•The impact of fluctuations in costs (including labor and labor-related costs, energy costs, freight rates and raw materials, including paper) and the impact of fluctuations in the availability of raw materials, including paper; •The inability of the Company to reduce costs and improve operating efficiency rapidly enough to meet market conditions;
•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 increased business complexity as a result of the Company's transformation to a marketing solutions partner;
•The impact negative publicity could have on our business;
•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;
•The failure of clients to perform under contracts or to renew contracts with clients on favorable terms or at all;
•The impact of changing future economic conditions;
•The fragility and decline in overall distribution channels;
•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 failure to attract and retain qualified talent across the enterprise;
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•The impact of regulatory matters and legislative developments or changes in
laws, including changes in cyber-security, privacy and environmental laws;
•Significant capital expenditures may be needed to maintain the Company's platforms and processes and to remain technologically and economically competitive;
•The impact of risks associated with the operations outside of
•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; 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. 38
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Table of Contents Overview Business Overview As a worldwide marketing solutions partner, Quad leverages its 50-year heritage of platform excellence, innovation, strong culture and social purpose to create a better way for its clients, employees and communities. The Company's integrated marketing platform helps brands and marketers reduce complexity, increase efficiency and enhance marketing spend effectiveness. Quad provides its clients with unmatched scale for on-site services and expanded subject expertise in marketing strategy, creative solutions, media deployment and marketing management services. With a client-centric approach that drives the Company to continuously evolve its offering, combined with leading-edge technology and single-source simplicity, the Company has the resources and knowledge to help a wide variety of clients in multiple vertical industries, including retail, publishing, consumer technology, consumer packaged goods, financial services, insurance, healthcare and direct-to-consumer. Quad believes employee pride, combined with a relentless quest to create a better way, builds the opportunity to invent the future as a preferred marketing solutions partner, helping its clients win every day. To accomplish this vision, Quad remains focused on its consistent strategic priorities as follows:
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 at every touchpoint. With a focus on solving problems and uncomplicating 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 corporate social responsibility goals. The Company also believes its proactive thought leadership in the key issues facing its clients, including data-driven marketing, sustainability 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 and ongoing print industry headwinds and grow the business as a
marketing solutions partner. Key components of this priority are:
•Expand existing account relationships by introducing clients to the Company's
ever-expanding offering that helps them market more efficiently and effectively
across media channels. To this end, Quad is focused on ensuring it has the right
talent in the right positions to facilitate strategic marketing conversations
with its clients that lead to a better understanding of their needs, developing
tailored solutions and growing market share.
•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.
•Grow print segment share by providing dependable, on-time performance and
ongoing investments in its platform that improve manufacturing and distribution
cost efficiencies, product features and effectiveness. At a time of significant
industry and economic disruption, Quad is a stable and reliable partner to its
clients.
•Make disciplined investments that take many different forms. The Company
intends to continue to pursue acquisitions that help expand and strengthen its
integrated marketing platform as well as value-driven industry consolidating
acquisitions that meet its disciplined acquisition criteria. 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 who will bolster its position as a marketing solutions
partner, as well as investments to increase employee engagement, retention and
productivity.
39-------------------------------------------------------------------------------- Table of Contents Strengthen the Core The Company operates what it believes to be a superior and unparalleled integrated marketing platform, which it has consciously built to reduce complexity, enhance efficiencies and improve marketing spend effectiveness across channels. Through this unique platform, the Company offers marketing strategy, including consumer insights and data analytics; creative solutions for producing quality content at scale; media optimization for all channels, including print, broadcast and digital; and 24/7 global production, supported by industry-leading print manufacturing 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 investments in employee development and retention, further supports its goal of strengthening its platform so that Quad can remain a high-quality, low-cost producer. To strengthen its core offering, the Company continually seeks to enhance its product portfolio, especially in the direct marketing and packaging space, with innovations that support clients' ability to stand out in the mailbox 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 books. Through these types of optimization efforts, Quad strengthens its core by remaining focused on where it can provide the most value to clients by uncomplicating marketing to deliver more.
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 and believing in people. The Company understands that its employees perform better at work when they can simply be themselves - confident in their abilities and comfortable sharing their ideas, opinions and beliefs - all of which leads to a more inclusive environment and better engagement, decision-making and business outcomes. The Company implements talent strategies to meet its labor and business transformation needs, and 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 impact 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 and printing industry challenges. This strategy is centered on the Company's ability to 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 adjusted based on 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, and 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 pursuing value-driven industry consolidation. The Company's Board of Directors proactively suspended the Company's quarterly dividends beginning in the second quarter of 2020, and the Company is currently prohibited from making dividend payments throughSeptember 30, 2021 . However, the Company remains committed to paying a dividend over the long term and will seek to resume a dividend following the stabilization of its operating environment. 40 -------------------------------------------------------------------------------- Table of Contents To provide ongoing improvement in manufacturing productivity, the Company applies holistic Continuous Improvement and Lean Enterprise methodologies to simplify and streamline processes and to ultimately maximize operating margins. These same methodologies are applied to its selling, general and administrative functions to create a truly lean enterprise. The Company has been working diligently 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.
Segments
The Company's operating and reportable segments are aligned with how the chief operating decision maker of the Company currently manages the business. As a result of the decision to sell the Company's United States Book business, all United States Print and Related Services segment amounts exclude the Book business discontinued operations for the three and six months endedJune 30, 2020 . 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 88% and 89% of the Company's consolidated net sales during the three and six months endedJune 30, 2021 , respectively. •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 inBrazil andIndia . This segment provides printed products and marketing and other complementary services consistent withthe United States Print and Related Services segment. The International segment accounted for approximately 12% and 11% of the Company's consolidated net sales during the three and six months endedJune 30, 2021 , respectively. •Corporate consists of unallocated general and administrative activities and associated expenses including, in part, executive, legal and finance, as well as certain expenses and income from frozen employee retirement plans, such as pension benefit plans.
Key Performance Metrics Overview
The Company's management believes the ability to generate net sales growth,
profit increases and positive cash flow, while maintaining the appropriate level
of debt, are key indicators of the successful execution of the Company's
business strategy and will increase shareholder value. The Company uses
period-over-period net sales growth, EBITDA, EBITDA margin, net cash provided by
operating activities, Free Cash Flow and Debt Leverage Ratio as metrics to
measure operating performance, financial condition and liquidity. EBITDA, EBITDA
margin, Free Cash Flow and Debt Leverage Ratio are non-GAAP financial measures
(see the definitions of EBITDA, EBITDA margin and the reconciliation of net
earnings (loss) attributable to Quad common shareholders to EBITDA in the
"Results of Operations" section below, and see the definitions of Free Cash Flow
and Debt Leverage Ratio, the reconciliation of net cash provided by operating
activities to Free Cash Flow, and the calculation of Debt Leverage Ratio in the
"Liquidity and Capital Resources" section below).
Net sales growth. The Company uses period-over-period net sales growth as a key
performance metric. The Company's management assesses net sales growth based on
the ability to generate increased net sales through increased sales to existing
clients, sales to new clients, sales of new or expanded solutions to existing
and new clients and opportunities to expand sales through strategic investments,
including acquisitions.
41-------------------------------------------------------------------------------- Table of Contents EBITDA and EBITDA margin. The Company uses EBITDA and EBITDA margin as metrics to assess operating performance. The Company's management assesses EBITDA and EBITDA margin based on the ability to increase revenues while controlling variable expense growth. Net cash provided by operating activities. The Company uses net cash provided by operating activities as a metric to assess liquidity. The Company's management assesses net cash provided by operating activities based on the ability to meet recurring cash obligations while increasing available cash to fund cash restructuring requirements related to cost reduction activities, as well as to fund capital expenditures, debt service requirements,World Color Press single employer pension plan contributions, World Color Press MEPPs withdrawal liabilities, acquisitions and other investments in future growth, shareholder dividends and share repurchases. Net cash provided by operating activities can be significantly impacted by the timing of non-recurring or infrequent receipts or expenditures. Free Cash Flow. The Company uses Free Cash Flow as a metric to assess liquidity and capital deployment. The Company's management assesses Free Cash Flow as a measure to quantify cash available for strengthening the balance sheet (debt and pension liability reduction), for strategic capital allocation and deployment through investments in the business (acquisitions and strategic investments) and for returning capital to the shareholders (dividends and share repurchases). The Company's priorities for capital allocation and deployment will change as circumstances dictate for the business, and Free Cash Flow can be significantly impacted by the Company's restructuring activities and other unusual items. Debt Leverage Ratio. The Company uses the Debt Leverage Ratio as a metric to assess liquidity and the flexibility of its balance sheet. Consistent with other liquidity metrics, the Company monitors the Debt Leverage Ratio as a measure to determine the appropriate level of debt the Company believes is optimal to operate its business, and accordingly, to quantify debt capacity available for strengthening the balance sheet (debt and pension liability reduction), for strategic capital allocation and deployment through investments in the business (capital expenditures, acquisitions and strategic investments), and for returning capital to the shareholders (dividends and share repurchases). The 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$77 million during the six months endedJune 30, 2021 , primarily due to the use of cash proceeds from the sale of the Company's third-party logistics business, the sale of property, plant and equipment and the increase in cash provided by operating activities to reduce debt obligations. Since the Company completed theWorld Color Press acquisition inJuly 2010 , the Company has reduced debt and finance lease obligations by$888 million and has reduced the obligations for pension, postretirement and MEPPs by$481 million , for a total obligation reduction since July of 2010 of over$1.4 billion . 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 magazine advertising page counts, retail inserts, and catalogs primarily due to back-to-school and holiday-related advertising and promotions. The Company expects this seasonality impact to continue in future years. Due to the continued uncertainty surrounding the COVID-19 pandemic, the Company anticipates this seasonality will be further impacted in 2021 and in future periods, as the Company is heavily dependent on consumer demand.
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. 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 quarterly
dividends and share repurchases).
The Company continues to make progress on integrating and streamlining all
aspects of its business, thereby lowering its cost structure by consolidating
its manufacturing platform into its most efficient facilities, as well as
realizing purchasing, mailing and logistics efficiencies by centralizing and
consolidating print manufacturing volumes and eliminating redundancies in its
administrative and corporate operations. The Company has continued to evolve its
manufacturing platform, equipping facilities to be product line agnostic, which
enables the Company to maximize equipment utilization. Quad believes that the
large plant size of certain of its key printing facilities allows the Company to
drive savings in certain product lines (such as publications and catalogs) due
to economies of scale and from investments in automation and technology. The
Company continues to focus on proactively aligning its cost structure to the
realities of the top-line pressures it faces in the printing industry through
Lean Manufacturing and sustainable continuous improvement programs.
Restructuring actions initiated by the Company beginning in 2010 have resulted
in the announcement of 50 plant closures through June 30, 2021 .
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. Without increased revenues or action by Congress to reform the USPS'
cost structure, these losses will continue into the future. As a result of these
financial difficulties, the USPS has come under increased pressure to adjust its
postal rates and service levels. Additional price increases may result in
clients reducing mail volumes and exploring the use of alternative methods for
delivering a larger portion of their products, such as continued diversion to
the internet and other alternative media channels in order to ensure that they
stay within their expected postage budgets. There are also delivery delays due
to ongoing COVID-19 impacts on daily operational staffing at the USPS .
Federal statute requires the Postal Regulatory Commission ("PRC") to conduct
reviews of the rates and services of the USPS , and ensure the Postal Service
meets all of its legal requirements. As a result of those reviews, the PRC has
authorized a new five year rate-authority structure that would provide the USPS
with additional pricing flexibility over the current Consumer Price Index cap,
which may result in a substantially altered rate structure for mailers. The
newly revised rate authority that is effective as a result of new rules issued
by the PRC includes a higher overall rate cap on the USPS' ability to increase
rates from year to year. This may lead to price spikes for mailers and may also
reduce the incentive for the USPS to continue to take out costs and instead
continue to rely on postage to cover the costs of an outdated postal service
that does not reflect the industry's ability or willingness to pay. The
uncertainty as to the actual rate increases due to competing lawsuits from both
industry and the USPS , as well as how much of the authority the USPS will use,
also creates potential volume declines as rate predictability with respect to
cost and timing is no longer known for mailers. The result may be reduced demand
for printed products as clients may move more aggressively into other delivery
methods, such as the many digital and mobile options now available to consumers.
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The Company has invested significantly in its mail preparation and distribution
capabilities to mitigate the impact of increases in postage costs, and to help
clients successfully navigate the ever-changing postal environment. Through its
data analytics, unique software to merge mail streams on a large scale, advanced
finishing capabilities and technology, and in-house transportation and logistics
operations, the Company manages the mail preparation and distribution of most of
its clients' products to maximize efficiency, to enable on-time and consistent
delivery and to partially reduce these costs; however, the net impact of
increasing postal costs may create a decrease in client demand for print and
mail products.
The Company's results of operations have been and continue to be adversely
impacted as a result of the COVID-19 pandemic. Through the Company's Crisis
Management Team, including executive and operations leadership, the Company has
been executing business continuity plans focused on protecting the health and
well-being of our employees, while also continuing to service clients, and
protect the long-term financial health of the Company as the COVID-19 pandemic
continues. In 2020, the Company amended its Senior Secured Credit Facility to
provide for certain financial covenant relief through the fiscal quarter ending
September 30, 2021 , which includes suspending quarterly dividend payments
through the Covenant Relief Period The Company is continuing to evaluate its
cost structure and expects to implement additional cost reduction measures as
necessary. As the pandemic continues to evolve, the extent of the impact on the
Company's business, financial condition, cash flows, results of operations and
supply chain will depend on future developments, all of which are still highly
uncertain.
The increasing cost and availability of raw materials, such as paper, ink,
supplies 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 with an increasing
inflow of client requests for future periods, including the Company's seasonally
higher third and fourth quarters. In addition, the Company has experienced and
anticipates it will continue to experience certain distribution challenges,
including, but not limited to, the above-noted delivery delays at the USPS and
recent volume restrictions at the United Parcel Service, Federal Express and
certain local couriers. As the supply chain, labor shortages, 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.
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Results of Operations for the Three Months Ended June 30, 2021 , Compared to the
Three Months Ended June 30, 2020 Summary Results
The Company's operating income (loss) from continuing operations, operating margin, net earnings (loss) attributable to Quad common shareholders (computed using a 25% normalized tax rate for all items subject to tax) and diluted earnings (loss) per share attributable to Quad common shareholders for the three months endedJune 30, 2021 , changed from the three months endedJune 30, 2020 , as follows (dollars in millions, except margin and per share data): Net Earnings Diluted Earnings Operating (Loss) (Loss) Per Share Income (Loss) from Attributable to Attributable to Continuing Quad Common Quad Common Operations Operating Margin Shareholders Shareholders For the Three Months Ended June 30, 2020 $ (2.8) (0.5) %$ (23.5) $ (0.46) Gain from sale and leaseback (1) 13.7 2.0 % 10.3 0.20 Restructuring, impairment and transaction-related charges (2) 29.8 4.7 % 22.3 0.42 Interest expense (3) N/A N/A 0.4 0.02 Net pension income (4) N/A N/A 0.7 0.01 2020 loss on debt extinguishment (5) N/A N/A 1.8 0.04 Income taxes (6) N/A N/A 8.1 0.15 Loss from discontinued operations, net of tax (7) N/A N/A 8.7 0.17 Investments in unconsolidated entity and noncontrolling interests, net of tax (8) N/A N/A 0.1 0.01 Operating income from continuing operations (9) 7.3 0.7 % 5.5 0.10 For the Three Months Ended June 30, 2021 $ 48.0 6.9 %$ 34.4 $ 0.66
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(1)The Company executed a sale and leaseback of its
(2)Restructuring, impairment and transaction-related charges decreased
a.A
b.A$0.8 million decrease in impairment charges from$1.7 million during the three months endedJune 30, 2020 , to$0.9 million during the three months endedJune 30, 2021 ;
c.A
d.A
e.A
The Company expects to incur additional restructuring and integration costs in future reporting periods in connection with eliminating excess manufacturing capacity and properly aligning its cost structure in conjunction with the Company's acquisitions and strategic investments, and other cost reduction programs. (3)Interest expense decreased$0.6 million ($0.4 million , net of tax) during the three months endedJune 30, 2021 , to$15.6 million . This change was due to lower average debt levels, partially offset by a$0.4 million increase in interest expense related to the interest rate swaps in the three months endedJune 30, 2021 , as compared to the three months endedJune 30, 2020 . 45 -------------------------------------------------------------------------------- Table of Contents (4)Net pension income increased$0.9 million ($0.7 million , net of tax) during the three months endedJune 30, 2021 , to$3.5 million . This was due to a$1.3 million decrease from interest cost on pension plan liabilities and a$0.2 million increase from the expected long-term return on pension plan assets, partially offset by a non-cash settlement charge of$0.6 million . (5)A$2.4 million loss on debt extinguishment ($1.8 million , net of tax) was recognized during the three months endedJune 30, 2020 , primarily relating to the fourth amendment to the Company'sApril 28, 2014 Senior Secured Credit Facility, completed onJune 29, 2020 . (6)The$8.1 million increase in income tax benefit on continuing operations as calculated in the following table is primarily due to an$8.4 million increase from decreased valuation allowance reserves. Three Months Ended
2021 2020 $ Change
Earnings (loss) from continuing operations before
income taxes and equity in loss of unconsolidated
entity $ 35.9 $ (18.8) $ 54.7
Normalized tax rate 25.0 % 25.0 %
Income tax expense (benefit) at normalized tax rate 9.0 (4.7) 13.7
Income tax expense (benefit) from the condensed
consolidated statements of operations 1.3 (4.3) 5.6
Impact of income taxes $ 7.7 $ (0.4) $ 8.1 (7)The loss from discontinued operations, net of tax, of
(8)The increase from investments in unconsolidated entity and noncontrolling interests, net of tax, of$0.1 million during the three months endedJune 30, 2021 , was primarily related to a$0.3 million decrease in the loss at the Company's investment in Plural Industria Gráfica Ltda. ("Plural"), the Company's Brazilian joint venture, partially offset by a$0.2 million decrease in the loss attributed to noncontrolling interests in the Company's condensed consolidated statements of operations related to the Company's majority ownership of Rise. (9)Operating income from continuing operations, excluding the gain from sale and leaseback and restructuring, impairment and transaction-related charges, increased$7.3 million ($5.5 million , net of tax) primarily due to the following: (1) an increase in print volume and services net sales; (2) a$8.0 million decrease in depreciation and amortization expense; (3) a$3.6 million net benefit in 2021 in the cost of worker's compensation claims from improved production safety procedures; (4) a$3.5 million increase in paper byproduct recoveries; and (5) savings from other cost reduction initiatives. These increases were partially offset by COVID-related temporary cost reduction from temporary salary reductions and furloughs in 2020. 46 -------------------------------------------------------------------------------- Table of Contents Operating Results from Continuing Operations 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 June 30, 2021 2020 (dollars in millions) % of % of % Amount Sales Amount Sales $ Change Change Net sales: Products$ 511.6 73.7 %$ 447.7 76.6 %$ 63.9 14.3 % Services 182.3 26.3 % 136.8 23.4 % 45.5 33.3 % Total net sales 693.9 100.0 % 584.5 100.0 % 109.4 18.7 % Cost of sales: Products 413.7 59.6 % 362.9 62.1 % 50.8 14.0 % Services 140.5 20.2 % 98.0 16.8 % 42.5 43.4 % Total cost of sales 554.2 79.8 % 460.9 78.9 % 93.3 20.2 % Selling, general & administrative expenses 80.1 11.6 % 63.3 10.8 % 16.8 26.5 % Gain from sale and leaseback (13.7) (2.0) % - - % (13.7) (100.0) % Depreciation and amortization 38.7 5.6 % 46.7 8.0 % (8.0) (17.1) % Restructuring, impairment and transaction-related charges (13.4) (1.9) % 16.4 2.8 % (29.8) (181.7) % Total operating expenses 645.9 93.1 % 587.3 100.5 % 58.6 10.0 % Operating income (loss) from continuing operations$ 48.0 6.9 %$ (2.8) (0.5) %$ 50.8 N/A Net Sales Product sales increased$63.9 million , or 14.3%, for the three months endedJune 30, 2021 , compared to the three months endedJune 30, 2020 , primarily due to the following: (1) a$44.5 million increase in sales in the Company's print product lines primarily due to organic growth compared to the COVID-19 pandemic impacted three months endedJune 30, 2020 ; (2) a$17.0 million increase from pass-through paper sales; and (3)$2.4 million in favorable foreign exchange impacts. Service sales, which primarily consist of logistics, distribution, marketing services, imaging and medical services, increased$45.5 million , or 33.3%, for the three months endedJune 30, 2021 , compared to the three months endedJune 30, 2020 , primarily due to a$32.9 million increase in logistics sales and a$12.1 million increase in print imaging services and sales of marketing services.
Cost of Sales
Cost of product sales increased$50.8 million , or 14.0%, for the three months endedJune 30, 2021 , compared to the three months endedJune 30, 2020 , primarily due to the following: (1) higher print volume; (2) an increase in pass-through paper costs; and (3) the impact from the rising costs of materials and other costs of production. These increases were partially offset by the following: (1) a$3.6 million net benefit in 2021 in the cost of worker's compensation claims from improved production safety procedures; (2) a$3.5 million increase in paper byproduct recoveries; and (3) other cost reduction initiatives. Cost of service sales increased$42.5 million , or 43.4%, for the three months endedJune 30, 2021 , compared to the three months endedJune 30, 2020 , primarily due to higher logistics, print imaging and marketing service sales. 47 -------------------------------------------------------------------------------- Table of Contents Selling, General and Administrative Expenses Selling, general and administrative expenses increased$16.8 million , or 26.5%, for the three months endedJune 30, 2021 , compared to the three months endedJune 30, 2020 , primarily due to the following: (1) a$12.3 million increase in employee-related costs, primarily related to COVID-related temporary cost reduction from salary reductions and furloughs in 2020; (2) a$2.3 million increase in foreign translation losses; and (3) the receipt of a$1.6 million COVID-19 related government subsidy inPoland in 2020 that did not repeat in 2021. Selling, general and administrative expenses as a percentage of net sales increased to 11.6% for the three months endedJune 30, 2021 , compared to 10.8% for the three months endedJune 30, 2020 .
Gain from sale and leaseback
The Company executed a sale and leaseback of itsChalfont, Pennsylvania facility resulting in a$13.7 million ($10.3 million , net of tax) gain during the three months endedJune 30, 2021 .
Depreciation and Amortization
Depreciation and amortization decreased$8.0 million , or 17.1%, for the three months endedJune 30, 2021 , compared to the three months endedJune 30, 2020 , due to a$5.6 million decrease in depreciation expense, primarily related to property, plant and equipment becoming fully depreciated over the past year, and a$2.4 million decrease in amortization expense.
Restructuring, Impairment and Transaction-Related Charges
Restructuring, impairment and transaction-related charges decreased
Three Months Ended June 30,
2021 2020 $ Change
Employee termination charges $ 2.8 $ 9.5 $ (6.7)
Impairment charges (a) 0.9 1.7 (0.8)
Transaction-related charges 0.2 0.3 (0.1)
Integration costs - 0.4 (0.4)
Other restructuring charges (income)
Vacant facility carrying costs and lease exit charges 6.3 2.4 3.9
Equipment and infrastructure removal costs 0.2 0.4 (0.2)
Gains on the sale of facilities (b) (2.3) - (2.3)
Other restructuring activities (c) (21.5) 1.7 (23.2)
Other restructuring charges (income) (17.3) 4.5 (21.8)
Total restructuring, impairment and transaction-related charges
$ (13.4) $ 16.4 $ (29.8) ______________________________
(a)Includes$0.9 million and$1.7 million of impairment charges for machinery and equipment no longer being utilized in production as a result of facility consolidations, as well as other capacity reduction restructuring activities during the three months endedJune 30, 2021 and 2020, respectively. (b)Includes$2.1 million of gains on the sale of other facilities during the three months endedJune 30, 2021 . (c)Includes a$20.9 million gain on the sale of a business during the three months endedJune 30, 2021 . 48
-------------------------------------------------------------------------------- Table of Contents EBITDA and EBITDA Margin-Consolidated
EBITDA and EBITDA margin for the three months ended
Three Months Ended June 30,
2021 2020
Amount % of Net Sales Amount % of Net Sales
(dollars in millions)
EBITDA and EBITDA margin (non-GAAP) $ 90.0 13.0 % $ 35.1 6.0 %
EBITDA increased $54.9 million for the three months ended June 30, 2021 ,
compared to the three months ended June 30, 2020 , primarily due to the
following: (1) higher print volume and service sales; (2) $29.8 million of
decreased restructuring, impairment and transaction-related charges; (3) a $13.7
million gain from sale and leaseback; (4) a $8.7 million decrease in loss from
discontinued operations, net of tax; (5) a $3.6 million net benefit in 2021 in
the cost of worker's compensation claims from improved production safety
procedures; (6) a $3.5 million increase in paper byproduct recoveries; and
(7) savings from other cost reduction initiatives. The increase was partially
offset by COVID-related temporary cost reductions primarily from temporary
salary reduction and furloughs in 2020.
EBITDA is defined as net earnings (loss) attributable to Quad common
shareholders, excluding (1) interest expense, (2) income tax expense (benefit),
and (3) depreciation and amortization. EBITDA margin represents EBITDA as a
percentage of net sales. EBITDA and EBITDA margin are presented to provide
additional information regarding Quad's performance. Both are important measures
by which Quad gauges the profitability and assesses the performance of its
business. EBITDA and EBITDA margin are non-GAAP financial measures and should
not be considered alternatives to net earnings (loss) as a measure of operating
performance, or to cash flows provided by operating activities as a measure of
liquidity. Quad's calculation of EBITDA and EBITDA margin may be different from
the calculations used by other companies, and therefore, comparability may be
limited.
A reconciliation of EBITDA to net earnings (loss) attributable to Quad common
shareholders for the three months ended June 30, 2021 and 2020, was as follows:
Three Months Ended June 30,
2021 2020
(dollars in millions) Net earnings (loss) attributable to Quad common shareholders (1)
$ 34.4 $ (23.5)
Interest expense 15.6 16.2
Income tax expense (benefit) 1.3 (4.3)
Depreciation and amortization 38.7 46.7
EBITDA (non-GAAP) $ 90.0 $ 35.1 ______________________________
(1)Net earnings (loss) attributable to Quad common shareholders included the following: a.Restructuring, impairment and transaction-related income of$13.4 million and charges of$16.4 million for the three months endedJune 30, 2021 and 2020, respectively; b.Gain from sale and leaseback of$13.7 million for the three months endedJune 30, 2021 ; c.Net pension income of$3.5 million and$2.6 million for the three months endedJune 30, 2021 and 2020, respectively; d.Loss on debt extinguishment of$2.4 million for the three months endedJune 30, 2020 ; e.Equity in loss of unconsolidated entity of$0.2 million and$0.5 million for the three months endedJune 30, 2021 and 2020, respectively; f.Loss from discontinued operations, net of tax, of$8.7 million for the three months endedJune 30, 2020 ; and g.Net loss attributable to noncontrolling interests of$0.2 million for the three months endedJune 30, 2020 . 49 -------------------------------------------------------------------------------- Table of Contents United States Print and Related Services
The following table summarizes net sales, operating income from continuing operations, operating margin and certain items impacting comparability within the United States Print and Related Services segment:
Three Months Ended June 30,
2021 2020
(dollars in millions)
Amount Amount $ Change % Change
Net sales:
Products $ 433.3 $ 393.0 $ 40.3 10.3 %
Services 177.6 133.5 44.1 33.0 %
Operating income from continuing operations
(including restructuring, impairment and
transaction-related charges) 55.8 8.3 47.5 572.3 %
Operating margin 9.1 % 1.6 % N/A N/A
Restructuring, impairment and
transaction-related charges $ (14.5) $ 13.4 $ (27.9) (208.2) %
Net Sales
Product sales for the United States Print and Related Services segment increased
$40.3 million , or 10.3%, for the three months ended June 30, 2021 , compared to
the three months ended June 30, 2020 , primarily due to a $32.5 million increase
in sales in the Company's print product lines due to organic growth compared to
the COVID-19 pandemic impacted three months ended June 30, 2020
and a $7.8 million increase from pass-through paper sales.
Service sales for the United States Print and Related Services segment increased
$44.1 million , or 33.0%, for the three months ended June 30, 2021 , compared to
the three months ended June 30, 2020 , primarily due to a $31.9 million increase
in logistics sales and a $11.7 million increase in print imaging services and
sales of marketing services.
Operating Income from Continuing Operations
Operating income from continuing operations for the United States Print and Related Services segment increased$47.5 million , or 572.3%, for the three months endedJune 30, 2021 , compared to the three months endedJune 30, 2020 , primarily due to the following: (1) an increase in print volume and services net sales; (2) a$27.9 million decrease in restructuring, impairment and transaction-related charges; (3) a$13.7 million gain from sale and leaseback; (4) a$7.5 million decrease in depreciation and amortization expense; (5) a$3.6 million net benefit in 2021 in the cost of worker's compensation claims from improved production safety procedures; (6) a$3.5 million increase in paper byproduct recoveries; and (7) savings from other cost reduction initiatives. These increases were partially offset by COVID-related temporary cost reductions primarily from temporary salary reductions and furloughs in 2020.
Operating margin for the United States Print and Related Services segment
increased to 9.1% for the three months ended
50
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Restructuring, Impairment and Transaction-Related Charges
Restructuring, impairment and transaction-related charges for the United States
Print and Related Services segment decreased $27.9 million for the three months
ended June 30, 2021 , compared to the three months ended June 30, 2020 , primarily
due to the following:
Three Months Ended June 30,
2021 2020 $ Change
Employee termination charges $ 2.9 $ 8.3 $ (5.4)
Impairment charges (a) 0.9 1.7 (0.8)
Transaction-related charges - 0.1 (0.1)
Integration costs - 0.4 (0.4)
Other restructuring charges (income) (b) (18.3) 2.9 (21.2)
Total restructuring, impairment and transaction-related charges
$ (14.5) $ 13.4 $ (27.9) ______________________________
(a)Includes$0.9 million and$1.7 million of impairment charges for machinery and equipment no longer being utilized in production as a result of facility consolidations, as well as other capacity reduction restructuring activities during the three months endedJune 30, 2021 and 2020, respectively. (b)Includes a$20.9 million gain on the sale of a business during the three months endedJune 30, 2021 .
International
The following table summarizes net sales, operating income (loss) from
continuing operations, operating margin, certain items impacting comparability
and equity in loss of unconsolidated entity within the International segment:
Three Months Ended June 30,
2021 2020
(dollars in millions)
Amount Amount $ Change % Change
Net sales:
Products $ 78.3 $ 54.7 $ 23.6 43.1 %
Services 4.7 3.3 1.4 42.4 %
Operating income (loss) from continuing
operations (including restructuring, impairment
and transaction-related charges) 3.0 (0.7) 3.7 nm
Operating margin 3.6 % (1.2) % N/A N/A
Restructuring, impairment and
transaction-related charges $ 0.9 $ 2.8 $ (1.9) (67.9) %
Equity in loss of unconsolidated entity 0.2 0.5 (0.3) (60.0) %
Net Sales
Product sales for the International segment increased $23.6 million , or 43.1%,
for the three months ended June 30, 2021 , compared to the three months ended
June 30, 2020 , primarily due to the following: (1) a $12.4 million increase in
volume, primarily in Europe , Mexico and Colombia ; (2) an $8.8 million increase
in pass-through paper sales; and (3) $2.4 million in favorable foreign exchange
impacts, primarily in Europe and Mexico .
Service sales for the International segment increased $1.4 million , or 42.4%,
for the three months ended June 30, 2021 , compared to the three months ended
June 30, 2020 , primarily due to an increase in logistics sales and imaging
services in Europe .
51-------------------------------------------------------------------------------- Table of Contents Operating Income (Loss) from Continuing Operations Operating income from continuing operations for the International segment increased$3.7 million for the three months endedJune 30, 2021 , compared to the three months endedJune 30, 2020 , primarily due to a$3.4 million increase in operating income, primarily inMexico , and a$1.9 million decrease in restructuring, impairment and transaction-related charges, partially offset by the receipt of a$1.6 million COVID-19 related government subsidy inPoland in 2020 that did not repeat in 2021.
Restructuring, Impairment and Transaction-Related Charges
Restructuring, impairment and transaction-related charges for the International segment decreased$1.9 million , or 67.9%, for the three months endedJune 30, 2021 , compared to the three months endedJune 30, 2020 , primarily due to the following: Three Months Ended June 30, 2021 2020 $ Change Employee termination charges $ (0.1)$ 1.2 $ (1.3) Other restructuring charges (a) 1.0 1.6 (0.6)
Total restructuring, impairment and transaction-related charges
$ 0.9 $ 2.8 $ (1.9) ______________________________
(a)Includes$0.6 million and$1.0 million in charges from foreign currency losses as a result of the economy inArgentina being classified as highly inflationary during the three months endedJune 30, 2021 and 2020, respectively. The Company has considered the economy inArgentina to be highly inflationary sinceJune 30, 2018 .
Equity in Loss 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 holds a 49% ownership interest in Plural, a commercial printer based inSão Paulo, Brazil . The equity in loss of unconsolidated entity in the International segment decreased$0.3 million for the three months endedJune 30, 2021 , compared to the three months endedJune 30, 2020 , due to a decrease in loss at the Company's investment in Plural.
Unrestricted Subsidiaries
As of
Corporate
The following table summarizes unallocated operating expenses presented as
Corporate:
Three Months Ended June 30,
2021 2020
(dollars in millions)
Amount Amount $ Change % Change
Operating expenses (including
restructuring, impairment and transaction-related
charges) $ 10.8 $ 10.4 $ 0.4 3.8 %
Restructuring, impairment and transaction-related
charges 0.2 0.2 - - %
Operating Expenses
Corporate operating expenses increased
52
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Restructuring, Impairment and Transaction-Related Charges
Corporate restructuring, impairment and transaction-related charges were
53
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Results of Operations for the Six Months Ended June 30, 2021 , Compared to the
Six Months Ended June 30, 2020 Summary Results
The Company's operating income from continuing operations, operating margin, net earnings (loss) attributable to Quad common shareholders (computed using a 25% normalized tax rate for all items subject to tax) and diluted earnings (loss) per share attributable to Quad common shareholders for the six months endedJune 30, 2021 , changed from the six months endedJune 30, 2020 , as follows (dollars in millions, except margin and per share data): Net Earnings Diluted Earnings Operating (Loss) (Loss) Per Share Income from Attributable to Attributable to Continuing Quad Common Quad Common Operations Operating Margin Shareholders Shareholders For the six months ended June 30, 2020 $ 2.2 0.2 %$ (35.9) $ (0.71) Gain from sale and leaseback (1) 13.7 1.0 % 10.3 0.20 Restructuring, impairment and transaction-related charges (2) 50.0 3.6 % 37.5 0.73 Interest expense (3) N/A N/A 3.0 0.08 Net pension income (4) N/A N/A 1.7 0.03 2020 loss on debt extinguishment (5) N/A N/A 1.4 0.02 Income taxes (6) N/A N/A 11.5 0.22 Loss from discontinued operations, net of tax (7) N/A N/A 12.5 0.25 Investments in unconsolidated entity and noncontrolling interests, net of tax (8) N/A N/A 0.2 0.01 Operating income from continuing operations (9) 3.1 0.1 % 2.4 0.02 For the six months ended June 30, 2021 $ 69.0 4.9 %$ 44.6 $ 0.85
______________________________
(1)The Company executed a sale and leaseback of its
(2)Restructuring, impairment and transaction-related charges decreased
a.A$14.6 million decrease in employee termination charges from$22.1 million during the six months endedJune 30, 2020 , to$7.5 million during the six months endedJune 30, 2021 ; b.A$2.5 million decrease in impairment charges from$4.2 million during the six months endedJune 30, 2020 , to$1.7 million during the six months endedJune 30, 2021 ;
c.A
d.A
e.A
The Company expects to incur additional restructuring and integration costs in future reporting periods in connection with eliminating excess manufacturing capacity and properly aligning its cost structure in conjunction with the Company's acquisitions and strategic investments, and other cost reduction programs. (3)Interest expense decreased$4.2 million ($3.0 million , net of tax) during the six months endedJune 30, 2021 , to$30.1 million . This change was due to lower average debt levels and a lower weighted average interest rate on borrowings, partially offset by a$0.9 million increase in interest expense related to the interest rate swaps in the six months endedJune 30, 2021 , as compared to the six months endedJune 30, 2020 . 54 -------------------------------------------------------------------------------- Table of Contents (4)Net pension income increased$2.3 million ($1.7 million , net of tax) during the six months endedJune 30, 2021 , to$7.6 million . This was due to a$2.6 million decrease from interest cost on pension plan liabilities and a$0.3 million increase from the expected long-term return on pension plan assets, partially offset by a non-cash settlement charge of$0.6 million . (5)A$1.8 million loss on debt extinguishment ($1.4 million , net of tax) was recognized during the six months endedJune 30, 2020 , primarily relating to$2.4 million loss on debt extinguishment from the fourth amendment to the Company'sApril 28, 2014 Senior Secured Credit Facility, completed onJune 29, 2020 , partially offset by a$0.6 million gain on debt extinguishment recorded during the first quarter of 2020, primarily related to the repurchase of the Company's unsecured 7.0% senior notes dueMay 1, 2022 . (6)The$11.5 million increase in income tax benefit on continuing operations as calculated in the following table is primarily due to the following: (1) a$13.1 million increase from decreased valuation allowance reserves; (2) a$1.6 million increase from equity award activity; and (3) a$1.0 million increase from a reduction in the Company's liability for unrecognized income tax benefits. These increases were partially offset by a$5.2 million income tax benefit related to the CARES Act net operating loss carry back provisions in 2020 that did not repeat in 2021. Six Months Ended June 30, 2021 2020 $ Change Earnings (loss) from continuing operations before income taxes and equity in earnings of unconsolidated entity$ 46.5 $ (28.6) $ 75.1 Normalized tax rate 25.0 % 25.0 % Income tax expense (benefit) at normalized tax rate 11.6 (7.2) 18.8 Income tax expense (benefit) from the condensed consolidated statements of operations 1.8 (5.5) 7.3 Impact of income taxes$ 9.8 $ (1.7) $ 11.5
(7)The loss from discontinued operations, net of tax, of
(8)The increase in investments in unconsolidated entity and noncontrolling interests, net of tax, of$0.2 million during the six months endedJune 30, 2021 , was due to an increase in earnings at the Company's investment in Plural Industria Grafica Ltda., the Company's Brazilian joint venture, partially offset by a$0.2 million decrease in the loss attributed to noncontrolling interests in the Company's condensed consolidated statements of operations related to the Company's majority ownership of Rise. (9)Operating income from continuing operations, excluding the gain from sale and leaseback and restructuring, impairment and transaction-related charges, increased$3.1 million ($2.4 million , net of tax impact) during the six months endedJune 30, 2021 , primarily due to the following: (1) a$13.5 million decrease in depreciation and amortization expense; (2) a$2.3 million decrease in selling, general and administrative expenses; (3) a$6.2 million increase in paper byproduct recoveries; and (4) savings from other cost reduction initiatives. These cost decreases were partially offset by COVID-related temporary cost reduction from temporary salary reductions and furloughs in 2020 and a$12.0 million benefit in 2020 from a change in the hourly production employee vacation policy. 55 -------------------------------------------------------------------------------- Table of Contents Operating Results from Continuing Operations 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: Six Months Ended June 30, 2021 2020 (dollars in millions) % of % of % Amount Sales Amount Sales $ Change Change Net sales: Products$ 1,037.6 74.1 %$ 1,092.7 77.7 %$ (55.1) (5.0) % Services 362.1 25.9 % 314.3 22.3 % 47.8 15.2 % Total net sales 1,399.7 100.0 % 1,407.0 100.0 % (7.3) (0.5) % Cost of sales: Products 842.0 60.2 % 886.6 63.0 % (44.6) (5.0) % Services 272.0 19.4 % 222.0 15.8 % 50.0 22.5 % Total cost of sales 1,114.0 79.6 % 1,108.6 78.8 % 5.4 0.5 % Selling, general & administrative expenses 160.6 11.5 % 162.9 11.5 % (2.3) (1.4) % Gain from sale and leaseback (13.7) (1.0) % - - % (13.7) (100.0) % Depreciation and amortization 80.6 5.8 % 94.1 6.7 % (13.5) (14.3) % Restructuring, impairment and transaction-related charges (10.8) (0.8) % 39.2 2.8 % (50.0) (127.6) % Total operating expenses 1,330.7 95.1 % 1,404.8 99.8 % (74.1) (5.3) % Operating income from continuing operations$ 69.0 4.9 %$ 2.2 0.2 %$ 66.8 N/A Net Sales Product sales decreased$55.1 million , or 5.0%, for the six months endedJune 30, 2021 , compared to the six months endedJune 30, 2020 , primarily due to the following: (1) a$35.4 million decrease from pass-through paper sales; (2) a$15.0 million decrease in sales in the Company's print product lines due to ongoing industry volume pressure, including the impacts from the COVID-19 pandemic; and (3) a$7.5 million decrease in sales due to the divestiture of the Company'sOmaha packaging plant. These decreases were partially offset by$2.8 million in favorable foreign exchange impacts. Service sales, which primarily consist of logistics, distribution, marketing services, imaging and medical services, increased$47.8 million , or 15.2%, for the six months endedJune 30, 2021 , compared to the six months endedJune 30, 2020 , primarily due to a$36.3 million increase in logistics sales and a$12.1 million increase in print imaging services and sales of marketing services.
Cost of Sales
Cost of product sales decreased$44.6 million , or 5.0%, for the six months endedJune 30, 2021 , compared to the six months endedJune 30, 2020 , primarily due to the following: (1) a decrease in pass-through paper costs; (2) lower print volume due to ongoing industry volume pressure, including the impacts from the COVID-19 pandemic; (3) the impact from the divestiture of theOmaha packaging plant; (4) a$6.2 million increase in paper byproduct recoveries; and (5) other cost reduction initiatives. These decreases were partially offset by (1) a$12.0 million benefit in 2020 from a change in the hourly production employee vacation policy; and (2) a$2.7 million net benefit in 2020 in the cost of worker's compensation claims from improved production safety procedures.
Cost of service sales increased
56
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Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased $2.3 million , or 1.4%,
for the six months ended June 30, 2021 , compared to the six months ended
June 30, 2020 , primarily due to a $5.2 million decrease in credit loss expense
primarily due to specific client credit reviews and a $3.6 million decrease from
foreign translations impacts, partially offset by a $5.2 million increase in
employee-related costs. Selling, general and administrative expenses as a
percentage of net sales was 11.5% for the six months ended June 30, 2021 and
June 30, 2020 .
Gain from sale and leaseback
The Company executed a sale and leaseback of its Chalfont, Pennsylvania facility
resulting in a $13.7 million ($10.3 million , net of tax) gain during the six
months ended June 30, 2021 .
Depreciation and Amortization
Depreciation and amortization decreased$13.5 million , or 14.3%, for the six months endedJune 30, 2021 , compared to the six months endedJune 30, 2020 , due to a$10.3 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$3.2 million decrease in amortization expense.
Restructuring, Impairment and Transaction-Related Charges
Restructuring, impairment and transaction-related charges decreased
Six Months Ended
June 30,
2021 2020 $ Change
Employee termination charges $ 7.5 $ 22.1 $ (14.6)
Impairment charges (a) 1.7 4.2 (2.5)
Transaction-related charges 0.4 0.8 (0.4)
Integration costs - 1.1 (1.1)
Other restructuring charges (income)
Vacant facility carrying costs and lease exit charges 10.2 5.1 5.1
Equipment and infrastructure removal costs 1.0 1.0 -
Gains on the sale of facilities (b) (10.1) (0.8) (9.3)
Other restructuring activities (c) (21.5) 5.7 (27.2)
Other restructuring charges (income) (20.4) 11.0 (31.4)
Total restructuring, impairment and transaction-related charges
$
(10.8)
______________________________
(a)Includes$1.7 million and$4.2 million of impairment charges for machinery and equipment no longer being utilized in production as a result of facility consolidations, as well as other capacity reduction restructuring activities, during the six months endedJune 30, 2021 and 2020, respectively. (b)Includes$9.7 million of gains on the sale of theRiverside, California and other facilities during the six months endedJune 30, 2021 ; and includes a$0.8 million gain on the sale of theShakopee, Minnesota facility during the six months endedJune 30, 2020 . (c)Includes a $20.9 million gain on the sale of a business and$2.9 million loss on the sale of a business during the six months endedJune 30, 2021 and 2020, respectively. 57
-------------------------------------------------------------------------------- Table of Contents EBITDA and EBITDA Margin-Consolidated
EBITDA and EBITDA margin for the six months ended
Six Months Ended June 30,
2021 2020
Amount % of Net Sales Amount % of Net Sales
(dollars in millions)
EBITDA and EBITDA margin (non-GAAP) $ 157.1 11.2 % $ 87.0 6.2 %
EBITDA increased $70.1 million for the six months ended June 30, 2021 , compared
to the six months ended June 30, 2020 , primarily due to the following:
(1) $50.0 million of decreased restructuring, impairment and transaction-related
charges; (2) a $13.7 million gain from sale and leaseback; (3) a $12.5 million
decrease in loss from discontinued operations, net of tax; (4) a $2.3 million
decrease in selling, general and administrative expenses; (5) a $6.2 million
increase in paper byproduct recoveries; and (6) savings from other cost
reduction initiatives. These increases were partially offset by the following:
(1) COVID-related temporary cost reductions primarily from temporary salary
reduction and furloughs in 2020; (2) lower print volume; and (3) a $12.0 million
net benefit in 2020 from a change in the hourly production employee vacation
policy.
EBITDA is defined as net earnings (loss) attributable to Quad common
shareholders, excluding (1) interest expense, (2) income tax expense (benefit)
and (3) depreciation and amortization. EBITDA margin represents EBITDA as a
percentage of net sales. EBITDA and EBITDA margin are presented to provide
additional information regarding Quad's performance. Both are important measures
by which Quad gauges the profitability and assesses the performance of its
business. EBITDA and EBITDA margin are non-GAAP financial measures and should
not be considered alternatives to net earnings (loss) as a measure of operating
performance, or to cash flows provided by operating activities as a measure of
liquidity. Quad's calculation of EBITDA and EBITDA margin may be different from
the calculations used by other companies, and therefore, comparability may be
limited.
A reconciliation of EBITDA to net earnings (loss) attributable to Quad common
shareholders for the six months ended
Six Months Ended
2021 2020
(dollars in millions) Net earnings (loss) attributable to Quad common shareholders (1)
$ 44.6 $ (35.9) Interest expense 30.1 34.3 Income tax expense (benefit) 1.8 (5.5) Depreciation and amortization 80.6 94.1 EBITDA (non-GAAP)$ 157.1 $ 87.0
______________________________
(1)Net earnings (loss) attributable to Quad common shareholders included the following: a.Restructuring, impairment and transaction-related income of$10.8 million and charges of$39.2 million for the six months endedJune 30, 2021 and 2020, respectively; b.Gain from sale and leaseback of$13.7 million for the six months endedJune 30, 2021 ; c.Net pension income of$7.6 million and$5.3 million for the six months endedJune 30, 2021 and 2020, respectively; d.Loss on debt extinguishment of$1.8 million for the six months endedJune 30, 2020 ; e.Equity in loss of unconsolidated entity of$0.1 million and$0.5 million for the six months endedJune 30, 2021 and 2020, respectively; and f.Loss from discontinued operations, net of tax, of$12.5 million for the six months endedJune 30, 2020 . 58
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The following table summarizes net sales, operating income from continuing operations, operating margin and certain items impacting comparability within the United States Print and Related Services segment:
Six Months Ended June 30,
2021 2020
(dollars in millions)
Amount Amount $ Change % Change
Net sales:
Products $ 893.2 $ 956.6 $ (63.4) (6.6) %
Services 352.3 306.5 45.8 14.9 %
Operating income from continuing operations
(including restructuring, impairment and
transaction-related charges) 88.3 24.6 63.7 258.9 %
Operating margin 7.1 % 1.9 % N/A N/A
Restructuring, impairment and
transaction-related charges $ (13.4) $ 34.2 $ (47.6) (139.2) %
Net Sales
Product sales for the United States Print and Related Services segment decreased
$63.4 million , or 6.6%, for the six months ended June 30, 2021 , compared to the
six months ended June 30, 2020 , primarily due to the following: (1) a
$39.6 million decrease from pass-through paper sales; (2) a $16.3 million
decrease in sales in the Company's print product lines due to ongoing industry
volume pressure, including the impacts from the COVID-19 pandemic; and (3) a
$7.5 million decrease in sales due to the divestiture of the Company's Omaha
packaging plant.
Service sales for the United States Print and Related Services segment increased
$45.8 million , or 14.9%, for the six months ended June 30, 2021 , compared to the
six months ended June 30, 2020 , primarily due to a $34.6 million increase in
logistics sales and a $11.8 million increase in print imaging services and sales
of marketing services.
Operating Income from Continuing Operations
Operating income from continuing operations for the United States Print and
Related Services segment increased $63.7 million , or 258.9%, for the six months
ended June 30, 2021 , compared to the six months ended June 30, 2020 , primarily
due to the following: (1) a $47.6 million decrease in restructuring, impairment
and transaction-related charges; (2) a $13.7 million gain from sale and
leaseback; (3) a $12.8 million decrease in depreciation and amortization
expense; (4) an $8.9 million decrease in selling, general and administrative
expenses; (5) a $6.2 million increase in paper byproduct recoveries; and (6)
savings from other cost reduction initiatives. These increases were partially
offset by the following: (1) lower print volume due to ongoing industry
pressures, including the impacts from the COVID-19 pandemic; (2) a $12.0 million
net benefit in 2020 from a change in the hourly production employee vacation
policy; (3) a $2.7 million net benefit in 2020 in the cost of worker's
compensation claims from improved production safety procedures; and (4)
COVID-related temporary cost reductions primarily from temporary salary
reduction and furloughs in 2020.
Operating margin for the United States Print and Related Services segment
increased to 7.1% for the six months ended
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Restructuring, Impairment and Transaction-Related Charges
Restructuring, impairment and transaction-related charges for the United States
Print and Related Services segment decreased $47.6 million for the six months
ended June 30, 2021 , compared to the six months ended June 30, 2020 , primarily
due to the following:
Six Months Ended
June 30,
2021 2020 $ Change
Employee termination charges $ 6.6 $ 20.4 $ (13.8)
Impairment charges (a) 1.7 4.2 (2.5)
Transaction-related charges - 0.1 (0.1)
Integration costs - 1.1 (1.1)
Other restructuring charges (income) (b) (21.7) 8.4 (30.1)
Total restructuring, impairment and transaction-related charges
$
(13.4)
______________________________
(a)Includes$1.7 million and$4.2 million of impairment charges for machinery and equipment no longer being utilized in production as a result of facility consolidations, as well as other capacity reduction restructuring activities, during the six months endedJune 30, 2021 and 2020, respectively. (b)Includes a$20.9 million gain on the sale of a business and$9.7 million of gains on the sale ofRiverside, California and other facilities during the six months endedJune 30, 2021 ; and includes a$2.9 million loss on the sale of a business, net of a$0.8 million gain on the sale of theShakopee, Minnesota facility during the six months endedJune 30, 2020 .
International
The following table summarizes net sales, operating income (loss) from
continuing operations, operating margin, certain items impacting comparability
and equity in loss of unconsolidated entity within the International segment:
Six Months Ended June 30,
2021 2020
(dollars in millions)
Amount Amount $ Change % Change
Net sales:
Products $ 144.4 $ 136.1 $ 8.3 6.1 %
Services 9.8 7.8 2.0 25.6 %
Operating income from continuing operations
(including restructuring, impairment and
transaction-related charges) 4.5 (0.4) 4.9 nm
Operating margin 2.9 % (0.3) % N/A N/A
Restructuring, impairment and
transaction-related charges $ 1.7 $ 4.1 $ (2.4) (58.5) %
Equity in loss of unconsolidated entity 0.1 0.5 0.4 80.0 %
Net Sales
Product sales for the International segment increased $8.3 million , or 6.1%, for
the six months ended June 30, 2021 , compared to the six months ended June 30,
2020 , primarily due to the following; (1) a $4.2 million increase in
pass-through paper sales; (2) $2.8 million in favorable foreign exchange
impacts, primarily in Europe and Mexico ; and (3) a $1.3 million increase in
volume, primarily in Europe and Mexico .
Service sales for the International segment increased
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Operating Income from Continuing Operations
Operating income from continuing operations for the International segment
increased $4.9 million , for the six months ended June 30, 2021 , compared to the
six months ended June 30, 2020 , primarily due to a $2.5 million increase in
operating income from cost saving initiatives and increased print volume and
a $2.4 million decrease in restructuring, impairment and transaction-related
charges.
Restructuring, Impairment and Transaction-Related Charges
Restructuring, impairment and transaction-related charges for the International segment decreased$2.4 million , or 58.5%, for the six months endedJune 30, 2021 , compared to the six months endedJune 30, 2020 , primarily due to the following: Six Months Ended June 30, 2021 2020 $ Change Employee termination charges$ 0.4 $ 1.5 $ (1.1) Other restructuring charges 1.3 2.6 (1.3) Total restructuring, impairment and transaction-related charges$ 1.7 $ 4.1 $ (2.4)
Equity in Loss 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 holds a 49% ownership interest in Plural Industria Gráfica Ltda., a commercial printer based inSão Paulo, Brazil . The equity in loss of unconsolidated entity in the International segment was$0.1 million for the six months endedJune 30, 2021 , compared to$0.5 million for the six months endedJune 30, 2020 . Unrestricted Subsidiaries
As of
Corporate
The following table summarizes unallocated operating expenses presented as
Corporate:
Six Months Ended June 30,
2021 2020
(dollars in millions)
Amount Amount $ Change % Change
Operating expenses (including
restructuring, impairment and transaction-related
charges) $ 23.8 $ 22.0 $ 1.8 8.2 %
Restructuring, impairment and transaction-related
charges 0.9 0.9 - - %
Operating Expenses
Corporate operating expenses increased $1.8 million , or 8.2%, for the six months
ended June 30, 2021 , compared to the six months ended June 30, 2020 , primarily
due to a $1.1 million increase in employee-related costs and a $1.0 million
increase in professional fees.
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Restructuring, Impairment and Transaction-Related Charges
Corporate restructuring, impairment and transaction-related charges were
Six Months Ended
June 30,
2021 2020 $ Change
Employee termination charges $ 0.5 $ 0.2 $ 0.3
Transaction-related charges 0.4 0.7 (0.3)
Other restructuring charges - - -
Total restructuring, impairment and transaction-related
charges $ 0.9 $ 0.9 $ -
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$561.4 million as ofJune 30, 2021 , which consisted of up to$463.1 million of unused capacity under its revolving credit arrangement, net of$36.9 million of issued letters of credit, and cash and cash equivalents of$98.3 million . Total liquidity is reduced to$416.0 million under the Company's most restrictive debt covenants, and consists of$317.7 million available under its revolving credit arrangement and$98.3 million in cash and cash equivalents. There were no borrowings under the$500.0 million revolving credit facility during the three and six months endedJune 30, 2021 . 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 Operating Activities
Six Months Ended
Net cash provided by operating activities increased$21.7 million , from$67.2 million for the six months endedJune 30, 2020 , to$88.9 million for the six months endedJune 30, 2021 . This increase was due to a$21.6 million increase in cash flows provided by changes in operating assets and liabilities and a$0.1 million increase in cash from earnings. Net Cash Provided by Investing Activities
Six Months Ended
Net cash provided by investing activities increased$39.8 million , from$6.1 million for the six months endedJune 30, 2020 , to$45.9 million for the six months endedJune 30, 2021 . The increase was primarily due to the following: (1) a$31.0 million increase in proceeds from the sale of property, plant, and equipment; (2) a$10.8 million decrease in purchases of property, plant and equipment; and (3) a$1.8 million decrease in cash used in the acquisition of businesses. These increases were partially offset by: (1) a$2.0 million increase in cash used in other investing activities; (2) a$1.1 million decrease in proceeds from the sale of businesses; and (3) a$0.7 million increase in cost investment in unconsolidated entities.
Six Months Ended
Net cash used in financing activities increased$10.0 million , from$81.5 million for the six months endedJune 30, 2020 , to$91.5 million for the six months endedJune 30, 2021 . The increase was primarily due to (1) a$17.0 million increase in net payments of debt and lease obligations in 2021 as compared to 2020; (2) an$8.2 million increase in cash used in other financing activities; and (3) a$0.1 million increase in equity awards redeemed to pay employees' tax obligations. These increases were partially offset by (1) an$8.1 million decrease in payments of cash dividends; (2) a$4.5 million decrease in changes in ownership of noncontrolling interests; and (3) a$2.7 million decrease in payments of debt issuance costs and financing fees. 62 -------------------------------------------------------------------------------- Table of Contents Free Cash Flow
Free Cash Flow is defined as net cash provided by 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 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 six months ended
Six Months Ended June 30,
2021 2020
(dollars in millions)
Net cash provided by operating activities $ 88.9 $ 67.2
Less: purchases of property, plant and equipment (27.2) (38.0)
Free Cash Flow (Non-GAAP) $ 61.7 $ 29.2
Free Cash Flow increased $32.5 million for the six months ended June 30, 2021 ,
compared to the six months ended June 30, 2020 , primarily due to a $21.7 million
increase in net cash provided by operating activities and a $10.8 million
decrease in capital expenditures. See the "Net Cash Provided by Operating
Activities" section above for further explanations of the change in operating
cash flows and the "Net Cash Provided by Investing Activities" section above for
further explanations of the changes in purchases of property, plant and
equipment. The above calculation of Free Cash Flow includes the cash flows
related to the Book business for the six months ended June 30, 2020 .
Debt Leverage Ratio
The Debt Leverage Ratio is defined as total debt and finance lease obligations
less cash and cash equivalents (Net Debt) divided by the trailing twelve months
Adjusted EBITDA, comprised of the sum of the following: (1) the last twelve
months of EBITDA (see the definition of EBITDA and the reconciliation of net
earnings (loss) attributable to Quad common shareholders to EBITDA in the
"Results of Operations" section above); (2) restructuring, impairment and
transaction-related charges; (3) earnings (loss) from discontinued operations,
net of tax; (4) net pension income; (5) gain from sale and leaseback; (6) (gain)
loss on debt extinguishment; (7) equity in (earnings) loss of unconsolidated
entity; (8) Adjusted EBITDA for unconsolidated equity method investments
(calculated in a consistent manner with the calculation for Quad); and (9) net
earnings (loss) attributable to noncontrolling interests.
The Company uses the Debt Leverage Ratio as a metric to assess liquidity and the
flexibility of its balance sheet. Consistent with other liquidity metrics, the
Company monitors the Debt Leverage Ratio as a measure to determine the
appropriate level of debt the Company believes is optimal to operate its
business, and accordingly, to quantify debt capacity available for 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 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.
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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 11, "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, excludes non-cash stock-based compensation expense from EBITDA and includes net earnings (loss) attributable to noncontrolling interests in EBITDA. The Total Net Leverage Ratio includes and excludes the same adjustments as the Total Leverage Ratio, in addition to netting domestic unrestricted cash with debt. Similarly, the Senior Secured Leverage Ratio includes and excludes the same adjustments as the Total LeverageRatio , 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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