Quad/Graphics(QUAD) - 2022 Q3 - Quarterly Report

PART I — FINANCIAL INFORMATION This section presents the unaudited condensed consolidated financial statements and management's discussion and analysis for Quad/Graphics, Inc., covering financial performance, condition, and market risks ITEM 1. Condensed Consolidated Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements for Quad/Graphics, Inc., including statements of operations, comprehensive income, balance sheets, cash flows, and shareholders' equity, along with detailed notes explaining the basis of presentation, revenue recognition, restructuring charges, debt, equity, and segment information for the three and nine months ended September 30, 2022 and 2021 Condensed Consolidated Statements of Operations (Unaudited) This section provides the unaudited condensed consolidated statements of operations, detailing net sales, earnings, and earnings per share for the three and nine months ended September 30, 2022 and 2021 Net Sales (Three Months Ended September 30) | Metric | 2022 (Millions) | 2021 (Millions) | Change (%) | | :----- | :-------------- | :-------------- | :--------- | | Products | $652.0 | $540.6 | 20.6% | | Services | $177.9 | $165.5 | 7.5% | | Total Net Sales | $829.9 | $706.1 | 17.5% | Net Sales (Nine Months Ended September 30) | Metric | 2022 (Millions) | 2021 (Millions) | Change (%) | | :----- | :-------------- | :-------------- | :--------- | | Products | $1,826.8 | $1,578.2 | 15.8% | | Services | $505.0 | $527.6 | -4.3% | | Total Net Sales | $2,331.8 | $2,105.8 | 10.7% | Net Earnings & EPS (Three & Nine Months Ended September 30) | Metric | 3 Months 2022 | 3 Months 2021 | 9 Months 2022 | 9 Months 2021 | | :----- | :------------ | :------------ | :------------ | :------------ | | Net Earnings | $13.7M | $14.3M | $18.0M | $58.9M | | Basic EPS | $0.27 | $0.28 | $0.35 | $1.15 | | Diluted EPS | $0.27 | $0.27 | $0.34 | $1.12 | Condensed Consolidated Statements of Comprehensive Income (Unaudited) This section presents the unaudited condensed consolidated statements of comprehensive income, showing net earnings and other comprehensive loss for the three and nine months ended September 30, 2022 and 2021 Comprehensive Income (Three & Nine Months Ended September 30) | Metric | 3 Months 2022 | 3 Months 2021 | 9 Months 2022 | 9 Months 2021 | | :----- | :------------ | :------------ | :------------ | :------------ | | Net Earnings | $13.7M | $14.3M | $18.0M | $58.9M | | Other Comprehensive Loss, net of tax | $(6.4)M | $(3.4)M | $(9.9)M | $(2.9)M | | Comprehensive Income | $7.3M | $10.9M | $8.1M | $56.0M | Condensed Consolidated Balance Sheets (Unaudited) This section provides the unaudited condensed consolidated balance sheets, detailing assets, liabilities, and shareholders' equity as of September 30, 2022, and December 31, 2021 Key Balance Sheet Items (as of September 30, 2022 vs December 31, 2021) | Metric | Sep 30, 2022 (Millions) | Dec 31, 2021 (Millions) | Change (%) | | :----- | :---------------------- | :---------------------- | :--------- | | Total Assets | $1,793.7 | $1,890.0 | -5.1% | | Total Liabilities | $1,656.0 | $1,753.2 | -5.6% | | Total Shareholders' Equity | $137.7 | $136.8 | 0.7% | | Cash and Cash Equivalents | $14.0 | $179.9 | -92.2% | | Total Current Liabilities | $766.6 | $957.1 | -19.9% | | Long-term Debt | $674.6 | $554.9 | 21.6% | Condensed Consolidated Statements of Cash Flows (Unaudited) This section presents the unaudited condensed consolidated statements of cash flows, summarizing cash activities from operations, investing, and financing for the nine months ended September 30, 2022 and 2021 Cash Flow Summary (Nine Months Ended September 30) | Activity | 2022 (Millions) | 2021 (Millions) | Change (YoY) | | :------- | :-------------- | :-------------- | :----------- | | Net cash provided by (used in) operating activities | $(30.3) | $22.1 | $(52.4)M decrease | | Net cash provided by (used in) investing activities | $(46.6) | $67.4 | $(114.0)M decrease | | Net cash used in financing activities | $(88.6) | $(117.1) | $28.5M decrease in usage | | Net decrease in cash and cash equivalents | $(165.9) | $ (27.8) | $(138.1)M decrease | Condensed Consolidated Statements of Shareholders' Equity (Unaudited) This section details the unaudited condensed consolidated statements of shareholders' equity, showing changes in equity components for the nine months ended September 30, 2022 Shareholders' Equity Changes (Nine Months Ended September 30, 2022) | Metric | Dec 31, 2021 (Millions) | Sep 30, 2022 (Millions) | | :----- | :---------------------- | :---------------------- | | Total Shareholders' Equity | $136.8 | $137.7 | | Net Earnings | $18.0 | | | Treasury Stock Purchases | $(10.0) | | - Accumulated deficit improved from $(527.8) million at December 31, 2021, to $(509.8) million at September 30, 2022[18] Notes to Condensed Consolidated Financial Statements (Unaudited) This section provides detailed notes to the unaudited condensed consolidated financial statements, explaining accounting policies, significant transactions, and financial instrument details Note 1. Basis of Presentation This note outlines the basis for preparing the condensed consolidated financial statements, including seasonality and the ongoing impacts of the COVID-19 pandemic and inflation - The company's quarterly results are seasonal, with net sales and operating income typically higher in the third and fourth quarters due to back-to-school and holiday-related advertising[22] - COVID-19 pandemic continues to have a negative impact on the business, supply chain, and raw materials availability, though effects have lessened; inflationary cost pressures on raw materials, distribution, and labor persist[24] Note 2. Revenue Recognition This note details the company's revenue recognition policies and disaggregates revenue by segment for products and services for the three and nine months ended September 30, 2022 Disaggregated Revenue by Segment (Three Months Ended September 30, 2022) | Segment | Products (Millions) | Services (Millions) | Total Net Sales (Millions) | | :------ | :------------------ | :------------------ | :------------------------- | | United States Print and Related Services | $540.0 | $173.1 | $713.1 | | International | $112.0 | $4.8 | $116.8 | | Total | $652.0 | $177.9 | $829.9 | Disaggregated Revenue by Segment (Nine Months Ended September 30, 2022) | Segment | Products (Millions) | Services (Millions) | Total Net Sales (Millions) | | :------ | :------------------ | :------------------ | :------------------------- | | United States Print and Related Services | $1,523.9 | $489.7 | $2,013.6 | | International | $302.9 | $15.3 | $318.2 | | Total | $1,826.8 | $505.0 | $2,331.8 | - Products include print operations (retail inserts, catalogs, direct mail, packaging, etc.) and global paper procurement; services include logistics, marketing services (digital content, photography, strategy), and medical services[29][30] Note 3. Restructuring, Impairment and Transaction-Related Charges This note provides a breakdown of restructuring, impairment, and transaction-related charges incurred for the three and nine months ended September 30, 2022 and 2021 Restructuring, Impairment & Transaction-Related Charges (Three & Nine Months Ended September 30) | Charge Type | 3 Months 2022 (Millions) | 3 Months 2021 (Millions) | 9 Months 2022 (Millions) | 9 Months 2021 (Millions) | | :---------- | :----------------------- | :----------------------- | :----------------------- | :----------------------- | | Employee termination charges | $1.2 | $1.0 | $2.8 | $8.5 | | Impairment charges | $0.5 | $0.3 | $0.6 | $2.0 | | Transaction-related charges | $0.3 | $0.0 | $0.8 | $0.4 | | Integration costs | $0.4 | $0.0 | $0.4 | $0.0 | | Other restructuring charges (income) | $3.2 | $6.1 | $7.8 | $(14.3) | | Total | $5.6 | $7.4 | $12.4 | $(3.4) | - Other restructuring charges (income) for the nine months ended September 30, 2021, included a $20.9 million gain on the sale of a business and gains on the sale of facilities[35] - Restructuring reserves at September 30, 2022, totaled $47.3 million, with $42.7 million in other current liabilities and $3.9 million in other long-term liabilities[40] Note 4. Receivables This note details the company's receivables and the allowance for credit losses, including credit loss expense for the three and nine months ended September 30, 2022 - Credit loss expense was $0.8 million for the three months and $2.3 million for the nine months ended September 30, 2022, an increase from $0.2 million and $1.0 million respectively in 2021[43] Allowance for Credit Losses (Nine Months Ended September 30, 2022) | Metric | Amount (Millions) | | :----- | :---------------- | | Balance at Dec 31, 2021 | $28.2 | | Provisions | $2.3 | | Write-offs | $(1.5) | | Translation | $(0.4) | | Balance at Sep 30, 2022 | $28.6 | Note 5. Inventories This note provides a breakdown of inventory components, including raw materials, work in process, and finished goods, as of September 30, 2022, and December 31, 2021 Inventory Components (as of September 30, 2022 vs December 31, 2021) | Component | Sep 30, 2022 (Millions) | Dec 31, 2021 (Millions) | Change (%) | | :-------- | :---------------------- | :---------------------- | :--------- | | Raw materials and manufacturing supplies | $218.1 | $148.6 | 46.8% | | Work in process | $41.8 | $31.6 | 32.3% | | Finished goods | $63.3 | $46.0 | 37.6% | | Total | $323.2 | $226.2 | 43.0% | Note 6. Commitments and Contingencies This note discusses the company's commitments and contingencies, including litigation and environmental remediation obligations, and their expected financial impact - Litigation and environmental remediation obligations are not expected to have a material impact on the condensed consolidated financial statements[46][47] Note 7. Debt This note outlines the company's debt activities, including repurchases of Senior Unsecured Notes and repayments using credit facilities and cash on hand - Repurchased $2.4 million of Senior Unsecured Notes in Q1 2022 to reduce interest expense[48] - Repaid $209.1 million of Senior Unsecured Notes on maturity in May 2022 using revolving credit facility and cash on hand[49] Note 8. Income Taxes This note details the company's income tax position, including changes in the liability for unrecognized tax benefits as of September 30, 2022 - The liability for unrecognized tax benefits decreased by $0.1 million to $11.6 million as of September 30, 2022, with an anticipated $0.6 million decrease within the next twelve months[52] Note 9. Financial Instruments and Fair Value Measurements This note describes the company's financial instruments, including interest rate swaps and foreign currency exchange contracts, and their fair value measurements - The company holds one active interest rate swap contract with a notional amount of $130.0 million, terminating March 28, 2024, to reduce variability of cash flows from variable-rate debt[54][55] Interest Rate Swap Fair Values (Millions) | Metric | Sep 30, 2022 | Dec 31, 2021 | | :----- | :----------- | :----------- | | Interest rate swap assets | $3.6 | $0.0 | | Interest rate swap liabilities | $0.0 | $(5.1) | - As of September 30, 2022, there were six open foreign currency exchange contracts designated as cash flow hedges with a total notional value of $7.6 million[57] Note 10. Employee Retirement Plans This note provides details on the company's employee retirement plans, including net pension income and multiemployer pension plan withdrawal liabilities Net Pension Income (Three & Nine Months Ended September 30) | Metric | 3 Months 2022 (Millions) | 3 Months 2021 (Millions) | 9 Months 2022 (Millions) | 9 Months 2021 (Millions) | | :----- | :----------------------- | :----------------------- | :----------------------- | :----------------------- | | Net periodic pension income | $3.2 | $3.6 | $9.5 | $11.8 | | Settlement charge | $0.0 | $(0.2) | $0.0 | $(0.8) | | Net pension income | $3.2 | $3.4 | $9.5 | $11.0 | - The company has withdrawn from all significant MEPPs and has a withdrawal liability of $29.4 million as of September 30, 2022, with payments scheduled until April 2032 (GCIU) and February 2024 (GCC)[66] Note 11. Earnings Per Share This note presents the reconciliation of basic and diluted earnings per share, including weighted average shares outstanding, for the three and nine months ended September 30, 2022 and 2021 EPS Reconciliation (Three & Nine Months Ended September 30) | Metric | 3 Months 2022 | 3 Months 2021 | 9 Months 2022 | 9 Months 2021 | | :----- | :------------ | :------------ | :------------ | :------------ | | Basic EPS | $0.27 | $0.28 | $0.35 | $1.15 | | Diluted EPS | $0.27 | $0.27 | $0.34 | $1.12 | | Basic weighted average shares outstanding | 50.1M | 51.3M | 51.2M | 51.3M | | Diluted weighted average shares outstanding | 51.6M | 53.1M | 53.0M | 52.8M | Note 12. Equity Incentive Programs This note details the total compensation expense related to equity incentive programs and the estimated future compensation expense as of September 30, 2022 Total Equity Incentive Compensation Expense (Three & Nine Months Ended September 30) | Metric | 3 Months 2022 (Millions) | 3 Months 2021 (Millions) | 9 Months 2022 (Millions) | 9 Months 2021 (Millions) | | :----- | :----------------------- | :----------------------- | :----------------------- | :----------------------- | | RS and RSU equity awards expense | $1.1 | $2.0 | $4.0 | $5.7 | | RSU liability awards expense | $0.0 | $0.0 | $0.2 | $0.1 | | DSU awards expense | $0.0 | $0.0 | $0.7 | $0.8 | | Total | $1.1 | $2.0 | $4.9 | $6.6 | - Total future compensation expense related to equity incentive programs is estimated at $7.2 million as of September 30, 2022[70] Note 13. Shareholders' Equity This note provides information on common stock outstanding, share repurchases, and the remaining authorization under the share repurchase program as of September 30, 2022 Common Stock Outstanding (as of September 30, 2022 vs December 31, 2021) | Class | Sep 30, 2022 (Millions) | Dec 31, 2021 (Millions) | | :---- | :---------------------- | :---------------------- | | Class A Common Stock | 39.2 | 40.8 | | Class B Common Stock | 13.5 | 13.5 | | Class C Common Stock | 0.0 | 0.0 | - Repurchased 2,803,539 Class A common shares for $9.1 million during Q3 2022, and 3,093,662 shares for $10.0 million during the nine months ended September 30, 2022[75] - $90.1 million of authorized repurchases remained under the $100.0 million share repurchase program as of September 30, 2022; quarterly dividends have been suspended since Q2 2020[75][76] Note 14. Accumulated Other Comprehensive Loss This note details the components of accumulated other comprehensive loss, including translation adjustments, interest rate swap adjustments, and pension benefit plan adjustments Accumulated Other Comprehensive Loss (Nine Months Ended September 30) | Component | Dec 31, 2021 (Millions) | Sep 30, 2022 (Millions) | | :-------- | :---------------------- | :---------------------- | | Translation Adjustments | $(143.1) | $(155.3) | | Interest Rate Swap Adjustments | $(6.7) | $(4.4) | | Pension Benefit Plan Adjustments | $(11.4) | $(11.4) | | Total | $(161.2) | $(171.1) | Note 15. Segment Information This note provides disaggregated financial information by segment, including net sales, products, services, and operating income for the United States Print and Related Services and International segments - United States Print and Related Services segment accounted for approximately 86% of consolidated net sales for the three and nine months ended September 30, 2022[81] Segment Net Sales (Three Months Ended September 30) | Segment | Products (Millions) | Services (Millions) | Operating Income (Loss) (Millions) | | :------ | :------------------ | :------------------ | :--------------------------------- | | US Print & Related Services | $540.0 | $173.1 | $33.3 | | International | $112.0 | $4.8 | $5.6 | | Corporate | $0.0 | $0.0 | $(13.7) | | Total | $652.0 | $177.9 | $25.2 | Segment Net Sales (Nine Months Ended September 30) | Segment | Products (Millions) | Services (Millions) | Operating Income (Loss) (Millions) | | :------ | :------------------ | :------------------ | :--------------------------------- | | US Print & Related Services | $1,523.9 | $489.7 | $65.0 | | International | $302.9 | $15.3 | $15.5 | | Corporate | $0.0 | $0.0 | $(35.7) | | Total | $1,826.8 | $505.0 | $44.8 | Note 16. New Accounting Pronouncements This note discusses the company's adoption plans for new accounting pronouncements, specifically regarding Reference Rate Reform, and its expected impact on financial statements - The company expects to elect the practical expedient under ASU 2020-04 and ASU 2021-01 for Reference Rate Reform, which allows prospective adjustment of the effective interest rate after a reference rate change, with no material impact expected on financial statements[87] ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on Quad/Graphics, Inc.'s financial condition and results of operations, offering an overview of the business, strategic priorities, key performance metrics, and trends affecting the company. It includes a detailed analysis of financial results for the three and nine months ended September 30, 2022, compared to the prior year, and discusses liquidity, capital resources, debt, and share repurchase activities Cautionary Statement Regarding Forward-Looking Statements This statement highlights various risks that could impact forward-looking statements, including cost fluctuations, inflationary pressures, demand changes, and operational challenges - Forward-looking statements are subject to risks including fluctuations in costs (labor, energy, raw materials), inflationary pressures, decreasing demand for printed materials, COVID-19 impacts, and labor shortages[92][93] - Other risks include increased business complexity from transformation to a marketing experience company, digital media changes, inability to reduce costs, changes in postal rates, cybersecurity risks, and the impact of restrictive debt covenants[93][97] Overview This section provides a high-level overview of Quad's business, strategic priorities, segment structure, key performance metrics, and prevailing industry trends Business Overview This section describes Quad as a global marketing experience company, detailing its client base, geographic reach, and core strategic priorities - Quad is a global marketing experience company serving over 4,600 clients in 14 countries with more than 15,000 employees[98] - Strategic priorities include: client focus, profitable growth, platform strength, employee empowerment, and financial strength[99][100][101][103][104][105] Segments This section outlines the company's two primary operating segments: United States Print and Related Services and International, detailing their respective contributions to consolidated net sales - The United States Print and Related Services segment accounts for approximately 86% of consolidated net sales, offering print and complementary marketing services[108] - The International segment accounts for approximately 14% of consolidated net sales, covering printing operations in Europe and Latin America[108] Key Performance Metrics Overview This section identifies the key financial and operational metrics used to evaluate the company's performance, including debt and pension obligation reductions - Key performance metrics include net sales growth, EBITDA, EBITDA margin, net cash from operating activities, Free Cash Flow, and Debt Leverage Ratio[108] - Since July 2010, the company has reduced debt and finance lease obligations by over $1.0 billion and pension/postretirement/MEPP obligations by $524 million, totaling over $1.5 billion in obligation reduction[114] - Seasonality leads to higher working capital requirements in the first three quarters of 2022 due to supply chain disruptions and increased inventory for peak production[115] Overview of Trends Affecting Quad This section discusses significant industry trends impacting the company, such as intense competition, postal rate changes, and rising costs of raw materials and labor - The printing industry faces intense competition, excess manufacturing capacity, and downward pricing pressures due to declining volumes and digital alternatives[117] - The Postal Service Reform Act of 2022 provides financial relief to USPS, but increased postal rates and altered rate structures may reduce client demand for print and mail products[121][122] - Rising interest rates, increasing costs and availability of raw materials (paper, ink), distribution challenges, and labor shortages are adversely impacting operations, leading the company to pass price increases to clients[125][126] Results of Operations for the Three Months Ended September 30, 2022, Compared to the Three Months Ended September 30, 2021 This section analyzes the company's financial performance for the three months ended September 30, 2022, in comparison to the same period in 2021, detailing changes in net sales, operating income, and key expenses Summary Results This section provides a concise overview of key financial results, including operating income, net earnings, and diluted EPS, for the three months ended September 30, 2022 and 2021 Summary Financial Results (Three Months Ended September 30) | Metric | 2022 (Millions) | 2021 (Millions) | Change ($M) | Change (%) | | :----- | :-------------- | :-------------- | :---------- | :--------- | | Operating Income | $25.2 | $28.0 | $(2.8) | -10.0% | | Net Earnings | $13.7 | $14.3 | $(0.6) | -4.2% | | Diluted EPS | $0.27 | $0.27 | $0.00 | 0.0% | - Operating income was impacted by a $10.8 million gain from sale and leaseback in 2021 that did not repeat in 2022, and a $13.3 million gain from a property insurance claim in 2021 that also did not repeat[128][130] - Decreased restructuring, impairment, and transaction-related charges by $1.8 million, and increased print product volume and pricing, along with higher paper byproduct recoveries, partially offset cost increases from supply chain disruptions, inflation, and labor shortages[130] Operating Results This section presents a detailed breakdown of operating results, including net sales, cost of sales, SG&A expenses, and depreciation and amortization, for the three months ended September 30, 2022 and 2021 Operating Results (Three Months Ended September 30) | Metric | 2022 (Millions) | % of Sales 2022 | 2021 (Millions) | % of Sales 2021 | Change ($M) | Change (%) | | :----- | :-------------- | :-------------- | :-------------- | :-------------- | :---------- | :--------- | | Total Net Sales | $829.9 | 100.0% | $706.1 | 100.0% | $123.8 | 17.5% | | Total Cost of Sales | $673.5 | 81.2% | $574.1 | 81.3% | $99.4 | 17.3% | | SG&A Expenses | $90.8 | 10.9% | $68.7 | 9.7% | $22.1 | 32.2% | | Depreciation & Amortization | $34.8 | 4.2% | $38.7 | 5.5% | $(3.9) | -10.1% | | Operating Income | $25.2 | 3.0% | $28.0 | 4.0% | $(2.8) | -10.0% | Net Sales This section analyzes the changes in product and service sales, attributing increases to print product lines, pass-through paper sales, and logistics, partially offset by foreign exchange impacts - Product sales increased $111.4 million (20.6%) due to a $61.0 million increase in print product lines (pricing and volume) and a $57.2 million increase from pass-through paper sales, partially offset by $6.8 million in unfavorable foreign exchange impacts[135] - Service sales increased $12.4 million (7.5%) primarily from a $9.6 million increase in logistics sales and a $2.8 million increase in marketing and medical services[136] Cost of Sales This section examines the changes in cost of product and service sales, highlighting the impact of higher paper costs, material/labor costs, and decreased freight costs - Cost of product sales increased $103.2 million (22.8%) due to higher pass-through paper costs, print volume, and rising material/labor costs, partially offset by a $3.9 million increase in paper byproduct recoveries[137] - Cost of service sales decreased $3.8 million (3.1%) primarily due to decreased freight costs[138] Selling, General and Administrative Expenses This section analyzes the increase in SG&A expenses, attributing it to a non-repeating property insurance claim gain in 2021 and higher employee-related costs - SG&A expenses increased $22.1 million (32.2%) due to a $13.3 million non-repeating property insurance claim gain in 2021 and an $8.4 million increase in employee-related costs[139] - SG&A as a percentage of net sales increased from 9.7% in 2021 to 10.9% in 2022[139] Gain from sale and leaseback This section notes the non-recurrence of a significant gain from a sale and leaseback transaction recognized in the prior year's third quarter - A $10.8 million gain ($8.1 million, net of tax) from a sale and leaseback of the West Allis, Wisconsin facility was recognized in Q3 2021 and did not repeat in Q3 2022[140] Depreciation and Amortization This section explains the decrease in depreciation and amortization expenses, primarily due to fully depreciated assets - Depreciation and amortization decreased $3.9 million (10.1%) due to $4.3 million less in depreciation expense from fully depreciated assets, partially offset by a $0.4 million increase in amortization[141] Restructuring, Impairment and Transaction-Related Charges This section details the changes in restructuring, impairment, and transaction-related charges for the three months ended September 30, 2022 and 2021 Restructuring, Impairment & Transaction-Related Charges (Three Months Ended September 30) | Charge Type | 2022 (Millions) | 2021 (Millions) | Change ($M) | | :---------- | :-------------- | :-------------- | :---------- | | Employee termination charges | $1.2 | $1.0 | $0.2 | | Impairment charges | $0.5 | $0.3 | $0.2 | | Transaction-related charges | $0.3 | $0.0 | $0.3 | | Integration costs | $0.4 | $0.0 | $0.4 | | Vacant facility carrying costs and lease exit charges | $2.0 | $4.9 | $(2.9) | | Equipment and infrastructure removal costs | $0.1 | $0.5 | $(0.4) | | Other restructuring activities | $1.1 | $0.7 | $0.4 | | Total | $5.6 | $7.4 | $(1.8) | EBITDA and EBITDA Margin—Consolidated This section presents the consolidated EBITDA and EBITDA margin, explaining the decrease primarily due to non-repeating gains from the prior year and increased costs Consolidated EBITDA & Margin (Three Months Ended September 30) | Metric | 2022 (Millions) | % of Net Sales 2022 | 2021 (Millions) | % of Net Sales 2021 | | :----- | :-------------- | :------------------ | :-------------- | :------------------ | | EBITDA | $63.2 | 7.6% | $70.3 | 10.0% | - EBITDA decreased primarily due to a $13.3 million non-repeating property insurance claim gain and a $10.8 million non-repeating gain from sale and leaseback in 2021, along with cost increases from supply chain disruptions, inflation, and labor shortages[144] United States Print and Related Services This section analyzes the performance of the US Print and Related Services segment, detailing changes in product and service sales, and operating income US Print & Related Services Segment Performance (Three Months Ended September 30) | Metric | 2022 (Millions) | 2021 (Millions) | Change ($M) | Change (%) | | :----- | :-------------- | :-------------- | :---------- | :--------- | | Product sales | $540.0 | $463.9 | $76.1 | 16.4% | | Service sales | $173.1 | $160.4 | $12.7 | 7.9% | | Operating income | $33.3 | $36.1 | $(2.8) | -7.8% | | Operating margin | 4.7% | 5.8% | N/A | N/A | - Operating income decreased due to non-repeating gains in 2021 (property insurance claim, sale and leaseback) and cost increases from supply chain disruptions, inflation, and labor shortages[151] International This section reviews the International segment's performance, highlighting increases in product sales driven by pricing, volume, and pass-through paper sales, offset by foreign exchange impacts International Segment Performance (Three Months Ended September 30) | Metric | 2022 (Millions) | 2021 (Millions) | Change ($M) | Change (%) | | :----- | :-------------- | :-------------- | :---------- | :--------- | | Product sales | $112.0 | $76.7 | $35.3 | 46.0% | | Service sales | $4.8 | $5.1 | $(0.3) | -5.9% | | Operating income | $5.6 | $3.6 | $2.0 | 55.6% | | Operating margin | 4.8% | 4.4% | N/A | N/A | - Product sales increased $35.3 million (46.0%) due to $21.3 million in print pricing/volume increases and $20.8 million in pass-through paper sales, partially offset by $6.8 million in unfavorable foreign exchange impacts[155] - Restructuring, impairment, and transaction-related charges increased by $1.5 million, including $0.6 million in charges from foreign currency impacts due to Argentina's highly inflationary economy[158] Corporate This section details the changes in corporate operating expenses, primarily driven by increased employee-related costs partially offset by decreased professional fees - Corporate operating expenses increased $2.0 million (17.1%) due to a $3.0 million increase in employee-related costs, partially offset by a $1.2 million decrease in professional fees[161] Results of Operations for the Nine Months Ended September 30, 2022, Compared to the Nine Months Ended September 30, 2021 This section analyzes the company's financial performance for the nine months ended September 30, 2022, compared to the same period in 2021, focusing on net sales, operating income, and key expense categories Summary Results This section provides a concise overview of key financial results, including operating income, net earnings, and diluted EPS, for the nine months ended September 30, 2022 and 2021 Summary Financial Results (Nine Months Ended September 30) | Metric | 2022 (Millions) | 2021 (Millions) | Change ($M) | Change (%) | | :----- | :-------------- | :-------------- | :---------- | :--------- | | Operating Income | $44.8 | $97.0 | $(52.2) | -53.8% | | Net Earnings | $18.0 | $58.9 | $(40.9) | -69.4% | | Diluted EPS | $0.34 | $1.12 | $(0.78) | -69.6% | - Operating income was significantly impacted by $24.5 million in gains from sale and leaseback and a $13.3 million gain from a property insurance claim in 2021 that did not repeat in 2022[164][166] - Restructuring, impairment, and transaction-related charges increased by $15.8 million, contributing to the decline in operating income[166] Operating Results This section presents a detailed breakdown of operating results, including net sales, cost of sales, SG&A expenses, and depreciation and amortization, for the nine months ended September 30, 2022 and 2021 Operating Results (Nine Months Ended September 30) | Metric | 2022 (Millions) | % of Sales 2022 | 2021 (Millions) | % of Sales 2021 | Change ($M) | Change (%) | | :----- | :-------------- | :-------------- | :-------------- | :-------------- | :---------- | :--------- | | Total Net Sales | $2,331.8 | 100.0% | $2,105.8 | 100.0% | $226.0 | 10.7% | | Total Cost of Sales | $1,911.2 | 81.9% | $1,688.1 | 80.2% | $223.1 | 13.2% | | SG&A Expenses | $256.8 | 11.0% | $229.3 | 10.9% | $27.5 | 12.0% | | Depreciation & Amortization | $106.6 | 4.6% | $119.3 | 5.7% | $(12.7) | -10.6% | | Operating Income | $44.8 | 1.9% | $97.0 | 4.6% | $(52.2) | -53.8% | Net Sales This section analyzes the changes in product and service sales, attributing increases to pass-through paper sales and print product lines, partially offset by divestitures and foreign exchange impacts - Product sales increased $248.6 million (15.8%) due to a $159.0 million increase from pass-through paper sales and a $104.3 million increase in print product lines (pricing and volume), partially offset by $14.7 million in unfavorable foreign exchange impacts[171] - Service sales decreased $22.6 million (4.3%) primarily due to a $58.0 million decrease from the divestiture of the third-party logistics business, partially offset by a $24.9 million increase in logistics sales and a $10.5 million increase in marketing and medical services[172] Cost of Sales This section examines the changes in cost of product and service sales, highlighting the impact of higher paper costs, material/labor costs, and the divestiture of a logistics business - Cost of product sales increased $268.1 million (20.7%) due to higher pass-through paper costs, rising material/labor costs, and higher print volumes, partially offset by a $19.1 million increase in paper byproduct recoveries[173] - Cost of service sales decreased $45.0 million (11.5%) due to the divestiture of the third-party logistics business, partially offset by increased freight costs[174] Selling, General and Administrative Expenses This section analyzes the increase in SG&A expenses, attributing it to a non-repeating property insurance claim gain in 2021, higher employee-related costs, and increased credit loss expense - SG&A expenses increased $27.5 million (12.0%) due to a $13.3 million non-repeating property insurance claim gain in 2021, an $11.4 million increase in employee-related costs, and a $1.3 million increase in credit loss expense[175] Gains from sale and leaseback This section notes the non-recurrence of significant gains from sale and leaseback transactions recognized in the prior year - A $24.5 million gain ($18.4 million, net of tax) from sale and leaseback transactions in 2021 did not repeat in 2022[176] Depreciation and Amortization This section explains the decrease in depreciation and amortization expenses, primarily due to fully depreciated assets - Depreciation and amortization decreased $12.7 million (10.6%) due to $11.7 million less in depreciation expense from fully depreciated assets and a $1.0 million decrease in amortization expense[177] Restructuring, Impairment and Transaction-Related Charges This section details the changes in restructuring, impairment, and transaction-related charges for the nine months ended September 30, 2022 and 2021, including non-recurring gains from the prior year Restructuring, Impairment & Transaction-Related Charges (Nine Months Ended September 30) | Charge Type | 2022 (Millions) | 2021 (Millions) | Change ($M) | | :---------- | :-------------- | :-------------- | :---------- | | Employee termination charges | $2.8 | $8.5 | $(5.7) | | Impairment charges | $0.6 | $2.0 | $(1.4) | | Transaction-related charges | $0.8 | $0.4 | $0.4 | | Integration costs | $0.4 | $0.0 | $0.4 | | Other restructuring charges (income) | $7.8 | $(14.3) | $22.1 | | Total | $12.4 | $(3.4) | $15.8 | - Other restructuring activities in 2021 included a $20.9 million gain on the sale of a business and $9.7 million in gains on facility sales, which did not recur in 2022[179] EBITDA and EBITDA Margin—Consolidated This section presents the consolidated EBITDA and EBITDA margin, explaining the decrease primarily due to non-repeating gains and increased restructuring charges from the prior year Consolidated EBITDA & Margin (Nine Months Ended September 30) | Metric | 2022 (Millions) | % of Net Sales 2022 | 2021 (Millions) | % of Net Sales 2021 | | :----- | :-------------- | :------------------ | :-------------- | :------------------ | | EBITDA | $160.9 | 6.9% | $227.4 | 10.8% | - EBITDA decreased due to $24.5 million in non-repeating gains from sale and leaseback, $15.8 million of increased restructuring charges, and a $13.3 million non-repeating property insurance claim gain from 2021[180] United States Print and Related Services This section analyzes the performance of the US Print and Related Services segment, detailing changes in product and service sales, and operating income, impacted by non-repeating gains and increased restructuring charges US Print & Related Services Segment Performance (Nine Months Ended September 30) | Metric | 2022 (Millions) | 2021 (Millions) | Change ($M) | Change (%) | | :----- | :-------------- | :-------------- | :---------- | :--------- | | Product sales | $1,523.9 | $1,357.1 | $166.8 | 12.3% | | Service sales | $489.7 | $512.7 | $(23.0) | -4.5% | | Operating income | $65.0 | $124.4 | $(59.4) | -47.7% | | Operating margin | 3.2% | 6.7% | N/A | N/A | - Operating income decreased due to $24.5 million in non-repeating gains from sale and leaseback, a $13.3 million non-repeating property insurance claim gain, and a $13.2 million increase in restructuring charges from 2021[186] International This section reviews the International segment's performance, highlighting increases in product sales driven by pass-through paper sales and print pricing/volume, offset by foreign exchange impacts and increased restructuring charges International Segment Performance (Nine Months Ended September 30) | Metric | 2022 (Millions) | 2021 (Millions) | Change ($M) | Change (%) | | :----- | :-------------- | :-------------- | :---------- | :--------- | | Product sales | $302.9 | $221.1 | $81.8 | 37.0% | | Service sales | $15.3 | $14.9 | $0.4 | 2.7% | | Operating income | $15.5 | $8.1 | $7.4 | 91.4% | | Operating margin | 4.9% | 3.4% | N/A | N/A | - Product sales increased $81.8 million (37.0%) due to $54.6 million in pass-through paper sales and $41.9 million in print pricing/volume increases, partially offset by $14.7 million in unfavorable foreign exchange impacts[191] - Restructuring, impairment, and transaction-related charges increased by $2.7 million (150.0%), including $2.3 million in charges from foreign currency losses due to Argentina's highly inflationary economy[194] Corporate This section details the changes in corporate operating expenses, primarily driven by increased employee-related costs partially offset by decreased professional fees and restructuring charges - Corporate operating expenses increased $0.2 million (0.6%) due to a $2.0 million increase in employee-related costs, partially offset by a $1.3 million decrease in professional fees and a $0.1 million decrease in restructuring charges[197] Liquidity and Capital Resources This section discusses the company's liquidity and capital resources, analyzing cash flows from operating, investing, and financing activities, along with free cash flow and debt leverage Net Cash Provided by (Used in) Operating Activities This section analyzes the change in net cash provided by (used in) operating activities, primarily due to increased cash used in changes in operating assets and liabilities - Net cash used in operating activities increased by $52.4 million to $(30.3) million for the nine months ended September 30, 2022, primarily due to a $60.6 million increase in cash used in changes in operating assets and liabilities[202] Net Cash Provided by (Used in) Investing Activities This section analyzes the change in net cash provided by (used in) investing activities, driven by decreased proceeds from asset and business sales - Net cash used in investing activities increased by $114.0 million to $(46.6) million, driven by a $63.1 million decrease in proceeds from property, plant, and equipment sales and a $39.0 million decrease in proceeds from a business sale[203] Net Cash Used in Financing Activities This section analyzes the change in net cash used in financing activities, primarily due to a decrease in net payments of debt and lease obligations - Net cash used in financing activities decreased by $28.5 million to $(88.6) million, mainly due to a $30.4 million decrease in net payments of debt and lease obligations[204] Free Cash Flow This section presents the company's Free Cash Flow, a non-GAAP metric, for the nine months ended September 30, 2022 and 2021 Free Cash Flow (Nine Months Ended September 30) | Metric | 2022 (Millions) | 2021 (Millions) | Change ($M) | | :----- | :-------------- | :-------------- | :---------- | | Net cash provided by (used in) operating activities | $(30.3) | $22.1 | $(52.4) | | Less: purchases of property, plant and equipment | $(49.5) | $(41.6) | $(7.9) | | Free Cash Flow (Non-GAAP) | $(79.8) | $(19.5) | $(60.3) | Debt Leverage Ratio This section details the company's Debt Leverage Ratio, a non-GAAP metric, and explains its increase due to higher net debt and reduced Adjusted EBITDA Debt Leverage Ratio (as of September 30, 2022 vs December 31, 2021) | Metric | Sep 30, 2022 (Millions) | Dec 31, 2021 (Millions) | | :----- | :---------------------- | :---------------------- | | Net Debt (Non-GAAP) | $715.3 | $623.8 | | Adjusted EBITDA (Non-GAAP) (TTM) | $233.2 | $260.5 | | Debt Leverage Ratio | 3.07x | 2.39x | - The Debt Leverage Ratio increased by 0.68x, exceeding the target range of 2.0x to 2.5x, due to a $91.5 million increase in Net Debt and a $27.3 million reduction in trailing twelve months Adjusted EBITDA[214] Debt Obligations This section outlines the company's debt instruments, including its Senior Secured Credit Facility and Master Note and Security Agreement - Debt instruments include a Senior Secured Credit Facility (Revolving credit facility: $154.3 million outstanding; Term Loan A: $563.3 million outstanding) and a Master Note and Security Agreement ($4.4 million outstanding)[216] Covenants and Compliance This section confirms the company's compliance with all debt covenants as of September 30, 2022, and notes limitations on certain payments due to the Total Leverage Ratio - The company was in compliance with all debt covenants as of September 30, 2022[217] - Total Leverage Ratio was 3.05 to 1.00 (max 3.75 to 1.00); Senior Secured Leverage Ratio was 3.04 to 1.00 (max 3.50 to 1.00); Interest Coverage Ratio was 5.50 to 1.00 (min 3.00 to 1.00)[217] - Limitations on dividend payments, capital stock repurchases, and certain other payments are applicable due to the Total Leverage Ratio being greater than 2.75 to 1.00[223] Share Repurchase Program This section provides details on the company's share repurchase activities during the quarter and the remaining authorization under its program - Repurchased 2,803,539 Class A common shares for $9.1 million in Q3 2022, and 3,093,662 shares for $10.0 million in the nine months ended September 30, 2022[220] - $90.1 million remained authorized under the $100.0 million share repurchase program as of September 30, 2022[220] Risk Management This section briefly mentions the company's approach to managing various financial and operational risks Contractual Obligations This section outlines the company's significant contractual obligations, including debt, lease, and other long-term commitments New Accounting Pronouncements This section discusses the impact of recently issued accounting pronouncements on the company's financial reporting ITEM 3. Quantitative and Qualitative Disclosures About Market Risk This section details the company's exposure to various market risks, including interest rate, foreign currency, credit, and commodity risks, and outlines the strategies and policies in place to identify, assess, and control these risks. It provides quantitative and qualitative information on potential impacts from changes in these market factors Interest Rate Risk This section assesses the company's exposure to interest rate fluctuations on its variable and fixed-rate debt, including the impact of interest rate swaps - Variable rate debt outstanding was $589.5 million (weighted average interest rate 5.2%), and fixed rate debt and finance leases were $139.8 million (weighted average interest rate 4.9%) as of September 30, 2022, including the impact of a $130.0 million interest rate swap[225] - A hypothetical 10% increase in market interest rates on variable rate debt would not materially impact interest expense[225] Foreign Currency Risk and Translation Exposure This section discusses the company's exposure to foreign currency fluctuations, hedging strategies, and the impact of highly inflationary economies like Argentina - Foreign currency exposure is limited as operating revenues and expenses are mostly in local currencies; foreign exchange contracts are used to hedge currency risk[226] - A hypothetical 10% adverse change in foreign currency exchange rates would result in an approximate $6.0 million decrease in net current assets of foreign subsidiaries (excluding Argentina)[227] - Argentina's economy has been classified as highly inflationary since June 30, 2018, leading to foreign currency losses of $0.6 million (3 months) and $2.3 million (9 months) ended September 30, 2022, reflected in the consolidated statements of operations[231] Credit Risk This section addresses the company's credit risk management, including client creditworthiness evaluation and the allowance for credit losses - The company evaluates client creditworthiness and maintains an allowance for credit losses of $28.6 million as of September 30, 2022[232] - The largest client accounted for less than 5% of net sales, indicating a diverse client base[233] Commodity Risk This section discusses the company's exposure to commodity price fluctuations for raw materials like paper, ink, and energy, and its mitigation strategies - Primary raw materials are paper, ink, and energy, with supply currently under pressure due to shortages and inflation[234] - Paper price risk is mitigated by purchasing efficiencies, diverse paper grades, and price adjustment clauses in sales contracts; approximately half of paper is client-supplied[235] - The company produces most of its ink, controlling quality, cost, and supply; energy price increases are generally not passed to clients, except for fuel in logistics[236][237] ITEM 4. Controls and Procedures This section confirms that management, with the participation of the principal executive and financial officers, concluded that the company's disclosure controls and procedures were effective as of September 30, 2022, and that there were no material changes in internal control over financial reporting during the quarter Disclosure Controls and Procedures This section confirms the effectiveness of the company's disclosure controls and procedures as of September 30, 2022 - Disclosure controls and procedures were evaluated and deemed effective as of September 30, 2022[240] Changes in Internal Control Over Financial Reporting This section states that no material changes in internal control over financial reporting occurred during the quarter ended September 30, 2022 - No material changes in internal control over financial reporting occurred during the quarter ended September 30, 2022[241] PART II — OTHER INFORMATION This section includes additional information such as risk factors, details on equity security sales, and a list of exhibits filed with the report ITEM 1A. Risk Factors This section states that there have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2021 - No material changes to risk factors previously disclosed in the 2021 Annual Report on Form 10-K[244] ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds This section provides details on the company's repurchases of Class A common stock during the quarter ended September 30, 2022, under its authorized share repurchase program, including the number of shares purchased, average price, and remaining authorization Class A Common Stock Repurchases (Q3 2022) | Period | Total Shares Purchased | Average Price Paid Per Share | Dollar Value Remaining Under Program | | :----- | :--------------------- | :--------------------------- | :----------------------------------- | | July 2022 | 1,332,510 | $2.82 | $95,360,552 | | August 2022 | 1,132,124 | $3.65 | $91,232,849 | | September 2022 | 338,905 | $3.46 | $90,061,874 | | Total Q3 2022 | 2,803,539 | N/A | N/A | - As of September 30, 2022, $90.1 million of authorized repurchases remained under the $100.0 million share repurchase program[245] ITEM 6. Exhibits This section lists the exhibits filed as part of the Quarterly Report on Form 10-Q, including certifications from the CEO and CFO, and financial statements formatted in Inline eXtensible Business Reporting Language (iXBRL) - Includes certifications of CEO and CFO (Exhibits 31.1, 31.2, 32) and financial statements in iXBRL format (Exhibit 101)[248] Signatures This section contains the duly authorized signatures of the Chairman, President, and Chief Executive Officer, and the Chief Financial Officer, certifying the Quarterly Report on Form 10-Q