Quad/Graphics, Inc. (QUAD) FY 2021 MD&A

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

Following discussion of the financial condition and results of operations of Quad should be read together with Quad’s audited consolidated financial statements for each of the three years in the period ended December 31, 2021, including the notes thereto, included in Part II, Item 8, “Financial Statements and Supplementary Data,” of this Annual Report on Form 10-K. This discussion contains forward-looking statements that reflect the Company’s plans, estimates and beliefs. The Company’s actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed in “Forward-Looking Statements” and Part I, Item 1A, “Risk Factors,” included earlier within this Annual Report on Form 10-K.

Management’s discussion and analysis of financial condition and results of operations is provided as a supplement to the Company’s 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:

•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 the year ended December 31, 2021, to the year ended December 31, 2020. The comparability of the Company’s results of operations between periods was impacted by acquisitions, strategic investments and divestitures, including the divestiture of the Omaha, Nebraska packaging plant, which was sold on January 31, 2020, the additional investment in Rise in June 2020, and the divestiture of Company’s third-party logistics business on June 30, 2021. The results of operations of the packaging plant and the third-party logistics divestitures are included in the Company’s 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 (“Book business”) have been reported as discontinued operations for the year ended December 31, 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 accounting principles generally accepted in the United States of America (“GAAP”).

•Liquidity and Capital Resources. This section provides an analysis of the Company’s capitalization, cash flows and a discussion and table 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.

•Critical Accounting Policies and Estimates. This section contains a discussion of the accounting policies that the Company’s management believes are important to the Company’s financial condition and results of operations, as well as allowances and reserves that require significant judgment and estimates on the part of the Company’s management. In addition, all of the Company’s significant accounting policies, including critical accounting policies, are summarized in Note 1, “Basis of Presentation and Summary of Significant Accounting Policies,” to the consolidated financial statements in Part II, Item 8, “Financial Statements and Supplementary Data,” of this Annual Report on Form 10-K.

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Overview

Business Overview

As a worldwide marketing solutions partner, Quad leverages its more than 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 removes friction throughout the marketing process thereby helping brands and marketers reduce complexity, increase efficiency and enhance marketing spend effectiveness. Quad provides its clients

with a complete through-the-line marketing offering, providing 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 hone and evolve its offering, combined with leading-edge technology, advanced data and analytics and single-source simplicity, the Company has the resources and

knowledge to help a wide variety of clients target, more deeply engage and grow audiences in multiple verticals,

including those in established and emerging industries, such as retail, publishing, consumer technology, consumer

packaged goods, financial services, insurance, healthcare and direct-to-consumer.

For a full description of the Company’s business overview, refer to Part I, Item 1, “Business,” of this Annual Report on Form 10-K.

The Company’s operating and reportable segments are aligned with how the chief operating decision maker of the Company currently manages the business. The Company’s operating and reportable segments, including their product and service offerings, and a “Corporate” category, are summarized below.

The United States Print and Related Services segment is predominantly comprised of the Company’s United 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 89% and 90% of the Company’s consolidated net sales during the years ended December 31, 2021 and 2020, respectively.

The International segment consists of the Company’s printing operations in Europe and Latin America, including operations in England, France, Germany, Poland, Argentina, Colombia, Mexico and Peru, as well as investments in printing operations in Brazil and India. This segment provides printed products and marketing and other complementary services consistent with the United States Print and Related Services segment. The International segment accounted for approximately 11% and 10% of the Company’s consolidated net sales during the years ended December 31, 2021 and 2020, 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.

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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.

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 debt service requirements, capital expenditures, cash restructuring requirements related to cost reduction activities, 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 Company’s 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.

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The Company remains disciplined with its debt leverage. The Company’s consolidated debt and finance lease obligations decreased by $125 million during the year ended December 31, 2021, primarily due to the use of cash provided by operating activities, cash proceeds from the sale of property, plant and equipment, and the sale of the Company’s third-party logistics business. Since the Company completed the World Color Press acquisition in July 2010, the Company has reduced debt and finance lease obligations by $936 million and has reduced the obligations for pension, postretirement and MEPPs by $511 million, for a total obligation reduction since July 2010 of approximately $1.4 billion.

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.

The Company leverages its data-driven print expertise as part of an integrated marketing platform that helps its clients not only plan and produce marketing programs, but also deploy, manage and measure them across all media channels. Competition in the printing industry remains highly fragmented and intense, and the Company believes that there are indicators of heightened competitive pressures. The industry has excess manufacturing capacity created by continued declines in industry volumes, compounded by the COVID-19 pandemic, which, in turn, have created accelerated downward pricing pressures. The Company faces competition due to the increased accessibility and quality of digital alternatives to traditional delivery of printed documents through the online distribution and hosting of media content, and the digital distribution of documents and data. The Company faces competition from print management and marketing consulting firms that look to streamline processes and reduce the overall print spend of the Company’s clients.

For a full description of the Company’s industry and competition overview, refer to Part I, Item 1, “Business,” of this Annual Report on Form 10-K.

The Company believes that a disciplined approach for capital management and a strong balance sheet are critical to be able to invest in profitable growth opportunities and technological advances, thereby providing the highest return for shareholders. Management balances the use of cash between deleveraging the Company’s balance sheet (through reduction in debt and pension obligations), compelling investment opportunities (through capital expenditures, acquisitions and strategic investments) and returns to shareholders (through dividends and share repurchases).

The Company continues to make progress on integrating and streamlining all aspects of its business, thereby lowering its cost structure by consolidating its manufacturing platform into its most efficient facilities, as well as realizing purchasing, mailing and logistics efficiencies by centralizing and consolidating print manufacturing volumes and eliminating redundancies in its administrative and corporate operations. The Company has continued to evolve its manufacturing platform, equipping facilities to be product line agnostic, which enables the Company to maximize equipment utilization. Quad believes that the large plant size of certain of its key printing facilities allows the Company to drive savings in certain product lines (such as publications and catalogs) due to economies of scale and from investments in automation and technology. The Company continues to focus on proactively aligning its cost structure to the realities of the top-line pressures it faces in the printing industry through Lean Manufacturing and sustainable continuous improvement programs.

The Company believes it will continue to drive productivity improvements and sustainable cost reduction initiatives into the future through an engaged workforce and ongoing adoption of the latest manufacturing automation and technology. Through this strategy, the Company believes it can maintain the strongest, most efficient print manufacturing platform to remain a high-quality, low-cost producer.

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Integrated distribution with the 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 decreased operational cost structures, increased efficiencies, 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 PRC to conduct reviews of the overall rate-making structure for the USPS to ensure funding stability. As a result of those reviews, the PRC authorized a five year rate-making structure that provides the USPS with additional pricing flexibility over the Consumer Price Index cap, which may result in a substantially altered rate structure for mailers. The revised rate authority that is effective as a result of the rules issued by the PRC includes a higher overall rate cap on the USPS’ ability to increase rates from year to year. This 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 how much of the authority the USPS will use also creates potential volume declines as rate predictability with respect to cost is no longer known for mailers. The result may be reduced demand for printed products as clients may move more aggressively into other delivery methods, such as the many digital and mobile options now available to consumers.

The Company has invested significantly in its mail preparation and distribution capabilities to mitigate the impact of increases in postage costs, and to help clients successfully navigate the ever-changing postal environment. Through its data analytics, unique software to merge mail streams on a large scale, advanced finishing capabilities and technology, and in-house transportation and logistics operations, the Company manages the mail preparation and distribution of most of its clients’ products to maximize efficiency, to enable on-time and consistent delivery and to partially reduce these costs; however, the net impact of increasing postal costs may create a decrease in client demand for print and mail products.

The Company’s results of operations have been adversely impacted as a result of the COVID-19 pandemic and the emergence of new variants. Through the Company’s Crisis Management Team, including executive and operations leadership, the Company has been executing business continuity plans focused on protecting the health and well-being of our employees, while also continuing to service clients, and protect the long-term financial health of the Company as the COVID-19 pandemic continues. With ongoing advancements against the COVID-19 pandemic, the effects on the Company have lessened from previous periods, particularly from the heavily impacted second and third quarters of 2020. The Company is continuing to evaluate the impact and may implement additional cost reduction measures as necessary. The ultimate impact of COVID-19 on the Company’s business, financial condition, cash flows, results of operations and supply chain will depend on future developments, including the duration of the pandemic and the related length of its impact on the global economy, all of which are still uncertain.

Additionally, the increasing cost and availability of raw materials, such as paper, ink, supplies, distribution and labor, have been and are expected to continue to adversely impact the Company’s results of operation. The Company is dependent on its production personnel to print the Company’s products in a cost-effective and efficient manner that allows the Company to obtain new clients and to drive sales from existing clients. The nationwide shortage of available production personnel may put a strain on the Company’s ability to accept new work from client requests, including the Company’s seasonally higher third and fourth quarters. The ongoing labor shortage is also placing upward price pressure on freight, as the number of available drivers have been reduced, and may have an adverse effect on our operations. Due to the reduced number of freight drivers available, the Company may not be able to meet rising customer demand and could fail to meet our clients’ expectations.

The Company has also experienced and anticipates it will continue to experience certain distribution challenges, including, but not limited to, the above-noted delivery delays at the USPS and recent volume restrictions at the United Parcel Service, Federal Express and certain local couriers. As the labor shortages, supply chain and distribution challenges continue to evolve, the Company is unable to predict the duration of the shortages and challenges and the

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extent of the impact on the Company’s business, financial condition, cash flows and results of operations. As a result of the rising inflationary cost pressures within our raw materials, distribution and labor, the Company has and will continue to pass along price increases to our clients. The Company expects inflationary cost pressures and supply chain shortages to potentially continue through fiscal year 2022. The Company is unable to predict the future impact of the labor and supply chain shortages as well as cost inflation, and the resulting impact on the Company’s business, financial condition, cash flows and results of operations.

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Results of Operations for the Year Ended December 31, 2021, Compared to the Year Ended December 31, 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 year ended December 31, 2021, changed from the year ended December 31, 2020, as follows (dollars in millions, except per share data):

______________________________

(1)The Company executed sale and leaseback transactions of its Chalfont, Pennsylvania and West Allis, Wisconsin facilities resulting in $24.5 million ($18.4 million, net of tax) in gains during the year ended December 31, 2021.

(2)Restructuring, impairment and transaction-related charges decreased $105.2 million ($78.9 million, net of tax), to $18.9 million during the year ended December 31, 2021, and included the following:

a.A $24.8 million decrease in employee termination charges from $34.7 million during the year ended December 31, 2020, to $9.9 million during the year ended December 31, 2021;

b.A $29.2 million decrease in impairment charges from $64.1 million during the year ended December 31, 2020, to $34.9 million during the year ended December 31, 2021;

c.A $0.8 million decrease in transaction-related charges from $1.4 million during the year ended December 31, 2020, to $0.6 million during the year ended December 31, 2021;

d.A $1.9 million decrease in integration-related charges from $1.9 million during the year ended December 31, 2020, to zero during the year ended December 31, 2021; and

e.A $48.5 million decrease in various other restructuring charges from $22.0 million of expense during the year ended December 31, 2020, to $26.5 million of income during the year ended December 31, 2021.

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.

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(3)Interest expense decreased $9.2 million ($6.9 million, net of tax) during the year ended December 31, 2021, to $59.6 million. This change was due to lower average debt levels and a $0.7 million decrease in interest expense related to the interest rate swaps during the year ended December 31, 2021, as compared to the year ended December 31, 2020.

(4)Net pension income increased $4.0 million ($3.0 million, net of tax) during the year ended December 31, 2021, to $14.5 million. This was due to a $4.8 million decrease from interest cost on pension plan liabilities, partially offset by an increase in non-cash settlement charges of $0.8 million.

(5)Loss on debt extinguishment decreased $1.1 million ($0.8 million, net of tax) from $1.8 million during the year ended December 31, 2020, to $0.7 million during the year ended December 31, 2021. The $0.7 million loss on debt extinguishment recorded during the year ended December 31, 2021, relates to a $0.5 million loss on debt extinguishment recorded during the fourth quarter of 2021, primarily related to the repurchase of the Company’s unsecured 7.0% senior notes due May 1, 2022 and a $0.2 million loss on debt extinguishment from the fifth amendment to the Company’s April 28, 2014 Senior Secured Credit Facility, completed on November 2, 2021. The $1.8 million loss on debt extinguishment recognized during the year ended December 31, 2020, relates to a $2.4 million loss on debt extinguishment from the fourth amendment to the Company’s April 28, 2014 Senior Secured Credit Facility, completed on June 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 due May 1, 2022.

(6)The $29.1 million increase in income tax benefit as calculated in the following table is primarily due to a $54.1 million increase from decreased valuation allowance reserves, partially offset by the following: (1) a $14.3 million income tax benefit related to the Coronavirus Aid, Relief, and Economic Security Act net operating loss carry back provisions in 2020 that did not repeat in 2021; (2) a $6.2 million decrease from impairment charges related to foreign investments in 2021; and (3) a $2.4 million decrease from income in foreign branches.

(7)The loss from discontinued operations, net of tax, of $21.9 million was recognized during the year ended December 31, 2020. The Company completed the sale of the Book business in 2020.

(8)The increase from investments in unconsolidated entity and noncontrolling interests, net of tax, of $0.3 million during the year ended December 31, 2021, was primarily due to a $0.5 million increase in earnings 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 loss attributed to noncontrolling interests in the Company’s consolidated statements of operations related to the Company’s majority ownership of Rise.

(9)Operating income from continuing operations, excluding the gains from sale and leaseback and restructuring, impairment and transaction-related charges, increased $9.1 million ($6.8 million, net of tax) primarily due to the following: (1) a $24.3 million decrease in depreciation and amortization expense; (2) a $22.2 million increase in paper byproduct recoveries; (3) an $8.7 million net benefit in 2021 of gains from property insurance claims; (4) higher print volume and pricing; and (5) savings from other cost reduction initiatives. These cost decreases were partially offset by the following: (1) $38.5 million in COVID-related temporary cost reductions primarily from temporary salary reduction and furloughs in 2020; (2) net cost increases from labor, freight and materials inflationary cost impacts; and (3) a $12.0 million benefit in 2020 from a change in the hourly production employee vacation policy.

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Operating Results From Continuing Operations

The following table sets forth certain information from the Company’s 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:

Net Sales

Product sales increased $18.4 million, or 0.8%, for the year ended December 31, 2021, compared to the year ended December 31, 2020, primarily due to the following: (1) a $19.4 million increase in sales in the Company’s print product lines, primarily due to increased print volume and pricing; (2) a $6.8 million increase from pass-through paper sales, partially offset by a $7.5 million decrease in sales due to the divestiture of the Company’s Omaha packaging plant and $0.3 million in unfavorable foreign exchange impacts

Service sales, which primarily consist of logistics, distribution, marketing services, imaging and medical services, increased $12.4 million, or 1.8%, for the year ended December 31, 2021, compared to the year ended December 31, 2020, primarily due to a $44.3 million increase in logistics sales and a $21.5 million increase in print imaging services and sales of marketing services, partially offset by a $53.4 million decrease in sales due to the divestiture of the Company’s third-party logistics business.

Cost of Sales

Cost of product sales increased $29.5 million, or 1.6%, for the year ended December 31, 2021, compared to the year ended December 31, 2020, primarily due to the following: (1) higher print volume compared to the COVID-19 pandemic impacted 2020; (2) a $12.0 million benefit in 2020 from a change in the hourly production employee vacation policy; (3) an increase in pass-through paper costs; (4) the impacts from rising costs of labor, materials and other costs of production. These increases were partially offset by a $22.2 million increase in paper byproduct recoveries and the impact from the divestiture of the Omaha packaging plant.

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Cost of service sales increased $25.6 million, or 5.1%, for the year ended December 31, 2021, compared to the year ended December 31, 2020, primarily due to increased freight costs, partially offset by the impact from the divestiture of the Company’s third-party logistics business.

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased $9.1 million, or 2.7%, for the year ended December 31, 2021, compared to the year ended December 31, 2020, primarily due to an $8.7 million net benefit in 2021 of gains from property insurance claims, a $7.8 million decrease in credit loss expense mainly due to specific client credit reviews and savings from other cost reduction initiatives, partially offset by a $14.3 million increase in employee-related costs. Selling, general and administrative expenses as a percentage of net sales decreased from 11.4% for the year ended December 31, 2020, to 11.0% for the year ended December 31, 2021.

Gains from sale and leaseback

The Company executed sale and leaseback transactions of its Chalfont, Pennsylvania and West Allis, Wisconsin facilities resulting in $24.5 million ($18.4 million, net of tax) in gains during the year ended December 31, 2021.

Depreciation and Amortization

Depreciation and amortization decreased $24.3 million, or 13.4%, for the year ended December 31, 2021, compared to the year ended December 31, 2020, due to a $16.7 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 $7.6 million decrease in amortization expense.

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Restructuring, Impairment and Transaction-Related Charges

Restructuring, impairment and transaction-related charges decreased $105.2 million, or 84.8%, for the year ended December 31, 2021, compared to the year ended December 31, 2020, primarily due to the following:

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(a)Includes $2.8 million and $22.1 million of impairment charges for machinery and equipment no longer being utilized in production as a result of facility consolidations, as well as other capacity reduction and strategic divestiture activities during the years ended December 31, 2021 and 2020, respectively; and $42.0 million of land and building impairment charges during the year ended December 31, 2020. $56.6 million of the impairment charges recorded during the year ended December 31, 2020 were related to property, plant and equipment for the Oklahoma City, Oklahoma facility. $32.1 million of the impairment charges recorded during the year ended December 31, 2021 were related to the Company’s decision to sell the investment in Plural.

(b)Includes a $13.8 million gain on the sale of the Oklahoma City, Oklahoma facility, a $7.6 million gain on the sale of the Riverside, California facility, a $1.0 million gain on the sale of the Fernley, Nevada facility and a $2.4 million gain on the sale of other facilities during the year ended December 31, 2021; and a $0.8 million gain on the sale of the Shakopee, Minnesota facility and a $0.8 million gain on the sale of the Midland, Michigan facility during the year ended December 31, 2020.

(c)Includes a $20.9 million gain on the sale of a business and a $2.7 million gain from the reclassification of foreign currency translation adjustments during the year ended December 31, 2021; and a $2.9 million loss on the sale of a business during the year ended December 31, 2020.

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EBITDA and EBITDA Margin—Consolidated

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.

EBITDA and EBITDA margin for the year ended December 31, 2021, compared to the year ended December 31, 2020, were as follows:

EBITDA increased $141.8 million for the year ended December 31, 2021, compared to the year ended December 31, 2020, primarily due to the following: (1) $105.2 million of decreased restructuring, impairment and transaction-related charges; (2) $24.5 million in gains from sale and leaseback transactions; (3) a $22.2 million increase in paper byproduct recoveries; (4) a $21.9 million decrease in loss from discontinued operations, net of tax; and (5) an $8.7 million net benefit in 2021 of gains from property insurance claims. These increases were partially offset by the following: (1) $38.5 million in COVID-related temporary cost reductions primarily from temporary salary reduction and furloughs in 2020; (2) net cost increases from labor, freight and materials inflationary cost impacts; and (3) a $12.0 million benefit in 2020 from a change in the hourly production employee vacation policy.

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A reconciliation of EBITDA to net earnings (loss) attributable to Quad common shareholders for the years ended December 31, 2021 and 2020, was as follows:

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(1)Net earnings (loss) attributable to Quad common shareholders included the following:

a.Restructuring, impairment and transaction-related charges of $18.9 million and $124.1 million for the years ended December 31, 2021 and 2020, respectively;

b.Gains from sale and leaseback of $24.5 million for the year ended December 31, 2021;

c.Net pension income of $14.5 million and $10.5 million for the years ended December 31, 2021 and 2020, respectively;

d.Loss on debt extinguishment of $0.7 million and $1.8 million for the years ended December 31, 2021 and 2020, respectively;

e.Equity in earnings of unconsolidated entity of $0.3 million for the year ended December 31, 2021 and equity in loss of unconsolidated entity of $0.2 million for the yeas ended December 31, 2020;

f.Loss from discontinued operations, net of tax, of $21.9 million for the year ended December 31, 2020; and

g.Net loss attributable to noncontrolling interests of $0.2 million for the year ended December 31, 2020.

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:

Net Sales

Product sales for the United States Print and Related Services segment decreased $8.2 million, or 0.4%, for the year ended December 31, 2021, compared to the year ended December 31, 2020, primarily due to a $8.8 million decrease from pass-through paper sales and a $7.5 million decrease in sales due to the divestiture of the Company’s Omaha packaging plant, partially offset by a $8.1 million increase in sales in the Company’s print product lines, primarily due to increased print volume and pricing.

Service sales for the United States Print and Related Services segment increased $9.2 million, or 1.3%, for the year ended December 31, 2021, compared to the year ended December 31, 2020, primarily due to to a $42.0 million increase in logistics sales and a $20.6 million increase in print imaging services and sales of marketing services, partially offset by a $53.4 million decrease in sales due to the divestiture of the Company’s third-party logistics business.

Operating Income from Continuing Operations

Operating income from continuing operations for the United States Print and Related Services segment increased $161.4 million for the year ended December 31, 2021, compared to the year ended December 31, 2020, primarily due to the following: (1) a $124.6 million decrease in restructuring, impairment and transaction-related charges; (2) $24.5 million in gains from sale and leaseback transactions; (3) a $22.2 million increase in paper byproduct recoveries; (4) a $22.0 million decrease in depreciation and amortization expense; (5) a $8.7 million net benefit in 2021 in gains from property insurance claims; and (6) savings from other cost reduction initiatives. These increases were partially offset by the following: (1) $38.5 million in COVID-related temporary cost reductions primarily from temporary salary reduction and furloughs in 2020; (2) net inflationary cost increases from labor, freight and materials; and (3) a $12.0 million benefit in 2020 from a change in the hourly production employee vacation policy.

The operating margin for the United States Print and Related Services segment increased to 6.2% for the year ended December 31, 2021, from 0.1% for the year ended December 31, 2020, primarily due to the reasons provided above.

Restructuring, Impairment and Transaction-Related Charges

Restructuring, impairment and transaction-related charges for the United States Print and Related Services segment decreased $124.6 million for the year ended December 31, 2021, compared to the year ended December 31, 2020, primarily due to the following:

______________________________

(a)Includes $2.8 million and $22.0 million of impairment charges for machinery and equipment no longer being utilized in production as a result of facility consolidations, as well as other capacity reduction and strategic divestiture activities during the years ended December 31, 2021 and 2020, respectively; and $42.0 million of land and building impairment charges during the year ended December 31, 2020. $56.6 million of the impairment charges recorded during the year ended December 31, 2020 were related to property, plant and equipment for the Oklahoma City, Oklahoma facility.

(b)Includes a $13.8 million gain on the sale of the Oklahoma City, Oklahoma facility, a $7.6 million gain on the sale of the Riverside, California facility, a $1.0 million gain on the sale of the Fernley, Nevada facility and a $2.4 million gain on the sale of other facilities during the year ended December 31, 2021; and a $0.8 million gain on the sale of the Shakopee, Minnesota facility and a $0.8 million gain on the sale of the Midland, Michigan facility during the year ended December 31, 2020.

(c)Includes a $20.9 million gain on the sale of a business and a $2.9 million loss on the sale of a business during the years ended December 31, 2021 and 2020, respectively.

International

The following table summarizes net sales, operating income from continuing operations, operating margin, certain items impacting comparability and equity in loss of unconsolidated entities within the International segment:

Net Sales

Product sales for the International segment increased $26.6 million, or 9.3%, for the year ended December 31, 2021, compared to the year ended December 31, 2020, primarily due to a $15.6 million increase in pass-through paper sales and a $11.3 million increase in volume, primarily in Mexico and Europe, partially offset by $0.3 million in unfavorable foreign exchange impacts, primarily in Argentina.

Service sales for the International segment increased $3.2 million, or 18.5%, for the year ended December 31, 2021, compared to the year ended December 31, 2020, primarily due to a increase in logistics sales and imaging services in Europe.

Operating Loss from Continuing Operations

Operating loss from continuing operations for the International segment increased $15.3 million for the year ended December 31, 2021, compared to the year ended December 31, 2020, primarily due a $19.1 million increase in restructuring, impairment and transaction-related charges and the receipt of a $2.2 million COVID-19 related government subsidy in Poland in 2020 that did not repeat in 2021, partially offset by a $6.0 million increase in operating income from cost saving initiatives and increased print volume.

Restructuring, Impairment and Transaction-Related Charges

Restructuring, impairment and transaction-related charges for the International segment increased $19.1 million, or 156.6%, for the year ended December 31, 2021, compared to the year ended December 31, 2020, primarily due to the following:

______________________________

(a)Includes $32.1 million of impairment charges related to the Company’s decision to sell the investment in Plural during the year ended December 31, 2021; and $0.1 million of impairment charges for machinery and equipment no longer being utilized in production as a result of facility consolidations, as well as other capacity reduction and strategic divestiture activities during the year ended December 31, 2020.

(b)Includes a $2.7 million gain from the reclassification of foreign currency translation adjustments during the year ended December 31, 2021; and $0.6 million and $5.9 million in charges from foreign currency losses as result of the economy in Argentina being classified as highly inflationary during the years ended December 31, 2021 and 2020, respectively.

Equity in (Earnings) Loss of Unconsolidated Entities

Investments in entities where Quad has the ability to exert significant influence, but not control, are accounted for using the equity method of accounting. At December 31, 2021, the Company held a 49% ownership interest in Plural, a commercial printer based in São Paulo, Brazil. The equity in earnings of unconsolidated entity in the International segment was $0.3 million for the year ended December 31, 2021, compared to equity in loss of unconsolidated entity of $0.2 million for the year ended December 31, 2020, due to an increase in earnings at the Company’s investment in Plural. In January 2022, the Company sold its investment in Plural. As a result of the planned sale, the Company recorded a $32.1 million impairment charge during the year ended December 31, 2021.

Unrestricted Subsidiaries

As of December 31, 2021, the Company has no unrestricted subsidiaries as defined in the Senior Unsecured Notes indenture.

Corporate

The following table summarizes unallocated operating expenses presented as Corporate:

Operating Expenses

Corporate operating expenses increased $7.3 million, or 15.6%, for the year ended December 31, 2021, compared to the year ended December 31, 2020, primarily due to a $6.6 million increase in employee-related costs and a $0.3 million increase in restructuring, impairment and transaction-related charges.

Restructuring, Impairment and Transaction-Related Charges

Corporate restructuring, impairment and transaction-related charges increased $0.3 million, or 16.7%, for the year ended December 31, 2021, compared to the year ended December 31, 2020, primarily due to the following:

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 $576.6 million as of December 31, 2021, which consisted of up to $396.7 million of unused capacity under its revolving credit arrangement, which was net of $35.8 million of issued letters of credit, and cash and cash equivalents of $179.9 million. Total liquidity is reduced to $314.6 million under the Company’s most restrictive debt covenants, and consists of $179.9 million in cash and cash equivalents and $134.7 million available under its revolving credit arrangement. There were no borrowings under the $432.5 million revolving credit facility as of December 31, 2021, and peak borrowings were $59.7 million during the year ended December 31, 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 for both the next 12 months and beyond.

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Net Cash Provided by Operating Activities

Year Ended December 31, 2021, Compared to Year Ended December 31, 2020

Net cash provided by operating activities was $136.5 million for the year ended December 31, 2021, compared to $190.2 million for the year ended December 31, 2020, resulting in a $53.7 million decrease in cash provided by operating activities. The decrease was primarily due to a $29.6 million decrease in cash from earnings and a $24.1 million decrease in cash flows provided by changes in operating assets and liabilities, primarily due to the strategic decision to carry higher inventory levels to serve clients.

Net Cash Provided by Investing Activities

Year Ended December 31, 2021, Compared to Year Ended December 31, 2020

Net cash provided by investing activities was $129.4 million for the year ended December 31, 2021, compared to $9.7 million for the year ended December 31, 2020, resulting in a $119.7 million increase in cash provided by investing activities. The increase was primarily due to the following: (1) a $118.9 million increase in proceeds from the sale of property, plant and equipment; (2) a $11.0 million decrease in purchases of property, plant and equipment; (3) a $10.2 million increase in the proceeds from property insurance claims; and (4) a $2.2 million decrease in cash used in the acquisition of business. These increases were partially offset by a $21.6 million decrease in the proceeds from the sale of businesses and a $0.9 million increase in cost investment in unconsolidated entities.

Net Cash Used in Financing Activities

Year Ended December 31, 2021, Compared to Year Ended December 31, 2020

Net cash used in financing activities was $140.9 million for the year ended December 31, 2021, compared to $223.6 million for the year ended December 31, 2020, resulting in a $82.7 million decrease in cash used in financing activities. The decrease was primarily due to a (1) a $63.4 million decrease in net payments of debt and lease obligations in 2021 compared to 2020; (2) a $20.5 million decrease in cash used in changes in ownership of noncontrolling interests; and (3) a $8.1 million decrease in cash used in the payment of dividends. These decreases were partially offset by a $6.0 million increase in other financing activities and a $3.2 million increase in payments of debt issuance costs and financing fees.

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.

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Free Cash Flow for the years ended December 31, 2021 and 2020, was as follows:

Free Cash Flow decreased $42.7 million for the year ended December 31, 2021, compared to the year ended December 31, 2020, primarily due to a $53.7 million decrease in net cash provided by operating activities, partially offset by an $11.0 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 year ended December 31, 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.

The Debt Leverage Ratio calculated below differs from the Total Leverage Ratio, the Total Net Leverage Ratio and Senior Secured Leverage Ratio included in the Company’s debt covenant calculations (see Note 12, “Debt,” to the consolidated financial statements in Part II, Item 8, “Financial Statements and Supplementary Data,” of this Annual Report on Form 10-K 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 income (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 Leverage Ratio, in addition to the exclusion of the outstanding balance of the Senior Unsecured Notes and surety bonds from debt and netting domestic unrestricted cash with debt.

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The Debt Leverage Ratio as of December 31, 2021 and 2020, was as follows:

The calculation of Adjusted EBITDA for the years ended December 31, 2021 and 2020, was as follows:

______________________________

(1)Other is comprised of equity in loss of unconsolidated entity, Adjusted EBITDA for unconsolidated equity method investments and net earnings (loss) attributable to noncontrolling interests.

The Debt Leverage Ratio, at December 31, 2021, decreased 0.81x to 2.54x compared to December 31, 2020, primarily due to a $249.2 million decrease in debt and finance lease obligations, partially offset by a $14.4 million decrease in Adjusted EBITDA. The Debt Leverage Ratio, at December 31, 2021, is above management’s desired target Debt Leverage Ratio range of 2.0x to 2.5x; however, the Company expects to operate above the Debt Leverage Ratio target range due to the ongoing supply chain shortages. The Company will also operate at times above the Debt Leverage Ratio target range depending on the timing of compelling strategic investment opportunities, as well as seasonal working capital needs.

Description of Significant Outstanding Debt Obligations as of December 31, 2021

As of December 31, 2021, the Company utilized a combination of debt instruments to fund cash requirements, including the following:

•Senior Secured Credit Facility:

◦$432.5 million revolving credit facility (no outstanding balance as of December 31, 2021); and

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◦$825.0 million Term Loan A ($575.4 million outstanding as of December 31, 2021);

•Senior Unsecured Notes ($211.5 million outstanding as of December 31, 2021); and

•Master Note and Security Agreement ($7.2 million outstanding as of December 31, 2021).

Senior Secured Credit Facility

On April 28, 2014, the Company entered into its Senior Secured Credit Facility, which included a revolving credit facility, Term Loan A and Term Loan B. The Company completed the fourth amendment to the Senior Secured Credit Facility on June 29, 2020. The Senior Secured Credit Facility was amended to (a) provide for certain financial covenant relief through the fiscal quarter ended September 30, 2021 (the Covenant Relief Period); (b) reduce the aggregate amount of the existing revolving credit facility from $800.0 million to $500.0 million; (c) make certain adjustments to pricing such as the addition of a 0.75% LIBOR floor; and (d) prohibit repurchases of capital stock and payments of cash dividends during the Covenant Relief Period. Certain amendments were also made to the quarterly financial covenants to which the Company is subject.

The Company completed the fifth amendment to the Senior Secured Credit Facility on November 2, 2021. The Senior Secured Credit Facility was amended to (a) reduce the aggregate amount of the existing revolving credit facility from $500.0 million to $432.5 million, and extend the maturity of a portion of the revolving credit facility such that $90.0 million under the revolving credit facility is due on the existing maturity date of January 31, 2024 (the “Existing Maturity Date”) and $342.5 million under the revolving credit facility is due on November 2, 2026 (the “Extended Maturity Date”); (b) extend the maturity of a portion of the existing term loan facility such that $91.5 million of such term loan facility is due on the Existing Maturity Date and $483.9 million is due on the Extended Maturity Date; (c) make certain adjustments to pricing, including an increase of 0.50% to the interest rate margin applicable to the loans maturing on the Extended Maturity Date; (d) modify certain financial and operational covenants; and (e) modify the interest rate provisions relating to the phase-out of LIBOR as a reference rate.

Borrowings under the revolving credit facility and Term Loan A made under the Senior Secured Credit Facility bear interest at 2.75% in excess of reserve adjusted LIBOR, or 1.75% in excess of an alternate base rate with a LIBOR floor of 0.75% for the extended tranche and bear interest at 2.50% in excess of reserve adjusted LIBOR, or 1.50% in excess of an alternate base rate with a LIBOR floor of 0.75% for the non-extending tranche.

At December 31, 2021, the Company had no outstanding borrowings on the revolving credit facility, and had $35.8 million of issued letters of credit, leaving up to $396.7 million available for future borrowings. The Senior Secured Credit Facility is secured by substantially all of the unencumbered assets of the Company. The Senior Secured Credit Facility also requires the Company to provide additional collateral to the lenders in certain limited circumstances.

Senior Unsecured Notes

The Company issued $300.0 million aggregate principal amount of its Senior Unsecured Notes due May 1, 2022, on April 28, 2014, of which $211.5 million is outstanding as of December 31, 2021. The Senior Unsecured Notes bear interest at 7.0%, and interest is payable semi-annually. The Company received $294.8 million in net proceeds from the sale of the Senior Unsecured Notes, after deducting the initial purchasers’ discounts and commissions.

During the year ended December 31, 2021, the Company repurchased $27.2 million of its outstanding Senior Unsecured Notes in the open market, resulting in a net loss on debt extinguishment of $0.5 million. During the year ended December 31, 2020, the Company repurchased $4.7 million of its outstanding Senior Unsecured Notes in the open market, resulting in a net gain on debt extinguishment of $0.8 million. All repurchased Senior Unsecured Notes were canceled. The Company used cash flows from operating activities and borrowings under its revolving credit facility to fund the repurchases. These repurchases were completed primarily to reduce interest expense.

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Each of the Company’s existing and future domestic subsidiaries that is a borrower or guarantees indebtedness under the Company’s Senior Secured Credit Facility or that guarantees certain of the Company’s other indebtedness or indebtedness of the Company’s restricted subsidiaries (other than intercompany indebtedness) fully and unconditionally guarantee or, in the case of future subsidiaries, will guarantee, on a joint and several basis, the Senior Unsecured Notes (the “Guarantor Subsidiaries”). All of the Guarantor Subsidiaries are 100% owned by the Company. Guarantor Subsidiaries will be automatically released from these guarantees upon the occurrence of certain events.

Master Note and Security Agreement

On September 1, 1995, and as last amended on November 24, 2014, the Company entered into its Master Note and Security Agreement pursuant to which the Company issued over time senior notes in an aggregate principal amount of $1.1 billion in various tranches, of which $7.2 million was outstanding as of December 31, 2021. The senior notes under the Master Note and Security Agreement had a weighted average interest rate of 7.81% at December 31, 2021, which is fixed to maturity, with interest payable semiannually. Principal payments commenced September 1997 and extend through April 2026 in various tranches. The notes are collateralized by certain United States press equipment under the terms of the Master Note and Security Agreement.

The Company redeemed $37.6 million of its senior notes under the Master Note and Security Agreement, at par (the outstanding principal balance as of the date of payment), during the year ended December 31, 2020. There was no direct gain or loss recognized as a result of the tender as all notes were redeemed at par; however, $0.2 million of unamortized debt issuance costs related to the tendered notes were recognized as a loss on debt extinguishment during the year ended December 31, 2020. All tendered senior notes under the Master Note and Security Agreement were canceled. The Company used cash flows from operating activities and borrowings under its revolving credit facility to fund the tender. The tender was primarily completed to reallocate debt to the lower interest rate revolving credit facility and thereby reduce interest expense based on the then current LIBOR rates.

Covenants and Compliance

The Company’s various lending arrangements include certain financial covenants (all financial terms, numbers and ratios are as defined in the Company’s debt agreements). Among these covenants, the Company was required to maintain the following as of December 31, 2021:

•Total Leverage Ratio. On a rolling twelve-month basis, the Total Leverage Ratio, defined as consolidated total indebtedness to consolidated EBITDA, shall not exceed 3.75 to 1.00 (for the twelve months ended December 31, 2021, the Company’s Total Leverage Ratio was 3.22 to 1.00).

•Liquidity, defined as unrestricted cash and permitted investments of the Company and its subsidiaries (subject to certain conditions) plus the aggregate amount of the unused revolving credit facility commitments, shall not be less than $181.6 million at any time during the period commencing December 15, 2023 and ending when all obligations owed under the Senior Secured Credit Facility to lenders that are not extending lenders are paid in full.

•If there is any amount outstanding on the Revolving Credit Facility or Term Loan A, or if any lender has any revolving credit exposure or Term Loan A credit exposure, the Company is required to maintain the following:

◦Senior Secured Leverage Ratio. On a rolling four-quarter basis, the Senior Secured Leverage Ratio, defined as the ratio of consolidated senior secured net indebtedness to consolidated EBITDA, shall not exceed (a) 3.50 to 1.00 for any fiscal quarter ending prior to December 31, 2023, and (b) 3.25 to 1.00 for any fiscal quarter ending on or after December 31, 2023 (other than, in the case of this clause (b), any fiscal quarter ending September 30 of any year, each of which shall be subject to a maximum Senior Secured Leverage Ratio not to exceed 3.50 to 1.00) (for the twelve months ended December 31, 2021, the Company’s Senior Secured Leverage Ratio was 1.68 to 1.00).

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•Interest Coverage Ratio. On a rolling twelve-month basis, the Interest Coverage Ratio, defined as consolidated EBITDA to cash consolidated interest expense, shall not be less than 3.00 to 1.00 (for the twelve months ended December 31, 2021, the Company’s Interest Coverage Ratio was 5.35 to 1.00).

The indenture underlying the Senior Unsecured Notes contains various covenants, including, but not limited to, covenants that, subject to certain exceptions, limit the Company’s and its restricted subsidiaries’ ability to incur and/or guarantee additional debt; pay dividends, repurchase stock or make certain other restricted payments; enter into agreements limiting dividends and certain other restricted payments; prepay, redeem or repurchase subordinated debt; grant liens on assets; enter into sale and leaseback transactions; merge, consolidate, transfer or dispose of substantially all of the Company’s consolidated assets; sell, transfer or otherwise dispose of property and assets; and engage in transactions with affiliates.

The Company was in compliance with all financial covenants in its debt agreements as of December 31, 2021. While the Company currently expects to be in compliance in future periods with all of the financial covenants, there can be no assurance that these covenants will continue to be met. The Company’s failure to maintain compliance with the covenants could prevent the Company from borrowing additional amounts and could result in a default under any of the debt agreements. Such default could cause the outstanding indebtedness to become immediately due and payable, by virtue of cross-acceleration or cross-default provisions.

In addition to those covenants, the Senior Secured Credit Facility also includes certain limitations on acquisitions, indebtedness, liens, dividends and repurchases of capital stock.

•If the Company’s Total Leverage Ratio is greater than 2.75 to 1.00, the Company is prohibited from making greater than $60.0 million of dividend payments, capital stock repurchases and certain other payments, over the course of the agreement. If the Company’s Total Leverage Ratio is above 2.50 to 1.00 but below 2.75 to 1.00, the Company is prohibited from making greater than $100.0 million of dividend payments, capital stock repurchases and certain other payments, over the course of the agreement. If the Total Leverage Ratio is less than 2.50 to 1.00, there are no such restrictions. As the Company’s Total Leverage Ratio as of December 31, 2021, was 3.22 to 1.00, the limitations described above are currently applicable.

•If the Company’s Senior Secured Leverage Ratio is greater than 3.00 to 1.00 or the Company’s Total Net Leverage Ratio which, on a rolling twelve-month basis, is defined as consolidated net indebtedness to consolidated EBITDA, is greater than 3.50 to 1.00, the Company is prohibited from voluntarily prepaying any of the Senior Unsecured Notes and from voluntarily prepaying any other unsecured or subordinated indebtedness, with certain exceptions (including any mandatory prepayments on the Senior Unsecured Notes or any other unsecured or subordinated debt). If the Senior Secured Leverage Ratio is less than 3.00 to 1.00 and the Total Net Leverage Ratio is less than 3.50 to 1.00, there are no such restrictions. The limitations described above are currently not applicable, as the Company’s Senior Secured Leverage Ratio was 1.68 to 1.00 and Total Net Leverage Ratio was 2.53 to 1.00, as of December 31, 2021.

Net Pension Obligations

The net underfunded pension and MEPPs obligations decreased by $40.9 million during the year ended December 31, 2021, from $92.3 million at December 31, 2020, to $51.4 million at December 31, 2021. This decrease in overall pension obligations was primarily due to a 40 basis point increase in the pension discount rate from 2.37% at December 31, 2020 to 2.77% at December 31, 2021, payments totaling $6.2 million made to the MEPPs and $1.6 million in employer pension contributions during the year ended December 31, 2021. The decrease was partially offset by an actual return on pension plan assets of 5.11% during the year ended December 31, 2021, which was below the expected return on plan assets assumption of 5.50%.

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The Company continues to focus on reducing pension obligations through cash contributions to the plans, lump-sum settlements and plan design changes.

Share Repurchase Program

On July 30, 2018, the Company’s Board of Directors authorized a share repurchase program of up to $100.0 million of the Company’s outstanding class A common stock. Under the authorization, share repurchases may be made at the Company’s discretion, from time to time, in the open market and/or in privately negotiated transactions as permitted by federal securities laws and other legal requirements. The timing, manner, price and amount of any repurchase will depend on economic and market conditions, share price, trading volume, applicable legal requirements and other factors. The program may be suspended or discontinued at any time.

There were no shares of the Company’s class A stock repurchased during the years December 31, 2021 and 2020. As of December 31, 2021, there were $100.0 million of authorized repurchases remaining under the program.

Risk Management

For a discussion of the Company’s exposure to market risks and management of those market risks, see Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” of this Annual Report on Form 10-K.

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Contractual Obligations and Other Commitments

The Company’s contractual cash obligations at December 31, 2021, were as follows (in millions):

______________________________

(1)Debt obligations include $97.4 million for anticipated future interest payments, including $5.2 million of estimated interest payments from the interest rate swaps, and excludes $9.1 million for future amortization of debt issuance costs. During 2021, the Company paid in advance $35.7 million on its Term Loan A for the year ended December 31, 2022. The Company also paid in advance $62.4 million of required amortization payments on its Term Loan A for the year ended December 31, 2023.

(2)Operating lease obligations include $20.3 million for anticipated future interest payments.

(3)MEPPs withdrawal obligations include $12.8 million for anticipated future interest payments. See Note 16, “Employee Retirement Plans,” to the consolidated financial statements in Part II, Item 8, “Financial Statements and Supplementary Data,” of this Annual Report on Form 10-K for further discussion of the MEPPs withdrawal liability.

(4)For the pension benefit obligations, contributions and benefit payments to be funded from Company assets included in the table have been actuarially estimated over a five year period. While benefit payments under these benefit plans are expected to continue beyond 2026, the Company believes that an estimate beyond this period is unreasonable.

(5)Finance lease obligations include $0.2 million for anticipated future interest payments.

(6)Purchase obligations consist primarily of $10.0 million in firm commitments to purchase press and finishing equipment and $11.4 million of other purchase obligations.

(7)The contractual obligations table above does not include reserves for uncertain tax positions recorded in accordance with the accounting guidance on uncertainties in income taxes. The Company has taken tax positions for which the ultimate amount and the year(s) any necessary payments will be made that pertain to those tax positions is uncertain. The reserve for uncertain tax positions prior to interest and penalties was $11.7 million as of December 31, 2021, of which $6.5 million was included in deferred income taxes and $5.2 million was included in other long-term liabilities.

(8)The contractual obligations table above does not include the share repurchase program as no repurchases are required under the program. See the “Share Repurchase Program” section above for further discussion, including the maximum potential cash payments under the program.

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Critical Accounting Policies and Estimates

The Company’s consolidated financial statements are prepared in accordance with GAAP. The Company’s most critical accounting policies are those that are most important to the portrayal of its financial condition and results of operations, and which require the Company to make its most difficult and subjective estimates. Management is required to make judgments and estimates that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the statements, and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. The Company’s management believes that such judgments and estimates are made with consistent and appropriate methods based on information available at the time, and that any reasonable deviation from those judgments and estimates would not have a material impact on the Company’s consolidated financial position or results of operations. Actual results may differ from these estimates under different assumptions or conditions. To the extent that the estimates used differ from actual results, adjustments to the consolidated statements of operations and corresponding consolidated balance sheets would be necessary. These adjustments would be made in future statements.

The Company has identified the following as its critical accounting policies and estimates.

Revenue Recognition

Performance Obligations

At contract inception, the Company assesses the products and services promised in its contracts with customers and identifies performance obligations for each promise to transfer to the customer a product or service that is distinct. To identify the performance obligations, the Company considers the goods or services promised in the contract regardless of whether they are explicitly stated or are implied by customary business practices. The Company determined that the following distinct products and services represent separate performance obligations:

•Pre-Press Services

•Print

•Other Services

For Pre-Press and Other Services, the Company recognizes revenue at point-in-time upon completion of the performed service and acceptance by the customer. The Company considers transfer of control to occur once the service is performed as the Company has right to payment and the customer has legal title and risk and reward of ownership.

The Company recognizes its Print revenues upon transfer of title and the passage of risk of loss, which is point-in-time upon shipment to the customer, and when there is a reasonable assurance as to collectability. Revenues related to the Company’s logistics operations, which includes the delivery of printed material, are included in the Print performance obligation and are also recognized at point-in-time as services are completed. Revenues related to the Company’s imaging operations, which include digital content management, photography, color services and page production, are recognized in accordance with the terms of the contract, typically upon completion of the performed service and acceptance by the customer. Under agreements with certain customers, products may be stored by the Company for future delivery. In these situations, the Company may receive warehouse management fees for the services it provides.

Certain revenues earned by the Company require judgment to determine if revenue should be recorded gross as principal or net of related costs as an agent. Billings for third-party shipping and handling costs, primarily in the Company’s logistics operations, and out-of-pocket expenses are recorded gross in net sales and cost of sales in the consolidated statements of operations in Item 8, “Financial Statements and Supplementary Data,” of this Annual Report on Form 10-K. Many of the Company’s operations process materials, primarily paper, that may be supplied directly by customers or may be purchased by the Company and sold to customers. No revenue is recognized for customer-supplied paper. Revenues for the Company-supplied paper are recognized on a gross basis. In some instances, the Company will

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deliver print work for a customer and bill the customer for postage. In these cases, the Company is acting as an agent and billings are recorded on a net basis in net sales.

Significant Payment Terms

Payment terms and conditions for contracts with customers vary. The Company typically offers standard terms of net 30 days.  It is not the Company’s standard business practice to offer extended payment terms longer than one year. The Company may offer cash discounts or prepayment and extended terms depending on certain facts and circumstances. As such, when the timing of the Company’s delivery of products and services differs from the timing of payment, the Company will record either a contract asset or a contract liability.

Variable Consideration

When evaluating the transaction price, the Company analyzes on a contract by contract basis all applicable variable considerations and non-cash consideration and also performs a constraint analysis. The nature of the Company’s contracts give rise to variable consideration, including, volume rebates, credits, discounts, and other similar items that generally decrease the transaction price. These variable amounts generally are credited to the customer, based on achieving certain levels of sales activity, when contracts are signed, or making payments within specific terms.

Product returns are not significant because the products are customized; however, the Company accrues for the estimated amount of customer allowances at the time of sale based on historical experience and known trends.

When the transaction price requires allocation to multiple performance obligations, the Company uses the estimated stand-alone selling prices using the adjusted market assessment approach.

Impairment of Property, Plant and Equipment and Finite-lived Intangible Assets

The Company performs impairment evaluations of its long-lived assets whenever business conditions, events or circumstances indicate that those assets may be impaired, including whether the estimated useful life of such long-lived assets may warrant revision or whether the remaining balance of an asset may not be recoverable. The Company’s most significant long-lived assets are property, plant and equipment and customer relationship intangible assets recorded in conjunction with an acquisition. Assessing the impairment of long-lived assets requires the Company to make important estimates and assumptions, including, but not limited to, the expected future cash flows that the assets will generate, how the assets will be used based on the strategic direction of the Company, their remaining useful life and their residual value, if any. Considerable judgment is also applied in incorporating the potential impact of the current economic climate on customer demand and selling prices, the cost of production and the limited activity on secondary markets for the assets and on the cost of capital. When the estimated future undiscounted cash flows to be generated by the assets are less than the carrying value of the long-lived assets, the assets are written down to fair value and a charge is recorded to current operations. The Company uses internal discounted cash flow estimates, quoted market prices when available and independent appraisals, as appropriate, to determine fair value. This fair value determination was categorized as Level 3 in the fair value hierarchy (see Note 15, “Financial Instruments and Fair Value Measurements,” to the consolidated financial statements in Part II, Item 8, “Financial Statements and Supplementary Data,” of this Annual Report on Form 10-K for the definition of Level 3 inputs).

The Company classifies long-lived assets to be sold as held for sale in the period in which: (i) there is an approved plan to sell the asset and the Company is committed to that plan, (ii) the asset is available for immediate sale in its present condition, (iii) an active program to locate a buyer and other actions required to sell the asset have been initiated, (iv) the sale of the asset is probable, (v) the asset is being actively marketed for sale at a price that is reasonable in relation to its current fair value, and (vi) it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. Assets held for sale are initially measured at the lower of the carrying value or the fair value less cost to sell. Losses resulting from this measurement are recognized in the period in which the held for sale criteria are met while gains are not recognized until the date of sale. Once designated as held for sale, the Company stops recording depreciation expense on the property, plant and equipment. The fair value less cost to sell of long-lived assets held for sale is assessed at each reporting period until it no longer meets this classification.

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Based on the assessments completed during the years ended December 31, 2021, and 2020, the Company recognized property, plant and equipment impairment charges from continuing operations of $2.8 million and $64.1 million, respectively, primarily related to facility consolidations, as well as other capacity reduction and strategic divestiture activities. There were no finite-lived intangible asset impairment charges recorded during the years ended December 31, 2021 and 2020.

The Company continues to monitor groups of assets to identify any new events or changes in circumstances that could indicate that their carrying values are not recoverable, particularly in light of potential declines in profitability that may result from the highly competitive industry landscape and continued uncertainty in the global economy. In the event that there are significant and unanticipated changes in circumstances, such as significant adverse changes in business climate, adverse actions by regulators, unanticipated competition, loss of key customers and/or changes in technology or markets, or that actual results differ from management’s estimates, a provision for impairment could be required in a future period.

New Accounting Pronouncements

See Note 23, “New Accounting Pronouncements,” to the consolidated financial statements in Part II, Item 8, “Financial Statements and Supplementary Data,” of this Annual Report on Form 10-K.

Summarized Financial Information of Subsidiary Guarantors Indebtedness

On April 28, 2014, Quad completed an offering of the Senior Unsecured Notes (see Note 12, “Debt,” for further details on the Senior Unsecured Notes). Each of the Company’s Guarantor Subsidiaries fully and unconditionally guarantee or, in the case of future subsidiaries, will guarantee, on a joint and several basis, the Senior Unsecured Notes. All of the current Guarantor Subsidiaries are 100% owned by the Company. Guarantor Subsidiaries will be automatically released from these guarantees upon the occurrence of certain events, including the following:

•the designation of any of the Guarantor Subsidiaries as an unrestricted subsidiary;

•the release or discharge of any guarantee or indebtedness that resulted in the creation of the guarantee of the Senior Unsecured Notes by any of the Guarantor Subsidiaries; or

•the sale or disposition, including the sale of substantially all the assets, of any of the Guarantor Subsidiaries.

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The following tables present summarized financial information for Quad and the Guarantor Subsidiaries on a combined basis after intercompany transactions have been eliminated, including adjustments to remove the equity in earnings from the Non-Guarantor Subsidiaries.

Included in long-term assets in the table above are $0.9 million and $11.6 million of current intercompany loan receivables due to Quad from the Non-Guarantor Subsidiaries as of December 31, 2021 and 2020, respectively. Also included in long-term assets are $435.1 million and $428.8 million of intercompany investments by Quad and the Guarantor Subsidiaries in the Non-Guarantor Subsidiaries. Included in current liabilities are $3.3 million and $2.9 million of current intercompany payables due to the Non-Guarantor Subsidiaries from Quad and the Guarantor Subsidiaries as of December 31, 2021 and 2020, respectively.