QUAD/GRAPHICS, INC.
10-Ks and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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T
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
June 30, 2012
or
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¨
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from to
Commission File Number 001-34806
QUAD/GRAPHICS, INC.
(Exact name of registrant as specified in its charter)
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Wisconsin
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39-1152983
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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N61 W23044 Harry's Way, Sussex, Wisconsin 53089-3995
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(414) 566-6000
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(Address of principal executive offices) (Zip Code)
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(Registrant's telephone number, including area code)
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
T
No
¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
T
No
¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filer
T
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Accelerated filer
o
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Non-accelerated filer
o
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Smaller reporting company
o
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(Do not check if a smaller reporting company)
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||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
¨
No
T
Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date.
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Class
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Outstanding as of August 6, 2012
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Class A Common Stock
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32,678,480
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Class B Common Stock
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14,198,464
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Class C Common Stock
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245,353
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QUAD/GRAPHICS, INC.
FORM 10-Q INDEX
For the Quarter Ended
June 30, 2012
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Page No.
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|||
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ITEM 1.
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Condensed Consolidated Financial Statements (Unaudited)
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QUAD/GRAPHICS, INC.
(in millions, except per share data)
(UNAUDITED)
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Three Months Ended June 30,
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Six Months Ended June 30,
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||||||||||||||
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2012
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2011
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2012
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2011
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||||||||||||
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Net sales
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|||||||||||||||
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Products
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$
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824.4
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$
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863.1
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$
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1,699.6
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$
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1,768.1
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|||
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Services
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109.8
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114.1
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224.2
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231.5
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|||||||
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Total net sales
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934.2
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977.2
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1,923.8
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1,999.6
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|||||||
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Cost of sales
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|||||||||||||||
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Products
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656.4
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665.2
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1,343.1
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1,362.2
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|||||||
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Services
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84.4
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91.4
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170.6
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178.1
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|||||||
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Total cost of sales
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740.8
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756.6
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1,513.7
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1,540.3
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|||||||
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Selling, general and administrative expenses
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80.6
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104.6
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172.6
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202.5
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|||||||
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Depreciation and amortization
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84.7
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83.5
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169.3
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170.8
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|||||||
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Restructuring, impairment and transaction-related charges
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37.7
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21.6
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75.9
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50.3
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|||||||
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Total operating expenses
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943.8
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966.3
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1,931.5
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1,963.9
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|||||||
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Operating income (loss) from continuing operations
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(9.6
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)
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10.9
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(7.7
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)
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35.7
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|||||||
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Interest expense
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20.7
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29.3
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42.1
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59.1
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|||||||
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Loss from continuing operations before income taxes and equity in earnings (loss) of unconsolidated entities
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(30.3
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)
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(18.4
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)
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(49.8
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)
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(23.4
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|||||||
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Income tax benefit
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(10.3
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)
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(3.7
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)
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(44.1
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)
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(10.9
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|||||||
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Loss from continuing operations before equity in earnings (loss) of unconsolidated entities
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(20.0
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)
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(14.7
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)
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(5.7
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)
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(12.5
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)
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|||||||
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Equity in earnings (loss) of unconsolidated entities
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(0.8
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)
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0.3
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0.3
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1.1
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|||||||
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Net loss from continuing operations
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$
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(20.8
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)
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$
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(14.4
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)
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$
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(5.4
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)
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$
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(11.4
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)
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|||
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Earnings (loss) from discontinued operations, net of tax
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—
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4.2
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(3.2
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)
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(6.1
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)
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|||||||
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Gain on disposal of discontinued operations, net of tax
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—
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—
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35.3
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—
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|||||||
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Net earnings (loss)
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$
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(20.8
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)
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$
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(10.2
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)
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$
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26.7
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$
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(17.5
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)
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|||
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Net earnings attributable to noncontrolling interests
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—
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(0.1
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)
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(0.1
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)
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(0.1
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)
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|||||||
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Net earnings (loss) attributable to Quad/Graphics common shareholders
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$
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(20.8
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)
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$
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(10.3
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)
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$
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26.6
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$
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(17.6
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)
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|||
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
2
QUAD/GRAPHICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (continued)
(in millions, except per share data)
(UNAUDITED)
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Three Months Ended June 30,
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Six Months Ended June 30,
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||||||||||||||
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2012
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2011
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2012
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2011
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||||||||||||
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Earnings (loss) per share attributable to Quad/Graphics common shareholders:
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|||||||||||||||
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Basic and diluted:
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|||||||||||||||
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Continuing operations
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$
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(0.44
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)
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$
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(0.31
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)
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$
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(0.12
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)
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$
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(0.24
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)
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|||
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Discontinued operations
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—
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0.09
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0.69
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(0.13
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)
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|||||||
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Earnings (loss) per share attributable to Quad/Graphics common shareholders
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$
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(0.44
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)
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$
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(0.22
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)
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$
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0.57
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$
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(0.37
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)
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|||
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Weighted average number of common shares outstanding:
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|||||||||||||||
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Basic and diluted
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46.8
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47.3
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46.8
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47.3
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|||||||
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Amounts attributable to Quad/Graphics common shareholders:
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|||||||||||||||
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Net loss from continuing operations
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$
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(20.8
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)
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$
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(14.4
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)
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$
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(5.4
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)
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$
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(11.4
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)
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|||
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Net earnings attributable to noncontrolling interests
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—
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(0.1
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)
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(0.1
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)
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(0.1
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)
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|||||||
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Net loss from continuing operations attributable to Quad/Graphics common shareholders
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$
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(20.8
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)
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$
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(14.5
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)
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$
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(5.5
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)
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$
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(11.5
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)
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|||
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Earnings (loss) from discontinued operations, net of tax
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$
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—
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$
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4.2
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$
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(3.2
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)
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$
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(6.1
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)
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|||
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Gain on disposal of discontinued operations, net of tax
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—
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—
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35.3
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—
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|||||||
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Net gain (loss) from discontinued operations, net of tax
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$
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—
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$
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4.2
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$
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32.1
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$
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(6.1
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)
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|||
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Net earnings (loss) attributable to Quad/Graphics common shareholders
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$
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(20.8
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)
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$
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(10.3
|
)
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$
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26.6
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$
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(17.6
|
)
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|||
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
3
QUAD/GRAPHICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in millions)
(UNAUDITED)
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
||||||||||||||
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2012
|
2011
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2012
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2011
|
||||||||||||
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Net earnings (loss)
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$
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(20.8
|
)
|
$
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(10.2
|
)
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$
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26.7
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$
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(17.5
|
)
|
|||
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Other comprehensive income (loss)
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|||||||||||||||
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Foreign currency translation adjustments
|
(15.2
|
)
|
15.0
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(2.2
|
)
|
27.8
|
|
|||||||
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Postretirement benefit plan amendment, net of tax
|
4.5
|
|
—
|
|
4.5
|
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—
|
|
|||||||
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Pension and other postretirement benefit amortization, net of tax
|
(0.3
|
)
|
(0.5
|
)
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(0.6
|
)
|
(1.0
|
)
|
|||||||
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Total other comprehensive income (loss)
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(11.0
|
)
|
14.5
|
|
1.7
|
|
26.8
|
|
|||||||
|
Total comprehensive income (loss)
|
(31.8
|
)
|
4.3
|
|
28.4
|
|
9.3
|
|
|||||||
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Less: comprehensive income attributable to noncontrolling interests
|
—
|
|
(0.1
|
)
|
(0.1
|
)
|
(0.1
|
)
|
|||||||
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Comprehensive income (loss) attributable to Quad/Graphics common shareholders
|
$
|
(31.8
|
)
|
$
|
4.2
|
|
$
|
28.3
|
|
$
|
9.2
|
|
|||
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
4
QUAD/GRAPHICS, INC.
(in millions)
(UNAUDITED)
|
June 30,
2012 |
December 31,
2011 |
||||||
|
ASSETS
|
|
|
|
|
|||
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Cash and cash equivalents
|
$
|
17.6
|
|
$
|
25.6
|
|
|
|
Receivables, less allowances for doubtful accounts of $68.3 at June 30, 2012 and $73.7 at December 31, 2011
|
531.9
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|
656.1
|
|
|||
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Inventories
|
252.5
|
|
249.5
|
|
|||
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Prepaid expenses and other current assets
|
75.7
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|
142.3
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|
|||
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Deferred income taxes
|
70.6
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|
86.7
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|
|||
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Short-term restricted cash
|
17.2
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8.5
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|||
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Current assets of discontinued operations (Note 4)
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—
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72.6
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|
|||
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Total current assets
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965.5
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1,241.3
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|||
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Property, plant and equipment—net
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2,023.2
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2,123.3
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|
|||
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Goodwill
|
787.3
|
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787.1
|
|
|||
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Other intangible assets—net
|
262.1
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295.6
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|||
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Long-term restricted cash
|
47.3
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67.4
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|
|||
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Equity method investments in unconsolidated entities
|
68.2
|
|
69.4
|
|
|||
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Other long-term assets
|
49.0
|
|
46.2
|
|
|||
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Long-term assets of discontinued operations (Note 4)
|
—
|
|
104.9
|
|
|||
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Total assets
|
$
|
4,202.6
|
|
$
|
4,735.2
|
|
|
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LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|||
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Accounts payable
|
$
|
266.2
|
|
$
|
301.9
|
|
|
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Amounts owing in satisfaction of bankruptcy claims
|
10.4
|
|
19.5
|
|
|||
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Accrued liabilities
|
341.0
|
|
393.9
|
|
|||
|
Purchase price payable on business exchange transaction (Note 3)
|
—
|
|
62.4
|
|
|||
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Short-term debt and current portion of long-term debt
|
98.7
|
|
82.1
|
|
|||
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Current portion of capital lease obligations
|
10.3
|
|
20.7
|
|
|||
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Current liabilities of discontinued operations (Note 4)
|
—
|
|
48.4
|
|
|||
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Total current liabilities
|
726.6
|
|
928.9
|
|
|||
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Long-term debt
|
1,208.7
|
|
1,342.8
|
|
|||
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Unsecured notes to be issued
|
27.6
|
|
38.7
|
|
|||
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Capital lease obligations
|
20.5
|
|
24.9
|
|
|||
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Deferred income taxes
|
432.4
|
|
471.9
|
|
|||
|
Other long-term liabilities
|
470.9
|
|
521.5
|
|
|||
|
Long-term liabilities of discontinued operations (Note 4)
|
—
|
|
99.6
|
|
|||
|
Total liabilities
|
2,886.7
|
|
3,428.3
|
|
|||
|
Commitments and contingencies (Note 11)
|
|
|
|
|
|||
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Redeemable equity (Note 20)
|
3.5
|
|
3.5
|
|
|||
|
Quad/Graphics common stock and other equity (Note 20)
|
|
|
|
|
|||
|
Preferred stock
|
—
|
|
—
|
|
|||
|
Common stock, Class A
|
1.0
|
|
1.0
|
|
|||
|
Common stock, Class B
|
0.4
|
|
0.4
|
|
|||
|
Common stock, Class C
|
—
|
|
—
|
|
|||
|
Additional paid-in capital
|
979.4
|
|
984.2
|
|
|||
|
Treasury stock, at cost
|
(283.7
|
)
|
(295.4
|
)
|
|||
|
Retained earnings
|
650.6
|
|
650.2
|
|
|||
|
Accumulated other comprehensive loss
|
(36.0
|
)
|
(37.7
|
)
|
|||
|
Quad/Graphics common stock and other equity
|
1,311.7
|
|
1,302.7
|
|
|||
|
Noncontrolling interests
|
0.7
|
|
0.7
|
|
|||
|
Total common stock and other equity and noncontrolling interests
|
1,312.4
|
|
1,303.4
|
|
|||
|
Total liabilities and shareholders' equity
|
$
|
4,202.6
|
|
$
|
4,735.2
|
|
|
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
5
QUAD/GRAPHICS, INC.
(in millions)
(UNAUDITED)
|
Six Months Ended June 30,
|
|||||||
|
2012
|
2011
|
||||||
|
OPERATING ACTIVITIES
|
|||||||
|
Net earnings (loss)
|
$
|
26.7
|
|
$
|
(17.5
|
)
|
|
|
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
|
|||||||
|
Depreciation and amortization
|
169.3
|
|
178.2
|
|
|||
|
Impairment charges
|
14.1
|
|
—
|
|
|||
|
Amortization of debt issuance costs
|
2.3
|
|
5.6
|
|
|||
|
Stock-based compensation charges
|
6.9
|
|
4.6
|
|
|||
|
Gain on disposal of discontinued operations, net of tax
|
(35.3
|
)
|
—
|
|
|||
|
(Gain) loss on sales or disposal of property, plant and equipment
|
0.1
|
|
(0.2
|
)
|
|||
|
Deferred income taxes
|
(25.5
|
)
|
9.4
|
|
|||
|
Equity in earnings of unconsolidated entities
|
(0.3
|
)
|
(1.1
|
)
|
|||
|
Dividends from unconsolidated entities
|
—
|
|
1.6
|
|
|||
|
Changes in operating assets and liabilities—net of acquisitions
|
12.2
|
|
(63.9
|
)
|
|||
|
Net cash provided by operating activities
|
170.5
|
|
116.7
|
|
|||
|
INVESTING ACTIVITIES
|
|||||||
|
Purchases of property, plant and equipment
|
(54.2
|
)
|
(98.5
|
)
|
|||
|
Investment in ManipalTech (Note 3)
|
(18.1
|
)
|
—
|
|
|||
|
Proceeds from the sale of property, plant and equipment
|
10.0
|
|
8.2
|
|
|||
|
Transfers from restricted cash
|
11.4
|
|
17.3
|
|
|||
|
Deposit refunded related to business exchange transaction (Note 3)
|
50.0
|
|
—
|
|
|||
|
Purchase price payments on business exchange transaction (Note 3)
|
(4.2
|
)
|
—
|
|
|||
|
Acquisition of business—net of cash acquired
|
(6.6
|
)
|
—
|
|
|||
|
Net cash used in investing activities
|
(11.7
|
)
|
(73.0
|
)
|
|||
|
FINANCING ACTIVITIES
|
|||||||
|
Payments of long-term debt
|
(35.9
|
)
|
(43.6
|
)
|
|||
|
Payments of capital lease obligations
|
(15.9
|
)
|
(8.8
|
)
|
|||
|
Borrowings on revolving credit facilities
|
65.1
|
|
389.5
|
|
|||
|
Payments on revolving credit facilities
|
(142.6
|
)
|
(360.9
|
)
|
|||
|
Bankruptcy claim payments on unsecured notes to be issued
|
(11.1
|
)
|
(8.0
|
)
|
|||
|
Proceeds from issuance of common stock
|
—
|
|
1.6
|
|
|||
|
Tax benefit on exercise of stock options
|
—
|
|
0.8
|
|
|||
|
Payment of cash dividends
|
(23.4
|
)
|
(9.4
|
)
|
|||
|
Payment of tax distributions
|
—
|
|
(4.2
|
)
|
|||
|
Net cash used in financing activities
|
(163.8
|
)
|
(43.0
|
)
|
|||
|
Effect of exchange rates on cash and cash equivalents
|
(3.0
|
)
|
(4.6
|
)
|
|||
|
Net decrease in cash and cash equivalents
|
(8.0
|
)
|
(3.9
|
)
|
|||
|
Cash and cash equivalents at beginning of period
|
25.6
|
|
20.5
|
|
|||
|
Cash and cash equivalents at end of period
|
$
|
17.6
|
|
$
|
16.6
|
|
|
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
6
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2012
(In millions, except share and per share data and unless otherwise indicated)
The accompanying unaudited condensed consolidated financial statements for Quad/Graphics, Inc. and its subsidiaries (the "Company" or "Quad/Graphics") have been prepared by the Company pursuant to the rules and regulations for interim financial information of the United States Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been omitted pursuant to such SEC rules and regulations. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated annual financial statements as of and for the year ended
December 31, 2011
, and notes thereto included in the Company's latest Annual Report on Form 10-K filed with the SEC on
February 29, 2012
.
The Company's business is seasonal, with the majority of historical net sales and operating income recognized in the second half of the fiscal year. Seasonality is driven by increased magazine advertising page counts and retail inserts and catalogs primarily due to back-to-school and holiday related advertising and promotions. Within any year, seasonality could adversely impact the Company's cash flow and results of operations on a quarterly basis.
The financial information contained herein reflects all adjustments, in the opinion of management, necessary for a fair presentation of the Company's results of operations for the
three and six months ended
June 30, 2012
and
2011
. All significant intercompany transactions have been eliminated in consolidation. These unaudited condensed consolidated financial statements include estimates and assumptions of management that affect the amounts reported in the condensed consolidated financial statements. Actual results could differ from these estimates.
The results of operations of the Company's Canadian operations have been reported as discontinued operations for all periods presented. As the sale of the Canadian operations was completed on
March 1, 2012
, the corresponding Canadian assets and liabilities are no longer included in the condensed consolidated balance sheet at
June 30, 2012
. At
December 31, 2011
, the Canadian assets and liabilities were presented in accordance with the authoritative literature on assets held for sale. In accordance with the authoritative literature, the Company has elected to not separately disclose the cash flows related to the Canadian discontinued operations. See
Note 4
for information about the Company's sale of the Canadian operations.
In September 2011, the Financial Accounting Standards Board ("FASB") issued new guidance on testing goodwill for impairment. This new guidance gives entities, subject to certain conditions, the option of first performing a qualitative assessment to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of the reporting unit is less than its carrying amount. The Company adopted this guidance effective January 1, 2012. Annual impairment tests of goodwill are performed in the fourth quarter of each year. The adoption of this guidance is not expected to have a material impact on the Company's condensed consolidated financial position, results of operations or cash flows.
In May 2011, the FASB issued new guidance on fair value measurements. This new guidance amends the definition of fair value measurement principles and disclosure requirements to eliminate differences between GAAP and International Financial Reporting Standards. This new guidance requires new quantitative and qualitative disclosures about the sensitivity of recurring Level 3 measurement disclosures, as well as transfers between Level 1 and Level 2 of the fair value hierarchy. The Company adopted this guidance effective January 1, 2012. The adoption of this guidance impacted the Company's disclosures and had no impact on the Company's condensed consolidated financial position, results of operations or cash flows.
7
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2012
(In millions, except share and per share data and unless otherwise indicated)
2012
Acquisitions and Strategic Investments
On
March 28, 2012
, the Company entered into a strategic partnership with India-based Manipal Technologies Limited ("ManipalTech") whereby Quad/Graphics paid
$18.1 million
for a minority equity ownership interest in ManipalTech. ManipalTech is one of India's largest providers of printing services and supports clients' marketing, branding and communication needs through print services and technology solutions. The Company's investment in ManipalTech is accounted for as a cost method investment and is recorded within other long-term assets in the condensed consolidated balance sheet.
2011
Acquisitions and Strategic Investments
On
July 12, 2011
, the Company and Transcontinental Inc. ("Transcontinental") entered into a definitive agreement whereby Quad/Graphics acquired
100%
of Transcontinental's Mexican operations in exchange for the Company's Canadian operations. Transcontinental's Mexican operations printed magazines, catalogs, retail inserts, books and other printed materials, and employed approximately
900
people among its
three
facilities in Azcapotzalco, Toluca and Xochimilco, Mexico. The Transcontinental Mexican operations are included within the International segment.
The Company completed the acquisition of Transcontinental's Mexican operations on
September 8, 2011
, and completed the sale of the Company's Canadian operations on
March 1, 2012
. See
Note 4
for further discussion of the sale of the Canadian discontinued operations.
In connection with the acquisition of Transcontinental's Mexican operations, the definitive agreement required the Company to deposit
50.0 million
Canadian dollars with Transcontinental until the Canadian operations sale was completed. The Company elected to hedge the foreign currency exchange rate exposure related to the
50.0 million
Canadian dollar deposit by entering into short-term foreign currency forward exchange contracts. The Company hedged this foreign currency exposure until the
March 1, 2012
sale of the Canadian net assets and refund of the
50.0 million
Canadian dollar deposit occurred. During the
six months ended
June 30, 2012
,
$1.6 million
of realized mark-to-market losses on the derivative contracts were offset by
$1.6 million
of transaction gains on translation of the foreign currency denominated deposit within selling, general and administrative expenses. The fair value determination of the foreign currency forward exchange contracts was categorized as Level 2 in the fair value hierarchy (see
Note 15
for the definition of Level 2 inputs).
The Company's determination of the Mexican acquired operations' fair value was
$63.6 million
. Of the
$63.6 million
purchase price,
$5.4 million
was paid in cash (
$1.2 million
was paid in 2011 and
$4.2 million
was paid in 2012). The remaining purchase price of
$58.2 million
was satisfied by the exchange transaction of the Company's Canadian business.
This acquisition was accounted for using the acquisition method of accounting. The Company recorded the allocation of the purchase price to the acquired tangible and identifiable intangible assets and liabilities assumed based on their fair values as of the acquisition date. Goodwill has been recorded based on the amount by which the purchase price exceeds the fair value of the net assets acquired. The final purchase price allocation is as follows:
|
Purchase Price Allocation
|
||||
|
Accounts receivable
|
$
|
15.3
|
|
|
|
Other current assets
|
11.9
|
|
||
|
Property, plant and equipment
|
35.7
|
|
||
|
Identifiable intangible assets
|
4.6
|
|
||
|
Other long-term assets
|
0.5
|
|
||
|
Accounts payable and accrued liabilities
|
(14.9
|
)
|
||
|
Other long-term liabilities
|
(0.6
|
)
|
||
|
Goodwill
|
11.1
|
|
||
|
Purchase price
|
$
|
63.6
|
|
|
8
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2012
(In millions, except share and per share data and unless otherwise indicated)
The purchase price allocation is based on valuations performed to determine the fair value of the net assets as of the acquisition date. The purchase price of
$63.6 million
was estimated by utilizing a discounted cash flow model, following an income approach that incorporates various assumptions including expected future revenue trends, profit margins, capital expenditures, working capital levels and a weighted-average cost of capital. The nonrecurring fair value measurement was classified as Level 3 in the valuation hierarchy (see
Note 15
for the definition of Level 3 inputs). Purchased identifiable intangible assets will be amortized on a straight-line basis over
six
years. The results of operations of the acquired business have been included since the respective dates of acquisition in the accompanying condensed consolidated financial statements. Pro forma information related to the acquisition is not included because the impact on the Company's condensed consolidated results of operations is considered to be immaterial.
On
March 1, 2012
, the Company completed the sale of its Canadian operations to Transcontinental (see
Note 3
for a description of the business exchange transaction). The gain on disposal of discontinued operations, net of tax, was determined as follows:
|
As of March 1, 2012
|
||||
|
Fair value of the acquired Transcontinental Mexican operations
|
$
|
63.6
|
|
|
|
Cash paid to Transcontinental
|
(5.4
|
)
|
||
|
Net proceeds
|
$
|
58.2
|
|
|
|
Net assets of discontinued operations
|
(26.3
|
)
|
||
|
Cumulative translation adjustment of discontinued operations
|
3.4
|
|
||
|
Gain on disposal of discontinued operations, net of tax
(1)
|
$
|
35.3
|
|
|
__________________________________
|
(1)
|
For tax purposes the disposal of discontinued operations resulted in a long-term capital loss, for which a deferred tax asset was recorded. An offsetting valuation allowance against the deferred tax asset was recorded to reflect the expected value at which the asset will be recovered.
|
The results of operations of the Canadian operations have been reflected as discontinued operations in the condensed consolidated financial statements for all periods presented. The following table summarizes the results of operations of the Canadian operations, which are included in the earnings (loss) from discontinued operations, net of tax in the condensed consolidated statements of operations for the
three and six months ended
June 30, 2012
and
2011
:
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
||||||||||||||
|
2012
|
2011
|
2012
|
2011
|
||||||||||||
|
Total net sales
|
$
|
—
|
|
$
|
93.3
|
|
$
|
32.2
|
|
$
|
173.2
|
|
|||
|
Earnings (loss) from discontinued operations before income taxes
|
—
|
|
4.3
|
|
(3.2
|
)
|
(6.0
|
)
|
|||||||
|
Income tax expense
|
—
|
|
0.1
|
|
—
|
|
0.1
|
|
|||||||
|
Earnings (loss) from discontinued operations, net of tax
|
$
|
—
|
|
$
|
4.2
|
|
$
|
(3.2
|
)
|
$
|
(6.1
|
)
|
|||
9
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2012
(In millions, except share and per share data and unless otherwise indicated)
As a result of the
March 1, 2012
sale of the Canadian operations, there were
no
net assets of discontinued operations at
June 30, 2012
. The following table summarizes the current and non-current assets and liabilities held for sale of the discontinued Canadian operations included in the condensed consolidated balance sheet at
December 31, 2011
:
|
December 31, 2011
|
||||
|
Receivables—net
|
$
|
64.1
|
|
|
|
Inventories
|
7.5
|
|
||
|
Prepaid expenses and other current assets
|
1.0
|
|
||
|
Current assets of discontinued operations
|
72.6
|
|
||
|
Property, plant and equipment—net
|
71.8
|
|
||
|
Goodwill
|
20.9
|
|
||
|
Other intangible assets—net
|
12.2
|
|
||
|
Long-term assets of discontinued operations
|
104.9
|
|
||
|
Total assets
|
$
|
177.5
|
|
|
|
Accounts payable
|
$
|
15.0
|
|
|
|
Accrued liabilities
|
33.4
|
|
||
|
Current liabilities of discontinued operations
|
48.4
|
|
||
|
Other long-term liabilities
|
99.6
|
|
||
|
Long-term liabilities of discontinued operations
|
99.6
|
|
||
|
Total liabilities
|
$
|
148.0
|
|
|
|
Net assets of discontinued operations
|
$
|
29.5
|
|
|
The Company recorded restructuring, impairment and transaction-related charges for the
three and six months ended
June 30, 2012
and
2011
, as follows:
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
|||||||||||||||
|
2012
|
2011
|
2012
|
2011
|
|||||||||||||
|
Employee termination charges
|
$
|
10.2
|
|
$
|
4.8
|
|
$
|
20.6
|
|
$
|
15.8
|
|
||||
|
Impairment charges
|
5.7
|
|
—
|
|
14.1
|
|
—
|
|
||||||||
|
Transaction-related charges
|
0.8
|
|
1.0
|
|
2.3
|
|
1.0
|
|
||||||||
|
Integration costs
|
11.2
|
|
8.9
|
|
23.1
|
|
15.3
|
|
||||||||
|
Other restructuring charges
|
9.8
|
|
6.9
|
|
15.8
|
|
18.2
|
|
||||||||
|
Total
|
$
|
37.7
|
|
$
|
21.6
|
|
$
|
75.9
|
|
$
|
50.3
|
|
||||
The costs related to these activities have been recorded on the condensed consolidated statements of operations as restructuring, impairment and transaction-related charges. See
Note 21
for restructuring, impairment and transaction-related charges by segment.
10
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2012
(In millions, except share and per share data and unless otherwise indicated)
Restructuring Charges
The Company began a restructuring program in 2010 related to eliminating excess manufacturing capacity and properly aligning its cost structure as part of the integration of the
July 2, 2010
World Color Press, Inc. ("World Color Press") acquisition. The Company has since expanded its restructuring program to include the cost reduction programs associated with the
September 8, 2011
Transcontinental Mexico acquisition as well as other cost reduction programs.
During the
six months ended
June 30, 2012
, the Company announced the closures of the Jonesboro, Arkansas plant and two plants in Mexico City, Mexico. Since 2010, the Company has announced a total of
15
plant closures and has reduced headcount by approximately
5,800
. As a result of these restructuring programs, the Company recorded the following charges for the
three and six months ended
June 30, 2012
and
2011
:
|
•
|
Employee termination charges of
$10.2 million
and
$20.6 million
during the
three and six months ended
June 30, 2012
, respectively, and
$4.8 million
and
$15.8 million
during the
three and six months ended
June 30, 2011
, respectively. The Company reduced its workforce through facility consolidations and involuntary separation programs.
|
|
•
|
Integration costs of
$11.2 million
and
$23.1 million
during the
three and six months ended
June 30, 2012
, respectively, and
$8.9 million
and
$15.3 million
during the
three and six months ended
June 30, 2011
, respectively. Integration costs were primarily related to preparing existing facilities to meet new production requirements resulting from work transferring from closed plants, as well as other costs related to the integration of the acquired companies. The integration costs during the
six months ended
June 30, 2011
, are presented net of a
$7.1 million
gain on the collection of a note receivable for the June 2008 sale of World Color Press' European operations.
|
|
•
|
Other restructuring charges of
$9.8 million
and
$15.8 million
during the
three and six months ended
June 30, 2012
, respectively, consisted of: (1)
$3.2 million
and
$6.7 million
, respectively, of vacant facility carrying costs, (2)
$3.0 million
and
$5.2 million
, respectively, of equipment and infrastructure removal costs from closed plants and (3)
$3.6 million
and
$3.9 million
, respectively, of lease exit charges. Other restructuring charges during the
six months ended
June 30, 2012
, are presented net of a
$2.4 million
gain on the collection of a note receivable related to a settlement of a disputed pre-acquisition World Color Press note receivable. Other restructuring charges of
$6.9 million
and
$18.2 million
during the
three and six months ended
June 30, 2011
, respectively, consisted of: (1)
$2.6 million
and
$7.4 million
, respectively, of vacant facility carrying costs, (2)
$2.2 million
and
$4.8 million
, respectively, of equipment and infrastructure removal costs from closed plants and (3)
$2.1 million
and
$6.0 million
, respectively, of lease exit charges.
|
The restructuring charges recorded are based on plans that have been committed to by management and are, in part, based upon management's best estimates of future events. Changes to the estimates may require future restructuring charges and adjustments to the restructuring liabilities. The Company expects to incur additional restructuring charges related to these and other initiatives in 2012.
Impairment Charges
As a result of plant closures related to capacity reduction restructuring initiatives, certain buildings and equipment are no longer utilized in production. The Company recognized impairment charges of
$5.7 million
and
$14.1 million
during the
three and six months ended
June 30, 2012
, respectively, primarily related to the Company's closed Pila, Poland and Stillwater, Oklahoma facilities. The fair values of the impaired assets were determined by the Company to be Level 3 under the fair value hierarchy and were estimated based on broker quotes and internal expertise related to current marketplace conditions. These assets were written down to their estimated fair values of
$3.4 million
at the time of impairment. There were no impairment charges recognized during the
three and six months ended
June 30, 2011
.
Transaction-Related Charges
The Company incurs transaction-related charges primarily consisting of professional service fees related to business acquisition and divestiture activities. The Company recognized transaction-related charges of
$0.8 million
and
$2.3 million
11
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2012
(In millions, except share and per share data and unless otherwise indicated)
during the
three and six months ended
June 30, 2012
, respectively. The Company recognized transaction related charges of
$1.0 million
during the
three and six months ended
June 30, 2011
. The transaction costs are expensed as incurred in accordance with the applicable accounting guidance on business combinations.
Reserves for Restructuring, Impairment and Transaction-Related Charges
Activity impacting the Company's reserves for restructuring, impairment and transaction-related charges for the
six months ended
June 30, 2012
, was as follows:
|
Employee
Termination Charges
|
Impairment
Charges
|
Transaction-Related
Charges
|
Integration
Costs
|
Other
Restructuring
Charges
|
Total
|
||||||||||||||||||
|
Balance at December 31, 2011
|
$
|
9.3
|
|
$
|
—
|
|
$
|
—
|
|
$
|
18.2
|
|
$
|
26.7
|
|
$
|
54.2
|
|
|||||
|
Expense from continuing operations
|
20.6
|
|
14.1
|
|
2.3
|
|
23.1
|
|
15.8
|
|
75.9
|
|
|||||||||||
|
Cash payments
|
(20.2
|
)
|
—
|
|
(2.0
|
)
|
(15.3
|
)
|
(19.4
|
)
|
(56.9
|
)
|
|||||||||||
|
Non-cash adjustments
|
—
|
|
(14.1
|
)
|
—
|
|
—
|
|
(1.8
|
)
|
(15.9
|
)
|
|||||||||||
|
Balance at June 30, 2012
|
$
|
9.7
|
|
$
|
—
|
|
$
|
0.3
|
|
$
|
26.0
|
|
$
|
21.3
|
|
$
|
57.3
|
|
|||||
These reserves are classified as accrued liabilities in the condensed consolidated balance sheets as the Company expects to complete these restructuring program actions within the next twelve months.
Goodwill is tested annually for impairment as of
October 31
, or more frequently if events or changes in circumstances indicate that it is more likely than not that the fair value of a reporting unit is below its carrying value. Goodwill at
June 30, 2012
did not include any accumulated impairment losses. No indications of impairment have been identified during the
six months ended
June 30, 2012
. As a result, no goodwill impairment was recorded during the
six months ended
June 30, 2012
or
2011
.
Activity impacting the Company's goodwill for the
six months ended
June 30, 2012
, was as follows:
|
United States Print and Related Services
|
International
|
Total
|
|||||||||
|
Balance at December 31, 2011
|
$
|
757.4
|
|
$
|
29.7
|
|
$
|
787.1
|
|
||
|
Translation adjustment
|
—
|
|
0.2
|
|
0.2
|
|
|||||
|
Balance at June 30, 2012
|
$
|
757.4
|
|
$
|
29.9
|
|
$
|
787.3
|
|
||
12
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2012
(In millions, except share and per share data and unless otherwise indicated)
The components of other intangible assets at
June 30, 2012
and
December 31, 2011
, were as follows:
|
June 30, 2012
|
December 31, 2011
|
||||||||||||||||||||||||||
|
Weighted
Average
Amortization
Period (years)
|
Gross
Carrying
Amount
|
Accumulated
Amortization
and Foreign
Exchange
|
Net Book
Value
|
Weighted
Average
Amortization
Period (years)
|
Gross
Carrying
Amount
|
Accumulated
Amortization
and Foreign
Exchange
|
Net Book
Value
|
||||||||||||||||||||
|
Finite-lived intangible assets:
|
|||||||||||||||||||||||||||
|
Trademarks, patents, licenses and agreements
|
5
|
$
|
10.4
|
|
$
|
(9.4
|
)
|
$
|
1.0
|
|
5
|
$
|
10.7
|
|
$
|
(9.6
|
)
|
$
|
1.1
|
|
|||||||
|
Customer relationships
|
6
|
383.6
|
|
(127.7
|
)
|
255.9
|
|
6
|
383.6
|
|
(95.7
|
)
|
287.9
|
|
|||||||||||||
|
Capitalized software
|
5
|
4.1
|
|
(2.1
|
)
|
2.0
|
|
5
|
4.1
|
|
(1.7
|
)
|
2.4
|
|
|||||||||||||
|
Acquired technology
|
5
|
8.0
|
|
(4.8
|
)
|
3.2
|
|
5
|
8.0
|
|
(4.0
|
)
|
4.0
|
|
|||||||||||||
|
Total finite-lived intangible assets
|
406.1
|
|
(144.0
|
)
|
262.1
|
|
406.4
|
|
(111.0
|
)
|
295.4
|
|
|||||||||||||||
|
Other indefinite-lived intangible assets
|
—
|
|
—
|
|
—
|
|
0.2
|
|
—
|
|
0.2
|
|
|||||||||||||||
|
Total
|
$
|
406.1
|
|
$
|
(144.0
|
)
|
$
|
262.1
|
|
$
|
406.6
|
|
$
|
(111.0
|
)
|
$
|
295.6
|
|
|||||||||
Amortization expense for other intangible assets was
$16.4 million
and
$33.2 million
for the
three and six months ended
June 30, 2012
, respectively, and
$16.5 million
and
$32.6 million
for the
three and six months ended
June 30, 2011
, respectively. The following table outlines the estimated future amortization expense related to intangible assets as of
June 30, 2012
:
|
Remainder of 2012
|
$
|
33.6
|
|
|
2013
|
65.7
|
|
|
|
2014
|
65.0
|
|
|
|
2015
|
64.4
|
|
|
|
2016
|
33.0
|
|
|
|
2017
|
0.4
|
|
|
|
Total
|
$
|
262.1
|
|
The components of the Company's inventories at
June 30, 2012
and
December 31, 2011
were as follows:
|
June 30,
2012 |
December 31,
2011 |
||||||
|
Raw materials and manufacturing supplies
|
$
|
161.1
|
|
$
|
124.9
|
|
|
|
Work in process
|
44.1
|
|
72.0
|
|
|||
|
Finished goods
|
47.3
|
|
52.6
|
|
|||
|
Total
|
$
|
252.5
|
|
$
|
249.5
|
|
|
13
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2012
(In millions, except share and per share data and unless otherwise indicated)
The components of the Company's property, plant and equipment at
June 30, 2012
and
December 31, 2011
were as follows:
|
June 30,
2012 |
December 31,
2011 |
||||||
|
Land
|
$
|
138.4
|
|
$
|
140.9
|
|
|
|
Buildings
|
905.7
|
|
930.1
|
|
|||
|
Machinery and equipment
|
3,388.5
|
|
3,398.2
|
|
|||
|
Other
|
203.2
|
|
201.7
|
|
|||
|
Construction in progress
|
30.7
|
|
23.0
|
|
|||
|
4,666.5
|
|
4,693.9
|
|
||||
|
Less: accumulated depreciation
|
(2,643.3
|
)
|
(2,570.6
|
)
|
|||
|
Total
|
$
|
2,023.2
|
|
$
|
2,123.3
|
|
|
Other consists of computer equipment, vehicles, furniture and fixtures, leasehold improvements and communication related equipment.
The Company recognized depreciation expense of
$68.3 million
and
$136.1 million
for the
three and six months ended
June 30, 2012
, respectively, and
$67.0 million
and
$138.2 million
for the
three and six months ended
June 30, 2011
, respectively.
Assets Held for Sale from Continuing Operations
Certain closed facilities are considered held for sale. The net book value of the assets held for sale from continuing operations was
$11.5 million
and
$14.3 million
as of
June 30, 2012
and
December 31, 2011
, respectively. These assets were valued at their fair value, less the estimated costs to sell. Assets held for sale from continuing operations are included in prepaid expenses and other current assets in the condensed consolidated balance sheets.
The components of the Company's restricted cash at
June 30, 2012
and
December 31, 2011
were as follows:
|
June 30,
2012 |
December 31,
2011 |
||||||
|
Defeasance of unsecured notes to be issued (see Note 12)
|
$
|
64.3
|
|
$
|
75.4
|
|
|
|
Other
|
0.2
|
|
0.5
|
|
|||
|
Total restricted cash
|
$
|
64.5
|
|
$
|
75.9
|
|
|
|
Less: short-term restricted cash
|
(17.2
|
)
|
(8.5
|
)
|
|||
|
Long-term restricted cash
|
$
|
47.3
|
|
$
|
67.4
|
|
|
The Company has a
49%
ownership interest in Plural Editora e Gráfica ("Plural"), a commercial printer based in São Paulo, Brazil, and a
50%
ownership interest in Quad/Graphics Chile S.A. ("Chile"), a commercial printer based in Santiago, Chile. The Company's ownership interest in Plural and Chile is accounted for using the equity method of accounting for all periods presented. The Company's equity earnings of Plural's and Chile's operations are recorded in the line item entitled equity in earnings (loss) of unconsolidated entities in the Company's condensed consolidated statements of operations, and is included within the International segment.
14
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2012
(In millions, except share and per share data and unless otherwise indicated)
The combined condensed statements of operations for Plural and Chile for the
three and six months ended
June 30, 2012
and
2011
are presented below:
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
||||||||||||||
|
2012
|
2011
|
2012
|
2011
|
||||||||||||
|
Net sales
|
$
|
43.6
|
|
$
|
49.1
|
|
$
|
96.2
|
|
$
|
103.1
|
|
|||
|
Operating income (loss)
|
(1.9
|
)
|
1.6
|
|
1.9
|
|
3.8
|
|
|||||||
|
Net earnings (loss)
|
(2.2
|
)
|
0.6
|
|
0.1
|
|
2.0
|
|
|||||||
Commitments
The Company had firm commitments of
$12.0 million
to purchase press and finishing equipment at
June 30, 2012
.
Litigation
In the normal course of business, the Company is named as a defendant in various lawsuits in which claims are asserted against the Company. In the opinion of management, the liabilities, if any, which ultimately result from such lawsuits are not expected to have a material impact on the condensed consolidated financial statements of the Company.
Environmental Reserves
The Company is subject to various laws, regulations and government policies relating to health and safety, to the generation, storage, transportation, and disposal of hazardous substances, and to environment protection in general. The Company provides for expenses associated with environmental remediation obligations when such amounts are probable and can be reasonably estimated. Such reserves are adjusted as new information develops or circumstances change. The environmental reserves are not discounted. The Company believes it is in compliance with such laws, regulations and government policies in all material respects. Furthermore, the Company does not anticipate that maintaining compliance with such environmental statutes will have a material impact upon the Company's competitive or consolidated financial position.
The Company continues to manage the bankruptcy claim settlement process for the Quebecor World Inc. ("QWI") bankruptcy proceedings in the United States and Canada (QWI changed its name to "World Color Press Inc." upon emerging from bankruptcy on
July 21, 2009
). To the extent claims are allowed, the holders of such claims are entitled to receive recovery, with the nature of such recovery dependent upon the type and classification of such claims. In this regard, with respect to certain types of claims, the holders thereof are entitled to receive cash and/or unsecured notes, while the holders of certain other types of claims are entitled to receive a combination of Quad/Graphics common stock and cash, in accordance with the terms of the World Color Press acquisition agreement.
With respect to claims asserted by the holders thereof as being entitled to a priority cash recovery, the Company has estimated that approximately
$10.4 million
and
$19.5 million
of such recorded claims have yet to be paid as of
June 30, 2012
and
December 31, 2011
, respectively, and this obligation is classified as amounts owing in satisfaction of bankruptcy claims in the condensed consolidated balance sheets.
With respect to unsecured claims held by creditors of the operating subsidiary debtors of Quebecor World (USA) Inc. (the "Class 3 Claims"), each allowed Class 3 Claim will be entitled to receive an unsecured note in an amount not to exceed
50%
of such creditor's allowed Class 3 Claim, provided, however, that the aggregate principal amount of all such unsecured notes cannot exceed
$75.0 million
. In the event that the total of all allowed Class 3 Claims exceeds
$150.0 million
, each creditor holding an allowed Class 3 Claim will receive its pro rata share of
$75.0 million
of the unsecured notes issued, together with accrued interest and a
5%
prepayment redemption premium thereon (the total of which is
$89.2 million
). In connection with the World Color Press acquisition, the Company was required to deposit the maximum potential payout to the Class 3
15
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2012
(In millions, except share and per share data and unless otherwise indicated)
Claim creditors of
$89.2 million
with a trustee, and that amount will remain with the trustee until either (1) it is paid to a creditor for an allowed Class 3 Claim or (2) upon all Class 3 Claims being resolved any excess amount will revert to the Company. In the
six months ended
June 30, 2012
,
$11.1 million
was paid to Class 3 Claim creditors. At
June 30, 2012
,
$64.3 million
remains and is classified as restricted cash in the condensed consolidated balance sheets (see
Note 9
). Based on the Company's analysis of the outstanding claims, the Company has recorded a liability, classified as unsecured notes to be issued in the condensed consolidated balance sheet, of
$27.6 million
at
June 30, 2012
.
|
Restricted Cash
|
Unsecured Notes
to be Issued
|
||||||
|
Balance at December 31, 2011
|
$
|
75.4
|
|
$
|
38.7
|
|
|
|
Class 3 Claim payments during 2012
|
(11.1
|
)
|
(11.1
|
)
|
|||
|
Balance at June 30, 2012
|
$
|
64.3
|
|
$
|
27.6
|
|
|
While the liabilities recorded for any bankruptcy matters are based on management's current assessment of the amount likely to be paid, it is not possible to identify the final amount of priority cash claims or the amount of Class 3 Claims that will ultimately be allowed by the U.S. Bankruptcy Court. Therefore, amounts owing in satisfaction of bankruptcy claims on the condensed consolidated balance sheet could be materially higher than the amounts estimated, which would require additional cash payments to be made for the amount exceeding the Company's estimate. Amounts payable related to the unsecured notes could reach the maximum aggregate principal amount of
$75.0 million
, which would not require an additional cash payment as the maximum potential exposure has already been funded in trust, but would require additional liability and expense to be recorded as the Company's estimate of total Class 3 Claim payments to be made is
$52.5 million
(
$24.9 million
paid out and
$27.6 million
remaining estimated liability as of
June 30, 2012
). In light of the substantial number and amount of claims filed, the claims resolution process will take considerable time to complete.
Long-term debt consisted of the following as of
June 30, 2012
and
December 31, 2011
:
|
June 30,
2012 |
December 31,
2011 |
||||||
|
Master note and security agreement
|
$
|
583.4
|
|
$
|
616.0
|
|
|
|
Term loan A—$450.0 million
|
450.0
|
|
450.0
|
|
|||
|
Term loan B—$200.0 million
|
197.6
|
|
198.6
|
|
|||
|
Revolving credit facility—$850.0 million
|
—
|
|
85.0
|
|
|||
|
International term loan—$72.1 million
|
62.4
|
|
65.9
|
|
|||
|
International revolving credit facility—$14.9 million
|
9.9
|
|
6.7
|
|
|||
|
Other
|
4.1
|
|
2.7
|
|
|||
|
Total debt
|
$
|
1,307.4
|
|
$
|
1,424.9
|
|
|
|
Less: short-term debt and current portion of long-term debt
|
(98.7
|
)
|
(82.1
|
)
|
|||
|
Long-term debt
|
$
|
1,208.7
|
|
$
|
1,342.8
|
|
|
Based upon the interest rates available to the Company for borrowings with similar terms and maturities, the fair value of the Company's total debt was approximately
$1.2 billion
at
June 30, 2012
. The fair value determination of the Company's total debt was categorized as Level 2 in the fair value hierarchy (see
Note 15
for the definition of Level 2 inputs).
16
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2012
(In millions, except share and per share data and unless otherwise indicated)
As of
June 30, 2012
, the Company's various lending arrangements included 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
June 30, 2012
(for each covenant, the most restrictive measurement has been included below):
|
•
|
On a rolling twelve-month basis, the total leverage ratio, defined as total consolidated debt to consolidated EBITDA (as defined in the debt agreement), shall not exceed
3.50
to 1.00 (for the twelve months ended
June 30, 2012
, the Company's leverage ratio was
2.16
to 1.00).
|
|
•
|
On a rolling twelve-month basis, the minimum interest coverage ratio, defined as consolidated EBITDA to consolidated cash interest expense, shall not be less than
3.25
to 1.00 (for the twelve months ended
June 30, 2012
, the Company's interest coverage ratio was
7.30
to 1.00).
|
|
•
|
On a rolling twelve-month basis, the fixed charge coverage ratio, defined as consolidated EBITDA and rent expense to interest and rent expense, shall not be less than
1.50
to 1.00 (for the twelve months ended
June 30, 2012
, the Company's fixed charge coverage ratio was
3.52
to 1.00).
|
|
•
|
Consolidated net worth of at least
$745.8 million
plus
40%
of positive consolidated net income cumulatively for each year (as of
June 30, 2012
, the Company's consolidated net worth under the most restrictive covenant per the various debt agreements was
$1.25 billion
).
|
In addition to those covenants, the
$1.5 billion
debt financing agreement entered into on
July 26, 2011
also includes certain limitations on acquisitions, indebtedness, liens, dividends and repurchases of capital stock. If the Company's total leverage ratio is greater than
3.00
to 1.00 (total leverage ratio as defined in the debt financing agreement), the Company is prohibited from making greater than
$120.0 million
of annual dividend payments, capital stock repurchases and certain other payments. If the total leverage ratio is less than
3.00
to 1.00, there are
no
such restrictions. As of
June 30, 2012
, the Company was in compliance with all financial covenants in its debt agreements.
The Company records income tax expense on an interim basis. The estimated annual effective income tax rate is adjusted quarterly and items discrete to a specific quarter are reflected in tax expense for that interim period. The actual effective income tax rate for the interim period can differ from the statutory tax rate, as it reflects changes in valuation allowances due to expected current year earnings or loss and other discrete items, such as changes in the liability for unrecognized tax benefits related to establishment and settlement of income tax exposures.
During the
six months ended
June 30, 2012
, the Company's liability for unrecognized tax benefits was reduced by
$70.8 million
, primarily related to settlement of Internal Revenue Service ("IRS") audits. In connection with the settlements, the Company recorded an income tax benefit of
$31.2 million
in the condensed consolidated statement of operations. The Company does not anticipate a material change in total unrecognized tax benefits within the next 12 months.
Certain assets and liabilities are required to be recorded at fair value on a recurring basis, while other assets and liabilities are recorded at fair value on a nonrecurring basis, generally as a result of acquisitions or impairment charges. Fair value is determined based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. The Company records the fair value of its forward contracts and pension plan assets on a recurring basis. Nonrecurring fair value measurements during the quarter were not significant. The fair value of cash and cash equivalents, receivables, inventories, restricted cash, accounts payable, accrued liabilities and amounts owing in satisfaction of bankruptcy claims approximate their carrying values as of
June 30, 2012
, and
December 31, 2011
. See
Note 13
for further discussion on the fair value of the Company's debt. GAAP also classifies the inputs used to measure fair value into the following hierarchy:
|
Level 1:
|
Quoted prices in active markets for identical assets or liabilities.
|
17
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2012
(In millions, except share and per share data and unless otherwise indicated)
|
Level 2:
|
Quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability.
|
|
Level 3:
|
Unobservable inputs for the asset or liability. There are no Level 3 recurring measurements of assets or liabilities as of
June 30, 2012
. In addition to assets and liabilities that are recorded at fair value on a recurring basis, the Company is required to record certain assets and liabilities at fair value on a nonrecurring basis, generally as a result of acquisitions or the remeasurement of assets resulting in impairment charges. See
Note 5
for further discussion on impairment charges recorded as a result of the remeasurement of certain long-lived assets as of
June 30, 2012
.
|
The Company has operations in countries that have transactions outside their functional currencies and periodically enters into foreign exchange contracts. These contracts are used to hedge the net exposures of changes in foreign currency exchange rates and are designated as either cash flow hedges or fair value hedges. Gains or losses on net foreign currency hedges are intended to offset losses or gains on the underlying net exposures in an effort to reduce the earnings volatility resulting from fluctuating foreign currency exchange rates.
The Company periodically enters into natural gas forward purchase contracts to hedge against increases in commodity costs. During the
three and six months ended
June 30, 2012
and
2011
, the Company's commodity contracts qualified for the exception related to normal purchases and sales as the Company takes delivery in the normal course of business.
The Company settled the short-term foreign currency forward exchange contract to hedge exchange rate exposure on the
50.0 million
Canadian dollars deposit related to the Transcontinental Mexico acquisition on
March 1, 2012
(see
Note 3
). There were
no
open foreign currency exchange contracts as of
June 30, 2012
. For the
three and six months ended
June 30, 2012
and
2011
, the impact on the condensed consolidated statements of operations of hedge ineffectiveness was not material.
Other long-term liabilities consisted of the following as of
June 30, 2012
and
December 31, 2011
:
|
June 30,
2012 |
December 31,
2011 |
||||||
|
Single employer pension and postretirement obligations
|
$
|
277.6
|
|
$
|
300.9
|
|
|
|
Multiemployer pension plans—withdrawal liability
|
80.4
|
|
83.5
|
|
|||
|
Tax-related liabilities
|
13.1
|
|
30.7
|
|
|||
|
Employee-related liabilities
|
44.1
|
|
45.0
|
|
|||
|
Other
|
55.7
|
|
61.4
|
|
|||
|
Total
|
$
|
470.9
|
|
$
|
521.5
|
|
|
The Company sponsors various funded and unfunded pension plans for a portion of its full-time employees in the United States. Benefits are generally based upon years of service and compensation. These plans are funded in conformity with the applicable government regulations. The Company funds at least the minimum amount required for all qualified plans using actuarial cost methods and assumptions acceptable under government regulations. In addition to pension benefits, the Company provides certain healthcare and life insurance benefits for some retired employees.
18
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2012
(In millions, except share and per share data and unless otherwise indicated)
The components of the net pension expense and net postretirement benefits income from continuing operations for the
three and six months ended
June 30, 2012
and
2011
, are as follows:
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
||||||||||||||
|
2012
|
2011
|
2012
|
2011
|
||||||||||||
|
Pension expense
|
|||||||||||||||
|
Service cost
|
$
|
—
|
|
$
|
0.1
|
|
$
|
0.1
|
|
$
|
0.2
|
|
|||
|
Interest cost
|
7.8
|
|
8.5
|
|
15.6
|
|
17.0
|
|
|||||||
|
Expected return on plan assets
|
(6.8
|
)
|
(6.9
|
)
|
(13.6
|
)
|
(13.8
|
)
|
|||||||
|
Net periodic pension benefit expense
|
1.0
|
|
1.7
|
|
2.1
|
|
3.4
|
|
|||||||
|
Settlement loss
|
—
|
|
—
|
|
0.1
|
|
—
|
|
|||||||
|
Net pension expense
|
$
|
1.0
|
|
$
|
1.7
|
|
$
|
2.2
|
|
$
|
3.4
|
|
|||
|
Postretirement benefits income
|
|||||||||||||||
|
Service cost
|
$
|
0.1
|
|
$
|
0.1
|
|
$
|
0.2
|
|
$
|
0.2
|
|
|||
|
Interest cost
|
0.2
|
|
0.4
|
|
0.5
|
|
0.8
|
|
|||||||
|
Amortization of deferred gains, net
|
(0.5
|
)
|
(0.8
|
)
|
(1.0
|
)
|
(1.6
|
)
|
|||||||
|
Net postretirement benefits income
|
$
|
(0.2
|
)
|
$
|
(0.3
|
)
|
$
|
(0.3
|
)
|
$
|
(0.6
|
)
|
|||
During the
six months ended
June 30, 2012
, the Company announced the elimination of life insurance coverage for all current and future retirees in all locations and the elimination of reimbursements of medical costs for certain retirees. Due to the plan amendments, the plan obligations as of
June 30, 2012
, were reduced by
$7.4 million
. There was no impact to the postretirement benefits income in the
six months ended
June 30, 2012
.
During the
six months ended
June 30, 2012
, the Company made the following contributions and benefits payments to its defined benefit pension and postretirement plans in its continuing operations:
|
Six Months Ended
|
||||
|
June 30, 2012
|
||||
|
Contributions on qualified pension plans
|
$
|
18.3
|
|
|
|
Settlement payments on non-qualified pension plans
|
3.2
|
|
||
|
Benefit payments on non-qualified pension plans
|
0.6
|
|
||
|
Benefit payments on postretirement plans
|
0.3
|
|
||
|
Total benefit plan payments
|
$
|
22.4
|
|
|
Multiemployer Pension Plans
The Company is in process of withdrawing from all significant multiemployer pension plans ("MEPPs") and, during 2011, replaced these union sponsored “promise to pay in the future” defined benefit plans with a Company sponsored “pay as you go” defined contribution plan. The two MEPPs, the Graphic Communications International Union - Employer Retirement Fund (“GCIU”) and the Graphic Communications Conference of the International Brotherhood of Teamsters National Pension Fund (“GCC”), are significantly underfunded, and will require the Company to pay a withdrawal liability to fund its pro rata share of the underfunding as of the plan year the full withdrawal was completed.
The Company has received notices of withdrawal and demand for payment letters for both the GCIU and GCC plans, and is in the process of determining the final withdrawal payment with both MEPPs' administrators. During this process the Company began making monthly payments as requested by the MEPPs and as required by the Employee Retirement Income Security Act, although such payments do not waive the Company's rights to object to the withdrawal liabilities submitted by the GCIU and GCC plan administrators. As of
June 30, 2012
, the Company has reserved
$94.6 million
as its estimate of the total MEPPs withdrawal liability, of which
$80.4 million
is recorded in other long-term liabilities,
$8.7 million
is recorded in
19
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2012
(In millions, except share and per share data and unless otherwise indicated)
accrued liabilities and
$5.5 million
is recorded in unsecured notes to be issued in the condensed consolidated balance sheet. This estimate may change depending on the final agreement with the MEPPs' administrators.
Basic earnings (loss) per share attributable to Quad/Graphics common shareholders is computed by dividing net earnings (loss) attributable to Quad/Graphics common shareholders by the weighted average common shares outstanding of
46.8 million
for the
three and six months ended
June 30, 2012
, respectively, and
47.3 million
shares for the
three and six months ended
June 30, 2011
, respectively. The calculation of a diluted earnings per share amount includes the effect of any dilutive equity incentive instruments. The Company uses the treasury stock method to calculate the effect of outstanding dilutive equity incentive instruments, which requires the Company to compute total proceeds as the sum of (1) the amount the employee must pay upon exercise of the award, (2) the amount of unearned stock-based compensation costs attributed to future services and (3) the amount of tax benefits, if any, that would be credited to additional paid-in capital assuming exercise of the award. Equity incentive instruments for which the total employee proceeds from exercise exceed the average fair value of the same equity incentive instrument over the period have an anti-dilutive effect on earnings per share during periods with net earnings from continuing operations, and accordingly, the Company excludes them from the calculation. Due to the net loss from continuing operations attributable to Quad/Graphics common shareholders incurred during the
three and six months ended
June 30, 2012
and
2011
, the assumed exercise of all equity incentive instruments was anti-dilutive and, therefore, not included in the diluted earnings (loss) per share attributable to Quad/Graphics common shareholders calculation.
20
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2012
(In millions, except share and per share data and unless otherwise indicated)
Reconciliations of the numerator and the denominator of the basic and diluted per share computations for the Company's common stock, including the impact of discontinued operations, for the
three and six months ended
June 30, 2012
and
2011
, are summarized as follows:
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
||||||||||||||
|
2012
|
2011
|
2012
|
2011
|
||||||||||||
|
Numerator:
|
|||||||||||||||
|
Net loss from continuing operations
|
$
|
(20.8
|
)
|
$
|
(14.4
|
)
|
$
|
(5.4
|
)
|
$
|
(11.4
|
)
|
|||
|
Net earnings attributable to noncontrolling interests
|
—
|
|
(0.1
|
)
|
(0.1
|
)
|
(0.1
|
)
|
|||||||
|
Net loss from continuing operations attributable to Quad/Graphics common shareholders
|
$
|
(20.8
|
)
|
$
|
(14.5
|
)
|
$
|
(5.5
|
)
|
$
|
(11.5
|
)
|
|||
|
Earnings (loss) from discontinued operations, net of tax
|
$
|
—
|
|
$
|
4.2
|
|
$
|
(3.2
|
)
|
$
|
(6.1
|
)
|
|||
|
Gain on disposal of discontinued operations, net of tax
|
—
|
|
—
|
|
35.3
|
|
—
|
|
|||||||
|
Net gain (loss) from discontinued operations, net of tax
|
$
|
—
|
|
$
|
4.2
|
|
$
|
32.1
|
|
$
|
(6.1
|
)
|
|||
|
Net earnings (loss) attributable to Quad/Graphics common shareholders
|
$
|
(20.8
|
)
|
$
|
(10.3
|
)
|
$
|
26.6
|
|
$
|
(17.6
|
)
|
|||
|
Denominator:
|
|||||||||||||||
|
Basic weighted average number of common shares outstanding for all classes of common shares
|
46.8
|
|
47.3
|
|
46.8
|
|
47.3
|
|
|||||||
|
Plus: effect of dilutive equity incentive instruments
|
—
|
|
—
|
|
—
|
|
—
|
|
|||||||
|
Diluted weighted average number of common shares outstanding for all classes of common shares
|
46.8
|
|
47.3
|
|
46.8
|
|
47.3
|
|
|||||||
|
Net earnings (loss) per share attributable to Quad/Graphics common shareholders:
|
|||||||||||||||
|
Basic and diluted:
|
|||||||||||||||
|
Continuing operations
|
$
|
(0.44
|
)
|
$
|
(0.31
|
)
|
$
|
(0.12
|
)
|
$
|
(0.24
|
)
|
|||
|
Discontinued operations
|
—
|
|
0.09
|
|
0.69
|
|
(0.13
|
)
|
|||||||
|
Earnings (loss) per share attributable to Quad/Graphics common shareholders
|
$
|
(0.44
|
)
|
$
|
(0.22
|
)
|
$
|
0.57
|
|
$
|
(0.37
|
)
|
|||
|
Cash dividends paid per common share for all classes of common shares
|
$
|
0.25
|
|
$
|
0.20
|
|
$
|
0.50
|
|
$
|
0.20
|
|
|||
The Company recognizes compensation expense, based on estimated grant date fair values, for all share-based awards issued to employees and non-employee directors using the Black-Scholes option pricing model. The total compensation expense recognized related to all equity incentive programs was
$3.3 million
and
$6.9 million
for the
three and six months ended
June 30, 2012
, respectively, and
$2.0 million
and
$4.6 million
for the
three and six months ended
June 30, 2011
, respectively, and was recorded in selling, general and administrative expenses in the condensed consolidated statements of operations. The Company recognizes compensation costs for only those awards expected to vest on a straight-line basis over the requisite service period of the awards, which is generally the vesting term. The Company estimated the number of awards expected to vest based, in part, on historical forfeiture rates and also based on management's expectations of employee turnover within the specific employee groups receiving each type of award. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods, if actual forfeitures differ from those estimates.
For grants beginning
January 1, 2011
, the shareholders of the Company approved the Quad/Graphics Inc. 2010 Omnibus Incentive Plan ("Omnibus Plan") for two complimentary purposes: (1) to attract and retain outstanding individuals to serve as directors, officers and employees and (2) to increase shareholder value. Concurrent with the
July 2, 2010
closing of
21
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2012
(In millions, except share and per share data and unless otherwise indicated)
the World Color Press acquisition, an additional
2.3 million
shares of Class A stock were approved for issuance under the Company's Omnibus Plan. The Omnibus Plan replaced the 1999 Nonqualified Stock Option Plan and the 1990 Stock Option Plan and, as of January 1, 2011, all equity grants are made from the Omnibus Plan. Within the framework of the Omnibus Plan, the Company's board of directors approved the form of a new stock option award agreement, a restricted stock award agreement, a restricted stock unit award agreement and a deferred stock unit award agreement. Each equity incentive instrument granted has an exercise price of no less than 100% of the fair market value of the class A stock on the date of grant.
As of
June 30, 2012
, there are
1.0 million
shares available for issuance under the Omnibus Plan.
Stock Options
Stock options vest over
four
years, with no vesting in the first year and one-third vesting upon the second, third and fourth anniversary dates. As defined in the individual grant agreements, acceleration of vesting may occur under a change in control, death, disability or normal retirement of the grantee. Options expire no later than the tenth anniversary of the grant date, twenty-four months after termination for death, thirty-six months after termination for normal retirement or disability and 90 days after termination of employment for any other reason. Excluding options granted on November 18, 2011, options are not credited with dividend declarations. Stock options are typically granted only to employees.
The Company granted
448,154
stock options under the Omnibus Plan on both
January 1, 2012
and
2011
with a weighted average fair value of
$2.25
and
$13.19
for the grants, respectively. The fair value of each stock option grant is estimated on the date of grant with the following weighted average assumptions for the
six months ended
June 30, 2012
and
2011
:
|
Six Months Ended June 30,
|
||||||
|
2012
|
2011
|
|||||
|
Expected volatility
|
36.7
|
%
|
36.0
|
%
|
||
|
Risk-free interest rate
|
1.3
|
%
|
2.3
|
%
|
||
|
Expected life (years)
|
7.0
|
|
7.0
|
|
||
|
Dividend yield
|
7.1
|
%
|
2.0
|
%
|
||
The Company determined expected volatility based on the volatility of comparable company stock. The average risk-free interest rate is based on the United States treasury security rate in effect as of the grant date over the term of the expected life. The expected life is based on the term and vesting period of each grant adjusted for historical experience in vesting.
Compensation expense recognized related to stock options was
$2.6 million
and
$5.0 million
for the
three and six months ended
June 30, 2012
, respectively, and
$1.6 million
and
$3.2 million
for the
three and six months ended
June 30, 2011
, respectively. Total future compensation expense for all stock options granted as of
June 30, 2012
is estimated to be
$25.5 million
. Estimated future compensation expense is
$5.1 million
for
2012
,
$10.1 million
for
2013
,
$10.1 million
for
2014
, and
$0.2 million
for
2015
.
22
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2012
(In millions, except share and per share data and unless otherwise indicated)
The following table is a summary of the stock option activity for the
six months ended
June 30, 2012
:
|
Shares Under
Option
(thousands)
|
Weighted Average
Exercise
Price
|
Weighted Average
Remaining
Contractual Term
(years)
|
Aggregate
Intrinsic Value
(millions)
|
|||||||||
|
Outstanding at December 31, 2011
|
3,984
|
|
$
|
21.09
|
|
7.7
|
$
|
1.1
|
|
|||
|
Granted
|
448
|
|
14.14
|
|
|
|
|
|||||
|
Exercised
|
—
|
|
—
|
|
|
|
||||||
|
Cancelled/forfeited/expired
|
(2
|
)
|
29.68
|
|
|
|
||||||
|
Outstanding at June 30, 2012
|
4,430
|
|
$
|
20.35
|
|
7.4
|
$
|
1.2
|
|
|||
|
Vested and expected to vest at June 30, 2012
|
4,086
|
|
$
|
20.28
|
|
7.4
|
$
|
1.2
|
|
|||
|
Exercisable at June 30, 2012
|
1,875
|
|
$
|
18.46
|
|
7.2
|
$
|
0.8
|
|
|||
The intrinsic value of options exercisable and options outstanding at
June 30, 2012
and
2011
is based on the fair value of the stock price. There were
no
option exercises in the
three and six months ended
June 30, 2012
. Cash received from option exercises was
$0
and
$1.6 million
for the
three and six months ended
June 30, 2011
, respectively. Share-based compensation activity for the
three and six months ended
June 30, 2012
and
2011
is noted below:
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
||||||||||||||
|
2012
|
2011
|
2012
|
2011
|
||||||||||||
|
Total intrinsic value of stock options exercised
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
3.1
|
|
|||
|
Cash received from stock option exercises
|
—
|
|
—
|
|
—
|
|
1.6
|
|
|||||||
|
Total fair value of stock options vested
|
—
|
|
—
|
|
—
|
|
5.4
|
|
|||||||
Restricted Stock, Restricted Stock Units and Deferred Stock Units
Restricted stock ("RS") and restricted stock unit ("RSU") awards consist of shares or the rights to shares of the Company's class A stock which are awarded to employees of the Company. The awards are restricted such that they are subject to substantial risk of forfeiture and to restrictions on their sale or other transfer by the employee. RSU awards are typically granted to eligible employees outside of the United States. As defined in the individual grant agreements, acceleration of vesting may occur under a change in control, or death, disability or normal retirement of the grantee. Grantees receiving RS grants are able to exercise full voting rights and receive full credit for dividends during the vesting period. All such dividends will be paid to the RS grantee within
45
days of full vesting. Grantees receiving RSUs granted prior to January 1, 2012 are not entitled to vote and do not earn dividend equivalents. Grantees receiving RSUs on or after January 1, 2012 are not entitled to vote but do earn dividends equivalents. Upon vesting, RSUs will be settled either through cash payment equal to the fair market value of the RSUs on the vesting date or through issuance of Company class A stock.
The following table is a summary of RS and RSU award activity for the
six months ended
June 30, 2012
:
|
Restricted Stock
|
Restricted Stock Units
|
||||||||||||||||||
|
Shares
(thousands)
|
Weighted-
Average
Grant Date
Fair Value
Per Share
|
Weighted-
Average
Remaining
Contractual
Term (years)
|
Units
(thousands)
|
Weighted-
Average
Grant Date
Fair Value
Per Share
|
Weighted-
Average
Remaining
Contractual
Term (years)
|
||||||||||||||
|
Nonvested at December 31, 2011
|
110.2
|
|
$
|
41.21
|
|
2.0
|
|
10.1
|
|
$
|
37.81
|
|
2.0
|
|
|||||
|
Granted
|
310.7
|
|
14.34
|
|
—
|
|
15.8
|
|
14.34
|
|
—
|
|
|||||||
|
Vested
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|||||||
|
Forfeited
|
(3.0
|
)
|
41.26
|
|
—
|
|
(3.5
|
)
|
38.86
|
|
—
|
|
|||||||
|
Nonvested at June 30, 2012
|
417.9
|
|
$
|
21.23
|
|
2.3
|
|
22.4
|
|
$
|
21.17
|
|
2.2
|
|
|||||
23
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2012
(In millions, except share and per share data and unless otherwise indicated)
On
January 1, 2012
, RS awards of
310,651
shares and RSU awards of
15,760
units were granted at a grant date fair value of
$14.34
. On
January 1, 2011
, RS awards of
119,315
shares and RSU awards of
14,625
units were granted at a grant date fair value of
$41.26
and
$38.86
, respectively. All of the RS shares and the RSUs will vest on the third anniversary of the grant date, provided the holder of the share is continuously employed by the Company until the vesting date. Compensation expense of
$0.7 million
and
$1.5 million
for the
three and six months ended
June 30, 2012
, respectively,
$0.4 million
and
$0.8 million
for the
three and six months ended
June 30, 2011
, respectively, was recognized related to RS and RSUs. Total future compensation expense for all RS and RSUs granted as of
June 30, 2012
is estimated to be
$6.0 million
. Estimated future compensation expense is
$1.5 million
for
2012
,
$3.1 million
for
2013
, and
$1.4 million
for
2014
.
The Company granted
31,525
and
13,704
deferred stock units ("DSU") on January 1, 2012 and 2011, respectively. The grant date fair value of deferred stock units was
$14.34
and
$41.26
during the
six months ended
June 30, 2012
and
2011
, respectively. The deferred stock units are fully vested on the grant date. Each DSU entitles the grantee to receive
one
share of class A stock upon the earlier of the separation date of the grantee or the second anniversary of the grant date, but could be subject to acceleration for a change in control or death or disability as defined in the individual DSU grant agreement. Grantees of DSUs may not exercise voting rights, but are credited with dividends and those dividends will be converted into additional DSUs based on the closing price of the class A stock. Dividend equivalents were granted during the
six months ended
June 30, 2012
and
2011
of
810
and
66
units, respectively. As of
June 30, 2012
,
44,830
deferred stock units were outstanding. The compensation expense recorded for these awards was
$0
and
$0.4 million
for the
three and six months ended
June 30, 2012
, respectively, and
$0
and
$0.6 million
for the
three and six months ended
June 30, 2011
, respectively. As these awards were fully vested on the grant date, all compensation expense was recognized at the date of grant.
Other information
Authorized unissued shares or treasury shares may be used for issuance under the Company's equity incentive programs. The Company intends to use treasury shares of its class A stock to meet the stock requirements of its awards in the future.
The Company has
three
classes of common stock as follows (share data in millions):
|
Issued Common Stock
|
||||||||||||||||||
|
Authorized Shares
|
Outstanding
|
Treasury
|
Issued Shares Classified as Common Stock
|
Issued Shares Classified as Redeemable Equity
|
Total Issued Shares
|
|||||||||||||
|
Class A stock ($0.025 par value)
|
80.0
|
|
||||||||||||||||
|
June 30, 2012
|
32.7
|
|
7.3
|
|
40.0
|
|
—
|
|
40.0
|
|
||||||||
|
December 31, 2011
|
32.4
|
|
7.6
|
|
40.0
|
|
—
|
|
40.0
|
|
||||||||
|
Class B stock ($0.025 par value)
|
80.0
|
|
||||||||||||||||
|
June 30, 2012
|
14.2
|
|
0.8
|
|
15.0
|
|
—
|
|
15.0
|
|
||||||||
|
December 31, 2011
|
14.2
|
|
0.8
|
|
15.0
|
|
—
|
|
15.0
|
|
||||||||
|
Class C stock ($0.025 par value)
|
20.0
|
|
||||||||||||||||
|
June 30, 2012
|
—
|
|
0.2
|
|
0.2
|
|
0.3
|
|
0.5
|
|
||||||||
|
December 31, 2011
|
—
|
|
0.2
|
|
0.2
|
|
0.3
|
|
0.5
|
|
||||||||
The Company also has
0.5 million
shares of
$0.01
par value preferred stock authorized, of which none were issued at
June 30, 2012
and
December 31, 2011
. The Company has no present plans to issue any preferred stock.
24
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2012
(In millions, except share and per share data and unless otherwise indicated)
In accordance with the Articles of Incorporation, dividends are paid equally for class A, class B and class C common shares. The following table details the dividend activity related to the Company's class A, class B and class C stock for the
six months ended
June 30, 2012
and
2011
:
|
Declaration Date
|
Record Date
|
Payment Date
|
Dividend Amount per Share
|
||||||
|
2012
|
|||||||||
|
Q2 2012 Dividend
|
May 9, 2012
|
June 11, 2012
|
June 22, 2012
|
$
|
0.25
|
|
|||
|
Q1 2012 Dividend
|
February 28, 2012
|
March 12, 2012
|
March 23, 2012
|
0.25
|
|
||||
|
2011
|
|||||||||
|
Q2 2011 Dividend
|
May 10, 2011
|
May 27, 2011
|
June 10, 2011
|
$
|
0.20
|
|
|||
|
Q1 2011 Dividend
(1)
|
N/A
|
N/A
|
N/A
|
—
|
|
||||
__________________________________
|
(1)
|
There was no dividend declared during the first quarter of
2011
.
|
In accordance with the Articles of Incorporation, each class A common share has one vote per share and each class B and class C common share has ten votes per share on all matters voted upon by the Company's shareholders. Liquidation rights are the same for all three classes of stock. The Company's class C stock is held by the Quad/Graphics Employee Stock Ownership Plan (and can only be owned by, or transferred to, a Company employee benefit plan which is intended to satisfy the qualification requirements of Section 401 of the Internal Revenue Code).
Redeemable equity
The Company follows the applicable GAAP and SEC authoritative guidance for redeemable stock which requires the Company to record the class C stock at full redemption value at each balance sheet date to the extent the redemption of those securities is not solely within the control of the Company. Under the terms of the Articles of Incorporation, the class C common shares are required to be owned by a qualified employee retirement plan of the Company and each holder of class C stock has a continuous right to have the class C stock repurchased by the Company.
The redemption value of the class C qualified employee retirement plan shares at
June 30, 2012
and
December 31, 2011
, was
$3.5 million
. There were
no
class C common shares redeemed by the Company during the
six months ended
June 30, 2012
. Subsequent changes to the redemption value of the securities due to changes in stock valuation or dividend declarations are charged to retained earnings, while decreases in redemption value due to elimination of redemption features are credited to additional paid-in capital and retained earnings. Information regarding the changes in redeemable equity for the
six months ended
June 30, 2012
, is provided in the table below:
|
Class C Common Stock
|
Total Redeemable Equity
|
|||||||||
|
Shares
|
Redemption Value
|
|||||||||
|
Balance at December 31, 2011
|
0.3
|
|
|
$
|
3.5
|
|
$
|
3.5
|
|
|
|
Cash dividends declared
|
—
|
|
(0.1
|
)
|
(0.1
|
)
|
||||
|
Increase in redemption value of redeemable equity
|
—
|
|
0.1
|
|
0.1
|
|
||||
|
Balance at June 30, 2012
|
0.3
|
|
$
|
3.5
|
|
$
|
3.5
|
|
||
25
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2012
(In millions, except share and per share data and unless otherwise indicated)
Common stock and other equity and noncontrolling interests
Activity impacting the Company's common stock and other equity and noncontrolling interests for the
six months ended
June 30, 2012
, was as follows:
|
Quad/Graphics Common Stock and Other Equity
|
Noncontrolling Interests
|
||||||
|
Balance at December 31, 2011
|
$
|
1,302.7
|
|
$
|
0.7
|
|
|
|
Net earnings attributable to Quad/Graphics common shareholders
|
26.6
|
|
—
|
|
|||
|
Net earnings attributable to noncontrolling interests
|
—
|
|
0.1
|
|
|||
|
Foreign currency translation adjustments
|
(2.2
|
)
|
(0.1
|
)
|
|||
|
Cash dividends declared
|
(26.2
|
)
|
—
|
|
|||
|
Stock-based compensation charges
|
6.9
|
|
—
|
|
|||
|
Postretirement benefit plan amendment, net of tax
|
4.5
|
|
—
|
|
|||
|
Pension and other postretirement benefit amortization, net of tax
|
(0.6
|
)
|
—
|
|
|||
|
Balance at June 30, 2012
|
$
|
1,311.7
|
|
$
|
0.7
|
|
|
The Company operates primarily in the commercial print portion of the printing industry, with related product and service offerings designed to offer customers complete solutions for communicating their messages to target audiences. As a result of the divestiture of the Company's Canadian operations to Transcontinental on
March 1, 2012
, as discussed in
Note 4
, the former North America Print and Related Services segment is now referred to as the United States Print and Related Services segment. All United States Print and Related Services segment amounts have been restated to exclude the Canadian discontinued operations. 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 reportable and operating segments and their product and service offerings are summarized below:
United States Print and Related Services
The United States Print and Related Services segment is predominantly comprised of the Company's United States printing operations. This segment is managed as one integrated platform and its products include catalogs, consumer magazines, special insert publications, direct mail, packaging and other commercial and specialty printed products, retail inserts, books and directories. The related service offerings include creative, digital imaging, video, photography, workflow solutions, interactive print solutions using mobile technology, response data analytics services, mailing, distribution, logistics and data optimization and hygiene services. This segment also includes the design, development, manufacture and service of printing-related auxiliary equipment, as well as the manufacture of ink.
International
The International segment consists of the Company's printing operations in Europe and Latin America, including the acquired Transcontinental Mexican operations (see
Note 3
). This segment provides printed products and related services consistent with the United States Print and Related Services segment, with the exception of printing-related auxiliary equipment, which is included in the United States Print and Related Services segment.
Corporate
The Corporate segment consists of unallocated general and administrative activities and associated expenses including, in part, executive, legal, finance, information technology and human resources.
26
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2012
(In millions, except share and per share data and unless otherwise indicated)
|
Net Sales
|
Operating Income/(Loss)
|
Restructuring, Impairment and Transaction-Related Charges
|
|||||||||||||
|
Products
|
Services
|
||||||||||||||
|
Three months ended June 30, 2012
|
|||||||||||||||
|
United States Print and Related Services
|
$
|
701.1
|
|
$
|
107.5
|
|
$
|
22.7
|
|
$
|
18.1
|
|
|||
|
International
|
123.3
|
|
2.3
|
|
(9.8
|
)
|
7.6
|
|
|||||||
|
Total operating segments
|
824.4
|
|
109.8
|
|
12.9
|
|
25.7
|
|
|||||||
|
Corporate
|
—
|
|
—
|
|
(22.5
|
)
|
12.0
|
|
|||||||
|
Total
|
$
|
824.4
|
|
$
|
109.8
|
|
$
|
(9.6
|
)
|
$
|
37.7
|
|
|||
|
Three months ended June 30, 2011
|
|||||||||||||||
|
United States Print and Related Services
|
$
|
748.6
|
|
$
|
110.9
|
|
$
|
40.7
|
|
$
|
9.4
|
|
|||
|
International
|
114.5
|
|
3.2
|
|
(6.0
|
)
|
0.9
|
|
|||||||
|
Total operating segments
|
863.1
|
|
114.1
|
|
34.7
|
|
10.3
|
|
|||||||
|
Corporate
|
—
|
|
—
|
|
(23.8
|
)
|
11.3
|
|
|||||||
|
Total
|
$
|
863.1
|
|
$
|
114.1
|
|
$
|
10.9
|
|
$
|
21.6
|
|
|||
|
Six months ended June 30, 2012
|
|||||||||||||||
|
United States Print and Related Services
|
$
|
1,452.7
|
|
$
|
219.2
|
|
$
|
56.4
|
|
$
|
32.4
|
|
|||
|
International
|
246.9
|
|
5.0
|
|
(18.0
|
)
|
18.1
|
|
|||||||
|
Total operating segments
|
1,699.6
|
|
224.2
|
|
38.4
|
|
50.5
|
|
|||||||
|
Corporate
|
—
|
|
—
|
|
(46.1
|
)
|
25.4
|
|
|||||||
|
Total
|
$
|
1,699.6
|
|
$
|
224.2
|
|
$
|
(7.7
|
)
|
$
|
75.9
|
|
|||
|
Six months ended June 30, 2011
|
|||||||||||||||
|
United States Print and Related Services
|
$
|
1,541.2
|
|
$
|
225.5
|
|
$
|
87.4
|
|
$
|
30.8
|
|
|||
|
International
|
226.9
|
|
6.0
|
|
(10.8
|
)
|
2.4
|
|
|||||||
|
Total operating segments
|
1,768.1
|
|
231.5
|
|
76.6
|
|
33.2
|
|
|||||||
|
Corporate
|
—
|
|
—
|
|
(40.9
|
)
|
17.1
|
|
|||||||
|
Total
|
$
|
1,768.1
|
|
$
|
231.5
|
|
$
|
35.7
|
|
$
|
50.3
|
|
|||
Restructuring, impairment and transaction-related charges for the
three and six months ended
June 30, 2012
and
2011
are further described in
Note 5
and are included in the operating income/(loss) results by segment above.
A reconciliation of operating income to loss from continuing operations before income taxes and equity in earnings of unconsolidated entities as reported in the condensed consolidated statements of operations for the
three and six months ended
June 30, 2012
and
2011
is as follows:
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
|||||||||||||||
|
2012
|
2011
|
2012
|
2011
|
|||||||||||||
|
Operating income (loss) from continuing operations
|
$
|
(9.6
|
)
|
$
|
10.9
|
|
$
|
(7.7
|
)
|
$
|
35.7
|
|
||||
|
Less: interest expense
|
20.7
|
|
29.3
|
|
42.1
|
|
59.1
|
|
||||||||
|
Loss from continuing operations before income taxes and equity in earnings of unconsolidated entities
|
$
|
(30.3
|
)
|
$
|
(18.4
|
)
|
$
|
(49.8
|
)
|
$
|
(23.4
|
)
|
||||
27
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2012
(In millions, except share and per share data and unless otherwise indicated)
Declaration of Quarterly Dividend
On
August 7, 2012
, the Company declared a quarterly dividend of
$0.25
per share, which will be paid on
September 21, 2012
, to shareholders of record as of
September 10, 2012
.
28
|
ITEM 2.
|
Management's Discussion and Analysis of Financial Condition and Results of Operations
|
The following discussion of the financial condition and results of operations of Quad/Graphics should be read together with (1) the Quad/Graphics condensed consolidated financial statements for the
three and six months ended
June 30, 2012
and
2011
, including the notes thereto, included elsewhere in this report and (2) the audited consolidated annual financial statements as of and for the year ended
December 31, 2011
, and notes thereto included in the Company's Annual Report on Form 10-K filed with the SEC on
February 29, 2012
.
Management's discussion and analysis of financial condition and results of operations is provided as a supplement to the Company's condensed consolidated financial statements and accompanying notes to help provide an understanding of the Company's financial condition, the changes in the Company's financial condition and the Company's results of operations. This discussion and analysis is organized as follows:
|
•
|
Cautionary Statement Regarding Forward-Looking Statements.
|
|
•
|
Overview.
This section includes a general description of the Company's business and segments, an overview of key performance metrics the Company's management measures and utilizes to evaluate business performance, and an overview of trends affecting the Company, including management's actions related to the trends.
|
|
•
|
Results of Operations.
This section contains an analysis of the Company's results of operations by comparing the results for (1) the
three months ended
June 30, 2012
, to the
three months ended
June 30, 2011
, and (2) the
six months ended
June 30, 2012
, to the
six months ended
June 30, 2011
. The comparability of the Company's results of operations between periods was impacted by the
September 8, 2011
acquisition of Transcontinental's Mexican operations. 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, non-GAAP financial measures that the Company uses to assess the performance of its business.
|
|
•
|
Liquidity and Capital Resources.
This section provides an analysis of the Company's capitalization and cash flows. The cash flows of the Company's Canadian operations have not been reported as discontinued operations and are included in all cash flow analysis. Forward-looking statements important to understanding the Company's financial condition are also included in this section. This section also provides a discussion of Free Cash Flow, a non-GAAP financial measure the Company uses to assess liquidity and capital deployment.
|
|
•
|
New Accounting Pronouncements.
This section provides a discussion of new accounting pronouncements and the anticipated impact of those accounting pronouncements to the Company's condensed consolidated financial statements.
|
Cautionary Statement Regarding Forward-Looking Statements
To the extent any statements in this Quarterly Report on Form 10-Q contain information that is not historical, these statements are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements relate to, among other things, the objectives, goals, strategies, beliefs, intentions, plans, estimates, prospects, projections and outlook of the Company, and can generally be identified by the use of words such as "may", "will", "expect", "intend", "estimate", "anticipate", "plan", "foresee", "believe" or "continue" or the negatives of these terms, variations on them and other similar expressions. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements.
These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond the control of the Company. These risks, uncertainties and other factors could cause actual results to differ materially from those expressed or implied by those forward-looking statements. Among risks, uncertainties and other factors that may impact Quad/Graphics are those described in Part I, Item 1A of the Company's
2011
Annual Report on Form 10-K, filed with the SEC on
February 29, 2012
, as may be amended or supplemented in Part II, Item 1A of the Company's subsequently filed Quarterly Reports on Form 10-Q (including this report), and the following:
|
•
|
The impact of significant overcapacity in the highly competitive commercial printing industry, which creates downward pricing pressure and fluctuating demand for printing services;
|
|
•
|
The inability of the Company to reduce costs and improve operating efficiency rapidly enough to meet market
|
29
conditions;
|
•
|
The impact of electronic media and similar technological changes;
|
|
•
|
The impact of changing future economic conditions;
|
|
•
|
The failure to renew long-term contracts with customers, the renewal of those contracts under different terms, or customer nonperformance in accordance with the terms and for the duration of long-term contracts;
|
|
•
|
Significant capital expenditures may be needed to maintain the Company's platform and processes and to remain technologically and economically competitive;
|
|
•
|
The impact of fluctuations in costs (including labor-related costs, energy costs, freight rates and raw materials) and the impact of fluctuations in the availability of raw materials;
|
|
•
|
The impact of regulatory matters and legislative developments or changes in laws, including changes in environmental and privacy laws and postal rates, regulations and services;
|
|
•
|
The impact on Quad/Graphics class A common shareholders of a limited active market for Quad/Graphics common stock and the inability to independently elect directors or control decisions due to the class B common stock voting rights;
|
|
•
|
An other than temporary decline in operating results and enterprise value could lead to non-cash impairment charges due to the impairment of goodwill, other intangible assets and property, plant and equipment, which could have a material adverse effect on the Company's results of operations and financial position and could result in the Company being in non-compliance with certain of its debt facility covenants;
|
|
•
|
The liabilities of World Color Press with respect to pension, postretirement benefits and MEPPs could grow in the future and create additional costs;
|
|
•
|
Restrictions imposed by various covenants in the Company's debt facilities may affect the Company's ability to operate its business;
|
|
•
|
Failure to successfully integrate the operations of Quad/Graphics and World Color Press;
|
|
•
|
Risks associated with the Company's operations outside of the United States;
|
|
•
|
The inability to retain and attract additional, key employees, or the adverse effects of any strikes or other labor protests.
|
Quad/Graphics cautions that the foregoing list of risks, uncertainties and other factors is not exhaustive and you should carefully consider the other factors detailed from time to time in Quad/Graphics' filings with the SEC and other uncertainties and potential events when reviewing the Company's forward-looking statements.
Because forward-looking statements are subject to assumptions and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. You are cautioned not to place undue reliance on such statements, which speak only as of the date of this Quarterly Report on Form 10-Q. Except to the extent required by the federal securities laws, Quad/Graphics undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Overview
Business Overview
Quad/Graphics is a leading global provider of print and related products and services that are designed to provide integrated multichannel solutions to marketers and publishers in the United States, Latin America and Europe. The Company's products and services include:
|
•
|
Print Solutions: including catalogs, consumer magazines, special interest publications, direct mail, packaging and other commercial and specialty printed products, retail inserts, books and directories.
|
|
•
|
Media Solutions: including creative, digital imaging, video, photography, workflow solutions, interactive print solutions using mobile technology, and response data analytics services.
|
|
•
|
Logistics Services: including mailing, distribution, logistics and data optimization and hygiene services.
|
30
In addition, substantial investments are made in research and development and other technological innovations. The Company has developed multiple manufacturing process improvements, including innovative press and finishing control systems and material-handling equipment for use in its own print operations, as well as for sale to other printers worldwide. The Company believes that its in-house research and development and its continuous improvement mentality toward printing technology is important to its success. The Company also manufactures ink, which is used in its own printing process. The Company separately reports its net sales and related costs of sales for its product and service offerings.
From a client-facing perspective, Quad/Graphics has focused on integrating new media to redefine print for its customers. The Company's Media Solutions group is dedicated to delivering innovative solutions across multiple media channels. Media Solutions' core building blocks include creative, digital imaging, video, photography, workflow solutions, interactive print solutions using mobile technology, and response data analytics services. These building blocks are seamlessly integrated to help clients optimize content and create experiences that connect with customers and subscribers across multiple channels including print, web, mobile, e-mail, e-book, tablet and in-store.
As a result of the divestiture of the Company's Canadian operations to Transcontinental on
March 1, 2012
, the former North America Print and Related Services segment is now referred to as the United States Print and Related Services segment. All United States Print and Related Services segment amounts have been restated to exclude the Canadian discontinued operations. 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 has three reportable segments: United States Print and Related Services, International and Corporate.
The United States Print and Related Services segment is predominantly comprised of the Company's United States printing operations. This segment is managed as one integrated platform and includes all of the product and related service offerings described above. The United States Print and Related Services segment accounted for approximately
87%
of the Company's consolidated net sales during the
three and six months ended
June 30, 2012
.
The International segment consists of the Company's printing operations in Europe and Latin America, including the acquired Transcontinental Mexican operations. This segment produces and delivers all of Quad/Graphics' product and service offerings in Europe and Latin America, with the exception of printing-related auxiliary equipment, which is included in the United States Print and Related Services segment. The International segment accounted for approximately
13%
of the Company's consolidated net sales during the
three and six months ended
June 30, 2012
.
The Corporate segment consists of unallocated general and administrative activities and associated expenses including, in part, executive, legal, finance, information technology and human resources.
Key Performance Metrics Overview
The Company's management believes the ability to generate net sales growth, profit increases and positive cash flow 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 and Free Cash Flow as metrics to measure operating performance, financial condition and liquidity. EBITDA, EBITDA margin and Free Cash Flow are non-GAAP financial measures (see the definitions of EBITDA, EBITDA margin and the reconciliation of net earnings (loss) attributable to Quad/Graphics common shareholders to EBITDA in the "Results of Operations" section below, and see the definition of Free Cash Flow and the reconciliation of net cash provided by operating activities to Free Cash Flow 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 customers, sales to new customers, sales of new or expanded solutions to existing and new customers 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
31
recurring cash obligations while increasing available cash to fund integration and restructuring requirements related to the acquired World Color Press and Transcontinental Mexican operations, as well as to fund capital expenditures, debt service requirements, World Color Press single employer pension plan contributions, World Color Press multiemployer pension plans withdrawal payments, 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 strategic capital deployment through investments in the business, including acquisitions, strengthening the balance sheet, including debt and pension repayment, and returning cash to the shareholders, including dividends and share repurchases. The priorities for capital 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, such as payments related to completing the World Color Press bankruptcy process.
Overview of Trends Affecting Quad/Graphics
Competition in the highly fragmented printing industry remains intense. The industry has excess manufacturing capacity created by declines in industry volumes, which is causing the printing industry to face continued downward pricing pressures. In addition, the growth and adaptation of alternative marketing technologies (such as online distribution and hosting of content and mobile technologies), as well as alternative delivery of content has resulted in marketers and publishers allocating their marketing and advertising spend across a wide and expanding selection of non-print media options, which further exacerbates industry overcapacity. Management anticipates that volume and pricing pressures will continue throughout 2012, and, in response, management will continue its focus on financial flexibility, a strong balance sheet and an efficient cost structure.
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 currently is balancing the use of cash between deleveraging the Company's balance sheet through reduction in debt and pension and postretirement obligations, compelling investment opportunities, and returns to shareholders including a quarterly shareholder dividend of
$0.25
per share and a share repurchase program approved in the third quarter of 2011 (there were no purchases under this program during the
six months ended
June 30, 2012
). The Company reduced consolidated debt and capital leases by
$132 million
during the
six months ended
June 30, 2012
, and
$457 million
since the
July 2, 2010
World Color Press acquisition date, despite incurring significant costs related to acquisition integration and restructuring programs.
The Company has been working diligently to lower 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. These efforts include the deployment of the Company's own brand of ERP software tools to streamline workflows and improve data visibility across the consolidated platform. In addition, restructuring actions initiated by the Company beginning in 2010 through
June 30, 2012
have resulted in the announcement of
15
plant closures and have reduced headcount by approximately
5,800
.
The Company has substantially completed the World Color Press integration as of
June 30, 2012
. Management estimates the annual synergy savings will be more than
$275 million
, which is $50 million greater than the Company's originally stated target of $225 million. The Company has recognized $242 million in total synergy savings as of
June 30, 2012
, and expects the remaining estimated synergy savings to be substantially recognized by
December 31, 2012
. Management also expects that the one-time costs incurred to achieve these synergy savings will be less than $225 million, which is within the original estimated integration-related costs range of $195 million to $240 million established at the start of the integration, despite exceeding the total expected synergy savings.
In addition to cost savings through acquisition-related synergies, the Company continues its focus on cost reductions through Lean Manufacturing and Continuous Improvement initiatives in order to achieve improved efficiencies, reduce waste, lower overall operating costs, enhance quality and timeliness and create a safer work environment for the Company's employees.
32
In this increasingly multichannel marketplace, the Company believes that the printing industry will make capital investments in new technologies, such as those to deliver targeted and customized print solutions and to deploy multichannel marketing campaigns through the integration of new media. The Company believes its ongoing commitment to technology has been paramount in delivering high-quality and relevant offerings to its customers. The Company invested
$54 million
in capital projects during the
six months ended
June 30, 2012
, and intends to invest a total of
$125 million
to
$150 million
in new capital projects in 2012.
When making capital investment decisions, management undertakes a thorough process aimed at driving the strongest contribution to long-term profitability, whether those are fixed asset additions as discussed above, organic growth opportunities, acquisitions or divestitures.
On
July 12, 2011
, the Company and Transcontinental entered into a definitive agreement pursuant to which Quad/Graphics acquired Transcontinental's Mexican operations in exchange for the Company's Canadian operations. As part of the Canadian transaction, Transcontinental assumed pension and post-retirement obligations pertaining to the Canadian employees. The Company believes with the acquisition of Transcontinental's Mexican operations it will be able to create an industry-leading print platform in an economy with a higher growth rate than that of Canada, and also achieve beneficial synergy savings through operational consolidation. The Company completed the acquisition of Transcontinental's Mexican operations on
September 8, 2011
, and completed the sale of its Canadian operations to Transcontinental on
March 1, 2012
.
On
March 28, 2012
, the Company entered into a strategic partnership with India-based ManipalTech through the purchase of a minority equity ownership interest. ManipalTech is one of India's largest providers of printing services and supports clients' marketing, branding and communication needs through print services and technology solutions. The strategic investment expanded Quad/Graphics' geographic reach to Asia and broadened its product and service scope.
The Company is subject to seasonality in its quarterly results as net sales and operating income are typically higher in the third and fourth quarters of the calendar year as compared to the first and second quarters. Seasonality is driven by increased magazine advertising page counts, retail inserts, catalogs and books primarily due to back-to-school and holiday related advertising and promotions. The Company's 2011 net sales followed the typical industry seasonality, and management anticipates this same impact of seasonality in 2012.
The Company's market capitalization can be affected by, among other things, changes in industry or market conditions, changes in results of operations and changes in forecasts or market expectations related to future results. The Company's management believes continued weakening of macroeconomic conditions globally and in the print industry contributed to volatility in the Company's market capitalization over the last 9 to 12 months. However, the Company believes that deterioration in the Company's market capitalization may not necessarily reflect the Company's actual operating performance, cash flows, financial condition and/or liquidity. If the Company's market capitalization remains below the Company's carrying value for a sustained period of time, an interim goodwill impairment test may need to be performed and may result in a non-cash goodwill impairment. A non-cash goodwill impairment charge would have the effect of decreasing the Company's earnings or increasing the Company's losses in the period in which the impairment charge is taken.
33
Results of Operations for the
Three Months Ended
June 30, 2012
Compared to the
Three Months Ended
June 30, 2011
Summary Results
The Company's operating income (loss) from continuing operations, operating margin, net earnings (loss) attributable to Quad/Graphics common shareholders and diluted earnings (loss) per share attributable to Quad/Graphics common shareholders for the
three months ended
June 30, 2012
, changed from the
three months ended
June 30, 2011
, as follows (dollars in millions, except per share data):
|
Operating Income (Loss) from Continuing Operations
|
Operating Margin
|
Net Earnings (Loss) Attributable to Quad/Graphics Common Shareholders
|
Earnings (Loss) Per Share
Attributable to
Quad/Graphics Common
Shareholders—Diluted
|
|||||||||||
|
For the Three Months Ended June 30, 2011
|
$
|
10.9
|
|
1.1
|
%
|
$
|
(10.3
|
)
|
$
|
(0.22
|
)
|
|||
|
2012 Restructuring, Impairment and Transaction-Related Charges
(1)
|
(37.7
|
)
|
(4.0
|
)%
|
(22.6
|
)
|
(0.48
|
)
|
||||||
|
2011 Restructuring, Impairment and Transaction-Related Charges
(2)
|
21.6
|
|
2.2
|
%
|
13.0
|
|
0.27
|
|
||||||
|
Decrease in Interest Expense
(3)
|
N/A
|
|
N/A
|
|
5.2
|
|
0.11
|
|
||||||
|
Decrease in Earnings from Discontinued Operations, net of tax
(4)
|
N/A
|
|
N/A
|
|
(4.2
|
)
|
(0.09
|
)
|
||||||
|
Decrease in Operating Income
(5)
|
(4.4
|
)
|
(0.3
|
)%
|
(1.9
|
)
|
(0.03
|
)
|
||||||
|
For the Three Months Ended June 30, 2012
|
$
|
(9.6
|
)
|
(1.0
|
)%
|
$
|
(20.8
|
)
|
$
|
(0.44
|
)
|
|||
__________________________________
|
(1)
|
Restructuring, impairment and transaction-related charges of
$37.7 million
incurred during the
three months ended
June 30, 2012
included:
|
|
a.
|
$10.2 million
of employee termination charges related to workforce reductions through facility consolidations and involuntary separation programs;
|
|
b.
|
$5.7 million
of impairment charges for certain buildings and equipment no longer being utilized in production as a result of facility consolidations, primarily related to the Company's Stillwater, Oklahoma and Pila, Poland facilities;
|
|
c.
|
$0.8 million
of transaction-related charges consisting of professional service fees related to business acquisition and divestiture activities;
|
|
d.
|
$11.2 million
of acquisition-related integration costs; and
|
|
e.
|
$9.8 million
of various other restructuring charges, including costs to maintain and exit closed facilities, as well as lease exit charges.
|
The Company expects to incur additional restructuring and integration costs in future reporting periods in connection with the restructuring program that began in
2010
related to eliminating excess manufacturing capacity and properly aligning its cost structure as part of the integration of the
July 2, 2010
World Color Press acquisition, the
September 8, 2011
Transcontinental Mexico acquisition, and other cost reduction programs.
|
(2)
|
Restructuring, impairment and transaction-related charges of
$21.6 million
incurred during the
three months ended
June 30, 2011
, included:
|
|
a.
|
$4.8 million
of employee termination charges related to workforce reductions through facility consolidations and involuntary separation programs;
|
|
b.
|
$1.0 million
of transaction-related charges incurred primarily in connection with the transaction with Transcontinental;
|
|
c.
|
$8.9 million
of acquisition-related integration costs; and
|
|
d.
|
$6.9 million
of various other restructuring charges, including costs to maintain and exit closed facilities, as well as lease exit charges.
|
34
|
(3)
|
Interest expense
decreased
$8.6 million
(
$5.2 million
net of tax) during the
three months ended
June 30, 2012
, to
$20.7 million
. This change was due to a reduction in debt in 2012, and lower interest rates as a result of the
$1.5 billion
debt financing agreement entered into on
July 26, 2011
.
|
|
(4)
|
Earnings from discontinued operations, net of tax,
decreased
$4.2 million
during the
three months ended
June 30, 2012
, due to the sale of the Canadian discontinued operations on
March 1, 2012
. As the Canadian discontinued operations were sold during the first quarter of
2012
, there is no activity to report for the
three months ended
June 30, 2012
.
|
|
(5)
|
Operating income
decreased
$4.4 million
primarily due to the margin impact of a
$43.0 million
, or
4.4%
, decline in net sales and
$1.2 million
in increased depreciation and amortization expense, partially offset by
$21 million
in incremental synergy savings from the integration of World Color Press' operations and lower selling, general and administrative expenses. The following discussion provides additional details.
|
Operating Results from Continuing Operations
The following table sets forth certain information from the Company's condensed consolidated statements of operations on an absolute dollar basis and as a relative percentage of total net sales for each noted period, together with the relative percentage change in such information between the periods set forth below (excluding the Canadian discontinued operations):
|
Three Months Ended June 30,
|
||||||||||||||||||||
|
2012
|
2011
|
|||||||||||||||||||
|
(dollars in millions)
|
||||||||||||||||||||
|
Amount
|
% of
Sales
|
Amount
|
% of
Sales
|
$ Change
|
%
Change
|
|||||||||||||||
|
Net Sales:
|
||||||||||||||||||||
|
Products
|
$
|
824.4
|
|
88.2
|
%
|
$
|
863.1
|
|
88.3
|
%
|
$
|
(38.7
|
)
|
(4.5
|
)%
|
|||||
|
Services
|
109.8
|
|
11.8
|
%
|
114.1
|
|
11.7
|
%
|
(4.3
|
)
|
(3.8
|
)%
|
||||||||
|
Total Net Sales
|
934.2
|
|
100.0
|
%
|
977.2
|
|
100.0
|
%
|
(43.0
|
)
|
(4.4
|
)%
|
||||||||
|
Cost of Sales:
|
||||||||||||||||||||
|
Products
|
656.4
|
|
70.3
|
%
|
665.2
|
|
68.1
|
%
|
(8.8
|
)
|
(1.3
|
)%
|
||||||||
|
Services
|
84.4
|
|
9.0
|
%
|
91.4
|
|
9.4
|
%
|
(7.0
|
)
|
(7.7
|
)%
|
||||||||
|
Total Cost of Sales
|
740.8
|
|
79.3
|
%
|
756.6
|
|
77.5
|
%
|
(15.8
|
)
|
(2.1
|
)%
|
||||||||
|
Selling, General & Administrative Expenses
|
80.6
|
|
8.6
|
%
|
104.6
|
|
10.7
|
%
|
(24.0
|
)
|
(22.9
|
)%
|
||||||||
|
Restructuring, Impairment and Transaction-Related Charges
|
37.7
|
|
4.0
|
%
|
21.6
|
|
2.2
|
%
|
16.1
|
|
74.5
|
%
|
||||||||
|
Depreciation and Amortization
|
84.7
|
|
9.1
|
%
|
83.5
|
|
8.5
|
%
|
1.2
|
|
1.4
|
%
|
||||||||
|
Total Operating Expenses
|
943.8
|
|
101.0
|
%
|
966.3
|
|
98.9
|
%
|
(22.5
|
)
|
(2.3
|
)%
|
||||||||
|
Operating Income (Loss) From Continuing Operations
|
$
|
(9.6
|
)
|
(1.0
|
)%
|
$
|
10.9
|
|
1.1
|
%
|
$
|
(20.5
|
)
|
(188.1
|
)%
|
|||||
Net Sales
Product sales
decreased
$38.7 million
, or
4.5%
, for the
three months ended
June 30, 2012
compared to the
three months ended
June 30, 2011
, primarily due to lower print volumes, lower print pricing due to continued pricing pressure from excess manufacturing capacity in the printing industry and lower pricing of byproduct sales, partially offset by an increase in paper sales.
Service sales, which primarily consist of imaging, logistics and distribution services,
decreased
$4.3 million
, or
3.8%
, for the
three months ended
June 30, 2012
, compared to the
three months ended
June 30, 2011
, primarily due to lower sales of logistics and distribution services.
35
Cost of Sales
Cost of product sales
decreased
$8.8 million
for the
three months ended
June 30, 2012
, compared with the
three months ended
June 30, 2011
, primarily due to lower print volumes and synergy savings related to labor, purchasing and other manufacturing savings resulting from the Company's World Color Press integration restructuring programs, which resulted in
15
announced plant closures.
Cost of product sales as a percentage of net sales increased from
68.1%
for the
three months ended
June 30, 2011
, to
70.3%
for the
three months ended
June 30, 2012
, primarily due to lower print unit volumes, lower print pricing due to continued pricing pressure from excess manufacturing capacity in the printing industry, lower pricing on byproduct recoveries and an increase in paper sales, which are generally sold at pass through prices reflecting minimal profit margin. These increases in cost of product sales as a percentage of net sales were partially offset by synergy cost savings related to the World Color Press integration.
Cost of service sales
decreased
$7.0 million
for the
three months ended
June 30, 2012
, compared with the
three months ended
June 30, 2011
, primarily due to lower sales of logistics and distribution services.
Selling, General and Administrative Expenses
Selling, general and administrative expenses
decreased
$24.0 million
for the
three months ended
June 30, 2012
, compared with the
three months ended
June 30, 2011
, primarily due to $6 million of synergy savings from the integration of World Color Press, $6 million decrease in the bad debt provision (mostly related to a change in payment terms for an existing customer), $4 million in reduced employee costs, $2 million decrease in legal and environmental reserves (primarily related to the sale of vacant facilities), $2 million decrease in professional fee expense, $1 million in reduced information technology costs and other net miscellaneous spending reductions. Selling, general and administrative expenses as a percentage of net sales decreased from
10.7%
to
8.6%
between periods due to the items discussed in the preceding sentence.
Restructuring, Impairment and Transaction-Related Charges
Restructuring, impairment and transaction-related charges
increased
$16.1 million
for the
three months ended
June 30, 2012
, compared with the
three months ended
June 30, 2011
, primarily due to a
$5.7 million
increase
in impairment charges, a
$5.4 million
increase
in employee termination charges, a
$2.9 million
increase
in other restructuring costs and a
$2.3 million
increase
in acquisition-related integration costs, partially offset by a
$0.2 million
decrease
in transaction-related charges.
Restructuring, impairment and transaction-related charges of
$37.7 million
incurred in the
three months ended
June 30, 2012
, included: (1)
$10.2 million
of employee termination charges related to workforce reductions through facility consolidations and involuntary separation programs, (2)
$5.7 million
of impairment charges for certain buildings and equipment no longer being utilized in production as a result of facility consolidations, primarily related to the Company's Stillwater, Oklahoma and Pila, Poland facilities, (3)
$0.8 million
of transaction-related charges consisting of professional service fees related to business acquisition and divestiture activities, (4)
$11.2 million
of integration costs primarily related to preparing existing facilities to meet new production requirements resulting from work transferring from closed plants, as well as other costs related to the integration of the acquired companies and (5)
$9.8 million
of various other restructuring charges, including costs to maintain and exit closed facilities, as well as lease exit charges.
Restructuring, impairment and transaction-related charges of
$21.6 million
incurred in the
three months ended
June 30, 2011
, included: (1)
$4.8 million
of employee termination charges related to workforce reductions through facility consolidations and involuntary separation programs, (2)
$1.0 million
of transaction-related charges incurred primarily in connection with the transaction with Transcontinental, (3)
$8.9 million
of acquisition-related integration costs and (4)
$6.9 million
of various other restructuring charges, including costs to maintain and exit closed facilities, as well as lease exit charges.
Depreciation and Amortization
Depreciation and amortization
increased
$1.2 million
for the
three months ended
June 30, 2012
, compared with the
three months ended
June 30, 2011
.
36
EBITDA and EBITDA Margin—Consolidated
EBITDA and EBITDA margin for the
three months ended
June 30, 2012
, compared to the
three months ended
June 30, 2011
, were as follows:
|
Three Months Ended June 30,
|
|||||||||||||
|
2012
|
2011
|
||||||||||||
|
Amount
|
% of Net Sales
|
Amount
|
% of Net Sales
|
||||||||||
|
(dollars in millions)
|
|||||||||||||
|
EBITDA and EBITDA margin
|
$
|
74.3
|
|
8.0
|
%
|
$
|
98.8
|
|
10.1
|
%
|
|||
EBITDA
decreased
$24.5 million
for the
three months ended
June 30, 2012
, primarily due to the margin impact of a
$43.0 million
, or
4.4%
decline in net sales,
$16.1 million
in
increased
restructuring, impairment and transaction-related charges and a
$4.2 million
decrease in earnings from discontinued operations. These declines were partially offset by
$21 million
in incremental synergy savings from integrating World Color Press' operations and lower selling, general and administrative expenses. EBITDA margin
decreased
for the
three months ended
June 30, 2012
, compared with the
three months ended
June 30, 2011
, primarily due to reasons described in the preceding sentence.
EBITDA represents net earnings (loss) attributable to Quad/Graphics common shareholders, plus (i) interest expense, (ii) income tax expense (if applicable) and (iii) depreciation and amortization, and less income tax benefit (if applicable). EBITDA margin represents EBITDA as a percentage of net sales. EBITDA and EBITDA margin are presented to provide additional information regarding Quad/Graphics' performance and because both are important measures by which Quad/Graphics gauges the profitability and assesses the performance of its business. EBITDA and EBITDA margin are not measures of financial performance in accordance with GAAP. EBITDA and EBITDA margin 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/Graphics' calculation of EBITDA and EBITDA margin may be different from the calculations used by other companies and therefore comparability may be limited. A reconciliation of EBITDA to net earnings (loss) attributable to Quad/Graphics common shareholders follows:
|
Three Months Ended June 30,
|
|||||||
|
2012
|
2011
|
||||||
|
(dollars in millions)
|
|||||||
|
Net Loss Attributable to Quad/Graphics Common Shareholders
(1)
|
$
|
(20.8
|
)
|
$
|
(10.3
|
)
|
|
|
Interest Expense
|
20.7
|
|
29.3
|
|
|||
|
Income Tax Benefit
|
(10.3
|
)
|
(3.7
|
)
|
|||
|
Depreciation and Amortization
|
84.7
|
|
83.5
|
|
|||
|
EBITDA
|
$
|
74.3
|
|
$
|
98.8
|
|
|
__________________________________
|
(1)
|
Net loss attributable to Quad/Graphics common shareholders includes the effects of:
|
|
a.
|
Restructuring, impairment and transaction-related charges of
$37.7 million
and
$21.6 million
for the
three months ended
June 30, 2012
, and
2011
, respectively;
|
|
b.
|
As the Company completed the sale of the Company's Canadian operations to Transcontinental on
March 1, 2012
, there is no impact from discontinued operations for the
three months ended
June 30, 2012
. Earnings from discontinued operations, net of tax, was
$4.2 million
for the
three months ended
June 30, 2011
. EBITDA from discontinued operations was
$8.7 million
for the
three months ended
June 30, 2011
, and include restructuring, impairment and transaction-related charges of
$1.8 million
for the
three months ended
June 30, 2011
.
|
37
United States Print and Related Services
The following table summarizes net sales, operating income, operating margin and certain items impacting comparability within the United States Print and Related Services segment (excluding the Canadian discontinued operations):
|
Three Months Ended June 30,
|
||||||||||||||
|
2012
|
2011
|
|||||||||||||
|
(dollars in millions)
|
||||||||||||||
|
Amount
|
Amount
|
$ Change
|
% Change
|
|||||||||||
|
Net Sales:
|
||||||||||||||
|
Products
|
$
|
701.1
|
|
$
|
748.6
|
|
$
|
(47.5
|
)
|
(6.3
|
)%
|
|||
|
Services
|
107.5
|
|
110.9
|
|
(3.4
|
)
|
(3.1
|
)%
|
||||||
|
Operating Income (including Restructuring, Impairment and Transaction-Related Charges)
|
22.7
|
|
40.7
|
|
(18.0
|
)
|
(44.2
|
)%
|
||||||
|
Operating Margin
|
2.8
|
%
|
4.7
|
%
|
N/A
|
|
N/A
|
|
||||||
|
Restructuring, Impairment and Transaction-Related Charges
|
$
|
18.1
|
|
$
|
9.4
|
|
$
|
8.7
|
|
92.6
|
%
|
|||
Net Sales
Product sales for the United States Print and Related Services segment
decreased
$47.5 million
for the
three months ended
June 30, 2012
, compared to the
three months ended
June 30, 2011
, primarily due to lower print volumes, lower print pricing due to continued pricing pressure from excess manufacturing capacity in the printing industry and lower pricing of byproduct sales, partially offset by an increase in paper sales.
Service sales for the United States Print and Related Services segment
decreased
$3.4 million
for the
three months ended
June 30, 2012
, compared to the
three months ended
June 30, 2011
, primarily due to lower sales of logistics and distribution services.
Operating Income
Operating income for the United States Print and Related Services segment
decreased
$18.0 million
for the
three months ended
June 30, 2012
, compared to the
three months ended
June 30, 2011
, primarily due to margin impact of a $50.9 million, or 5.9% decline in net sales and
$8.7 million
in
increased
restructuring, impairment and transaction-related charges, partially offset by $21 million in synergy savings from the integration of World Color Press' operations and lower selling, general and administrative expenses.
Operating margin for the United States Print and Related Services segment decreased from
4.7%
for the
three months ended
June 30, 2011
, to
2.8%
for the
three months ended
June 30, 2012
, primarily due to the reasons discussed in the preceding paragraph.
Restructuring, Impairment and Transaction-Related Charges
Restructuring, impairment and transaction-related charges for the United States Print and Related Services segment for the
three months ended
June 30, 2012
, were
$18.1 million
, consisting of: (1)
$6.3 million
of employee termination charges related to workforce reductions through facility consolidations and involuntary separation programs, (2)
$2.9 million
of impairment charges for certain buildings and equipment no longer being utilized in production as a result of facility consolidations, primarily related to the Company's Stillwater, Oklahoma facility and (3)
$8.9 million
of various other restructuring charges, including costs to maintain and exit closed facilities, as well as lease exit charges.
Restructuring, impairment and transaction-related charges for the United States Print and Related Services segment for the
three months ended
June 30, 2011
, were
$9.4 million
, consisting of: (1)
$3.4 million
of employee termination charges related to workforce reductions through facility consolidations and involuntary separation programs and (2)
$6.0 million
of various other restructuring charges, including costs to maintain and exit closed facilities, as well as lease exit charges.
38
International
The following table summarizes net sales, operating loss, operating margin, certain items impacting comparability and equity in earnings (loss) of unconsolidated entities within the International segment:
|
Three Months Ended June 30,
|
||||||||||||||
|
2012
|
2011
|
|||||||||||||
|
(dollars in millions)
|
||||||||||||||
|
Amount
|
Amount
|
$ Change
|
% Change
|
|||||||||||
|
Net Sales:
|
||||||||||||||
|
Products
|
$
|
123.3
|
|
$
|
114.5
|
|
$
|
8.8
|
|
7.7
|
%
|
|||
|
Services
|
2.3
|
|
3.2
|
|
(0.9
|
)
|
(28.1
|
)%
|
||||||
|
Operating Loss (including Restructuring, Impairment and Transaction-Related Charges)
|
(9.8
|
)
|
(6.0
|
)
|
(3.8
|
)
|
(63.3
|
)%
|
||||||
|
Operating Margin
|
(7.8
|
)%
|
(5.1
|
)%
|
N/A
|
|
N/A
|
|
||||||
|
Restructuring, Impairment and Transaction-Related Charges
|
7.6
|
|
0.9
|
|
6.7
|
|
744.4
|
%
|
||||||
|
Equity in Earnings (Loss) of Unconsolidated Entities
|
$
|
(0.8
|
)
|
$
|
0.3
|
|
$
|
(1.1
|
)
|
(366.7
|
)%
|
|||
Net Sales
Product sales for the International segment
increased
$8.8 million
for the
three months ended
June 30, 2012
, compared to the
three months ended
June 30, 2011
, primarily due to a $17.8 million increase in net sales in Latin America (mostly related to the Transcontinental Mexican acquisition, which was completed on
September 8, 2011
), partially offset by lower print volumes primarily in Argentina and Brazil and a negative impact from currency translation.
Operating Loss
Operating loss for the International segment
increased
$3.8 million
for the
three months ended
June 30, 2012
, compared to the
three months ended
June 30, 2011
, primarily due to a
$6.7 million
increase
in restructuring, impairment and integration expenses, partially offset by the margin impact of the
$8.8 million
sales increase.
Restructuring, Impairment and Transaction-Related Charges
Restructuring, impairment and transaction-related charges for the International segment for the
three months ended
June 30, 2012
, were
$7.6 million
, consisting of: (1)
$3.9 million
of employee termination charges related to workforce reductions through facility consolidations and involuntary separation programs, (2)
$2.8 million
of impairment charges for equipment no longer being utilized in production as a result of facility consolidations primarily related to the Pila, Poland facility and (3)
$0.9 million
of other restructuring charges.
Restructuring, impairment and transaction-related charges for the International segment for the
three months ended
June 30, 2011
were
$0.9 million
, consisting of: (1)
$0.1 million
of employee termination costs related to workforce reduction initiatives and (2)
$0.8 million
of other restructuring charges.
Equity in Earnings of Unconsolidated Entities
Investments in entities where Quad/Graphics has the ability to exert significant influence but not control are accounted for using the equity method of accounting. The Company holds a
49%
ownership interest in Plural, a commercial printer based in São Paulo, Brazil, as well as a
50%
interest in a joint venture in Chile that was acquired as part of the World Color Press acquisition. The equity in earnings of unconsolidated entities in the International segment
decreased
$1.1 million
for the
three months ended
June 30, 2012
, compared to the
three months ended
June 30, 2011
, due to decreased earnings at Plural.
39
Corporate
The following table summarizes unallocated operating expenses presented as Corporate:
|
Three Months Ended June 30,
|
|||||||
|
2012
|
2011
|
||||||
|
(dollars in millions)
|
|||||||
|
Operating Expenses (including Restructuring, Impairment and Transaction-Related Charges)
|
$
|
22.5
|
|
$
|
23.8
|
|
|
|
Restructuring, Impairment and Transaction-Related Charges
|
12.0
|
|
11.3
|
|
|||
Corporate operating expenses
decreased
$1.3 million
for the
three months ended
June 30, 2012
, compared with the
three months ended
June 30, 2011
, primarily due to synergy savings from the integration of World Color Press, partially offset by a
$0.7 million
increase
in restructuring, impairment and transaction-related charges.
Corporate restructuring, impairment and transaction-related charges for the
three months ended
June 30, 2012
, were
$12.0 million
, consisting of: (1)
$0.8 million
of transaction-related charges consisting of professional service fees related to business acquisition and divestiture activities and (2)
$11.2 million
of acquisition-related integration costs.
Corporate restructuring, impairment and transaction-related charges for the
three months ended
June 30, 2011
, were
$11.3 million
, consisting of: (1)
$1.3 million
of employee termination costs related to workforce reduction initiatives, (2)
$8.9 million
of acquisition-related integration costs, (3)
$1.0 million
of transaction-related charges incurred primarily in connection with the transaction with Transcontinental and (4)
$0.1 million
of various other restructuring charges.
40
Results of Operations for the
Six Months Ended
June 30, 2012
, Compared to the
Six Months Ended
June 30, 2011
Summary Results
The Company's operating income (loss) from continuing operations, operating margin, net earnings (loss) attributable to Quad/Graphics common shareholders and diluted earnings (loss) per share attributable to Quad/Graphics common shareholders for the
six months ended
June 30, 2012
, changed from the
six months ended
June 30, 2011
, as follows (dollars in millions, except per share data):
|
Operating Income (Loss) from Continuing Operations
|
Operating Margin
|
Net Earnings (Loss) Attributable to Quad/Graphics Common Shareholders
|
Earnings (Loss) Per Share
Attributable to
Quad/Graphics Common
Shareholders—Diluted
|
|||||||||||
|
For the Six Months Ended June 30, 2011
|
$
|
35.7
|
|
1.8
|
%
|
$
|
(17.6
|
)
|
$
|
(0.37
|
)
|
|||
|
2012 Restructuring, Impairment and Transaction-Related Charges
(1)
|
(75.9
|
)
|
(3.9
|
)%
|
(45.5
|
)
|
(0.97
|
)
|
||||||
|
2011 Restructuring, Impairment and Transaction-Related Charges
(2)
|
50.3
|
|
2.5
|
%
|
30.2
|
|
0.64
|
|
||||||
|
Decrease in Interest Expense
(3)
|
N/A
|
|
N/A
|
|
10.2
|
|
0.22
|
|
||||||
|
Income Tax Benefit from Settlement of IRS Audits
(4)
|
N/A
|
|
N/A
|
|
31.2
|
|
0.67
|
|
||||||
|
Decrease in Loss from Discontinued Operations, net of tax
(5)
|
N/A
|
|
N/A
|
|
2.9
|
|
0.06
|
|
||||||
|
Increase in Gain on Disposal of Discontinued Operations, net of tax
(6)
|
N/A
|
|
N/A
|
|
35.3
|
|
0.75
|
|
||||||
|
Decrease in Operating Income
(7)
|
(17.8
|
)
|
(0.8
|
)%
|
(20.1
|
)
|
(0.43
|
)
|
||||||
|
For the Six Months Ended June 30, 2012
|
$
|
(7.7
|
)
|
(0.4
|
)%
|
$
|
26.6
|
|
$
|
0.57
|
|
|||
__________________________________
|
(1)
|
Restructuring, impairment and transaction-related charges of
$75.9 million
incurred during the
six months ended
June 30, 2012
, included:
|
|
a.
|
$20.6 million
of employee termination charges related to workforce reductions through facility consolidations and involuntary separation programs;
|
|
b.
|
$14.1 million
of impairment charges for certain buildings and equipment no longer being utilized in production as a result of facility consolidations, primarily related to the Company's Stillwater, Oklahoma and Pila, Poland facilities;
|
|
c.
|
$2.3 million
of transaction-related charges consisting of professional service fees related to business acquisition and divestiture activities;
|
|
d.
|
$23.1 million
of acquisition-related integration costs; and
|
|
e.
|
$15.8 million
of various other restructuring charges, including costs to maintain and exit closed facilities, as well as lease exit charges, net of a
$2.4 million
gain on the collection of a note receivable related to a settlement of a disputed pre-acquisition World Color Press note receivable.
|
The Company expects to incur additional restructuring and integration costs in future reporting periods in connection with the restructuring program that began in
2010
related to eliminating excess manufacturing capacity and properly aligning its cost structure as part of the integration of the
July 2, 2010
World Color Press acquisition, the
September 8, 2011
Transcontinental Mexico acquisition, and other cost reduction programs.
|
(2)
|
Restructuring, impairment and transaction-related charges of
$50.3 million
incurred during the
six months ended
June 30, 2011
, included:
|
|
a.
|
$15.8 million
of employee termination charges related to workforce reductions through facility consolidations and involuntary separation programs;
|
|
b.
|
$1.0 million
of transaction-related charges incurred primarily in connection with the transaction with Transcontinental;
|
|
c.
|
$15.3 million
of acquisition-related integration costs, net of a
$7.1 million
gain on the collection of a note receivable for the June 2008 sale of World Color Press' European operations; and
|
41
|
d.
|
$18.2 million
of various other restructuring charges, including costs to maintain and exit closed facilities, as well as lease exit charges.
|
|
(3)
|
Interest expense
decreased
$17.0 million
(
$10.2 million
, net of tax) during the
six months ended
June 30, 2012
, to
$42.1 million
. This change was due to a reduction in debt in 2012 and lower interest rates as a result of the
$1.5 billion
debt financing agreement entered into on
July 26, 2011
.
|
|
(4)
|
The Company settled IRS audits which resulted in an income tax benefit of
$31.2 million
during the
six months ended
June 30, 2012
.
|
|
(5)
|
Loss on discontinued operations, net of tax,
decreased
$2.9 million
during the
six months ended
June 30, 2012
to a
$3.2 million
loss primarily due to four less months of Canadian operations in
2012
as the Canadian discontinued operations were sold on
March 1, 2012
.
|
|
(6)
|
Gain on disposal of discontinued operations, net of tax, was
$35.3 million
during the
six months ended
June 30, 2012
, due to the
March 1, 2012
, completion of the sale of the Company's Canadian operations to Transcontinental.
|
|
(7)
|
Operating income
decreased
$17.8 million
primarily due to the margin impact of a
$75.8 million
, or
3.8%
, decline in net sales, partially offset by
$46.0 million
in incremental synergy savings from the integration of World Color Press' operations, reduced selling, general and administrative costs and
$1.5 million
in reduced depreciation and amortization expense. The
$20.1 million
decrease in net earnings in the table above reflects the
$17.8 million
decrease in operating income discussed in the previous sentence, and additional tax expense recorded primarily related to an increase in the liability for unrecognized tax benefits and for losses with no tax benefits recorded due to valuation allowances. The following discussion provides additional details.
|
Operating Results from Continuing Operations
The following table sets forth certain information from the Company's condensed consolidated statements of operations on an absolute dollar basis and as a relative percentage of total net sales for each noted period, together with the relative percentage change in such information between the periods set forth below (excluding the Canadian discontinued operations):
|
Six Months Ended June 30,
|
||||||||||||||||||||
|
2012
|
2011
|
|||||||||||||||||||
|
(dollars in millions)
|
||||||||||||||||||||
|
Amount
|
% of
Sales
|
Amount
|
% of
Sales
|
$ Change
|
%
Change
|
|||||||||||||||
|
Net Sales:
|
||||||||||||||||||||
|
Products
|
$
|
1,699.6
|
|
88.3
|
%
|
$
|
1,768.1
|
|
88.4
|
%
|
$
|
(68.5
|
)
|
(3.9
|
)%
|
|||||
|
Services
|
224.2
|
|
11.7
|
%
|
231.5
|
|
11.6
|
%
|
(7.3
|
)
|
(3.2
|
)%
|
||||||||
|
Total Net Sales
|
1,923.8
|
|
100.0
|
%
|
1,999.6
|
|
100.0
|
%
|
(75.8
|
)
|
(3.8
|
)%
|
||||||||
|
Cost of Sales:
|
||||||||||||||||||||
|
Products
|
1,343.1
|
|
69.8
|
%
|
1,362.2
|
|
68.1
|
%
|
(19.1
|
)
|
(1.4
|
)%
|
||||||||
|
Services
|
170.6
|
|
8.9
|
%
|
178.1
|
|
8.9
|
%
|
(7.5
|
)
|
(4.2
|
)%
|
||||||||
|
Total Cost of Sales
|
1,513.7
|
|
78.7
|
%
|
1,540.3
|
|
77.0
|
%
|
(26.6
|
)
|
(1.7
|
)%
|
||||||||
|
Selling, General & Administrative Expenses
|
172.6
|
|
9.0
|
%
|
202.5
|
|
10.1
|
%
|
(29.9
|
)
|
(14.8
|
)%
|
||||||||
|
Restructuring, Impairment and Transaction-Related Charges
|
75.9
|
|
3.9
|
%
|
50.3
|
|
2.5
|
%
|
25.6
|
|
50.9
|
%
|
||||||||
|
Depreciation and Amortization
|
169.3
|
|
8.8
|
%
|
170.8
|
|
8.6
|
%
|
(1.5
|
)
|
(0.9
|
)%
|
||||||||
|
Total Operating Expenses
|
1,931.5
|
|
100.4
|
%
|
1,963.9
|
|
98.2
|
%
|
(32.4
|
)
|
(1.6
|
)%
|
||||||||
|
Operating Income (Loss) From Continuing Operations
|
$
|
(7.7
|
)
|
(0.4
|
)%
|
$
|
35.7
|
|
1.8
|
%
|
$
|
(43.4
|
)
|
(121.6
|
)%
|
|||||
Net Sales
Product sales
decreased
$68.5 million
, or
3.9%
, for the
six months ended
June 30, 2012
, compared to the
six months ended
June 30, 2011
, primarily due to lower print volumes, lower print pricing due to continued pricing pressure from excess manufacturing capacity in the printing industry and lower pricing of byproduct sales, partially offset by increased paper sales.
Service sales, which primarily consist of imaging, logistics and distribution services,
decreased
$7.3 million
, or
3.2%
, for the
six months ended
June 30, 2012
, compared to the
six months ended
June 30, 2011
, primarily due to lower sales on logistics and distribution services and imaging.
42
Cost of Sales
Cost of product sales
decreased
$19.1 million
for the
six months ended
June 30, 2012
, compared with the
six months ended
June 30, 2011
, primarily due to decreased print volumes and synergy savings related to labor, purchasing and other manufacturing savings resulting from the Company's World Color Press integration restructuring programs, which resulted in
15
announced plant closures.
Cost of product sales as a percentage of net sales increased from
68.1%
for the
six months ended
June 30, 2011
, to
69.8%
for the
six months ended
June 30, 2012
, primarily due to lower print pricing due to continued pricing pressure from excess manufacturing capacity in the printing industry, lower pricing on byproduct recoveries and an increase in paper sales, which are generally sold at pass through prices reflecting minimal profit margin. These increases in cost of product sales as a percentage of net sales were partially offset by synergy cost savings related to the World Color Press integration.
Cost of service sales
decreased
$7.5 million
for the
six months ended
June 30, 2012
, compared with the
six months ended
June 30, 2011
, primarily due to lower sales on logistics and distribution services and imaging.
Selling, General and Administrative Expenses
Selling, general and administrative expenses
decreased
$29.9 million
for the
six months ended
June 30, 2012
, compared with the
six months ended
June 30, 2011
, primarily due to $11 million of synergy savings from the integration of World Color Press, $4 million decrease in the bad debt provision (mostly related to a change in payment terms for an existing customer), $3 million in reduced employee costs, $3 million in reduced information technology costs, $2 million decrease in legal and environmental reserves (primarily related to the sale of vacant facilities), $1 million decrease in professional fee expense and other net miscellaneous spending reductions. Selling, general and administrative expenses as a percentage of net sales decreased from
10.1%
to
9.0%
between years due to the items discussed in the preceding sentence.
Restructuring, Impairment and Transaction-Related Charges
Restructuring, impairment and transaction-related charges
increased
$25.6 million
for the
six months ended
June 30, 2012
, compared with the
six months ended
June 30, 2011
, primarily due to a
$14.1 million
increase
in impairment charges, a
$7.8 million
increase
in acquisition-related integration costs, a
$4.8 million
increase
in employee termination charges and a
$1.3 million
increase
in transaction-related charges, partially offset by a
$2.4 million
decrease
in other restructuring costs.
Restructuring, impairment and transaction-related charges of
$75.9 million
incurred in the
six months ended
June 30, 2012
, included: (1)
$20.6 million
of employee termination charges related to workforce reductions through facility consolidations and involuntary separation programs, (2)
$14.1 million
of impairment charges for certain buildings and equipment no longer being utilized in production as a result of facility consolidations, primarily related to the Company's Pila, Poland and Stillwater, Oklahoma facilities, (3)
$2.3 million
of transaction-related charges consisting of professional service fees related to business acquisition and divestiture activities, (4)
$23.1 million
of integration costs primarily related to preparing existing facilities to meet new production requirements resulting from work transferring from closed plants, as well as other costs related to the integration of the acquired companies and (5)
$15.8 million
of various other restructuring charges, including costs to maintain and exit closed facilities, as well as lease exit charges, net of a
$2.4 million
gain on the collection of a note receivable related to a settlement of a disputed pre-acquisition World Color Press note receivable.
Restructuring, impairment and transaction-related charges of
$50.3 million
incurred in the
six months ended
June 30, 2011
, included: (1)
$15.8 million
of employee termination charges related to workforce reductions through facility consolidations and involuntary separation programs, (2)
$1.0 million
of transaction-related charges incurred primarily in connection with the transaction with Transcontinental, (3)
$15.3 million
of acquisition-related integration costs, net of a
$7.1 million
gain on the collection of a note receivable for the June 2008 sale of World Color Press' European operations and (4)
$18.2 million
of various other restructuring charges, including costs to maintain and exit closed facilities, as well as lease exit charges.
43
Depreciation and Amortization
Depreciation and amortization
decreased
$1.5 million
for the
six months ended
June 30, 2012
, compared with the
six months ended
June 30, 2011
, due primarily to decreased capital expenditures for property, plant and equipment, and the impact of the Company's restructuring activities, which have resulted in
15
announced plant closures.
EBITDA and EBITDA Margin—Consolidated
EBITDA and EBITDA margin for the
six months ended
June 30, 2012
, compared to the
six months ended
June 30, 2011
, were as follows:
|
Six Months Ended June 30,
|
|||||||||||||
|
2012
|
2011
|
||||||||||||
|
Amount
|
% of Net Sales
|
Amount
|
% of Net Sales
|
||||||||||
|
(dollars in millions)
|
|||||||||||||
|
EBITDA and EBITDA margin
|
$
|
193.9
|
|
10.1
|
%
|
$
|
201.4
|
|
10.1
|
%
|
|||
EBITDA
decreased
$7.5 million
for the
six months ended
June 30, 2012
, primarily due to the margin impact of a
$75.8 million
, or
3.8%
decline in net sales and
$25.6 million
of
increased
restructuring, impairment and transaction-related charges. These declines were partially offset by
$46.0 million
in incremental synergy savings from integrating World Color Press' operations, a
$35.3 million
gain on the disposal of the Canadian discontinued operations and a
$2.9 million
decrease in loss from discontinued operations. EBITDA margin remained the same for the
six months ended
June 30, 2012
, compared with the
six months ended
June 30, 2011
.
EBITDA represents net earnings (loss) attributable to Quad/Graphics common shareholders, plus (i) interest expense, (ii) income tax expense (if applicable) and (iii) depreciation and amortization, and less income tax benefit (if applicable). EBITDA margin represents EBITDA as a percentage of net sales. EBITDA and EBITDA margin are presented to provide additional information regarding Quad/Graphics' performance and because both are important measures by which Quad/Graphics gauges the profitability and assesses the performance of its business. EBITDA and EBITDA margin are not measures of financial performance in accordance with GAAP. EBITDA and EBITDA margin 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/Graphics' calculation of EBITDA and EBITDA margin may be different from the calculations used by other companies and therefore comparability may be limited. A reconciliation of EBITDA to net earnings (loss) attributable to Quad/Graphics common shareholders follows:
|
Six Months Ended June 30,
|
|||||||
|
2012
|
2011
|
||||||
|
(dollars in millions)
|
|||||||
|
Net Earnings (Loss) Attributable to Quad/Graphics Common Shareholders
(1)
|
$
|
26.6
|
|
$
|
(17.6
|
)
|
|
|
Interest Expense
|
42.1
|
|
59.1
|
|
|||
|
Income Tax Benefit
|
(44.1
|
)
|
(10.9
|
)
|
|||
|
Depreciation and Amortization
|
169.3
|
|
170.8
|
|
|||
|
EBITDA
|
$
|
193.9
|
|
$
|
201.4
|
|
|
__________________________________
|
(1)
|
Net earnings (loss) attributable to Quad/Graphics common shareholders includes the effects of:
|
|
a.
|
Restructuring, impairment and transaction-related charges of
$75.9 million
and
$50.3 million
for the
six months ended
June 30, 2012
, and
2011
, respectively;
|
|
b.
|
Loss from discontinued operations, net of tax, was
$3.2 million
and
$6.1 million
for the
six months ended
June 30, 2012
, and
2011
, respectively. EBITDA from discontinued operations was
$(3.2) million
and
$1.7 million
for the
six months ended
June 30, 2012
, and
2011
, respectively, and include restructuring, impairment and transaction-related charges of
$1.7 million
and
$7.9 million
for the
six months ended
June 30, 2012
and
2011
, respectively; and
|
|
c.
|
Gain on disposal of discontinued operations, net of tax, was
$35.3 million
for the
six months ended
June 30, 2012
.
|
44
United States Print and Related Services
The following table summarizes net sales, operating income, operating margin and certain items impacting comparability within the United States Print and Related Services segment (excluding the Canadian discontinued operations):
|
Six Months Ended June 30,
|
||||||||||||||
|
2012
|
2011
|
|||||||||||||
|
(dollars in millions)
|
||||||||||||||
|
Amount
|
Amount
|
$ Change
|
% Change
|
|||||||||||
|
Net Sales:
|
||||||||||||||
|
Products
|
$
|
1,452.7
|
|
$
|
1,541.2
|
|
$
|
(88.5
|
)
|
(5.7
|
)%
|
|||
|
Services
|
219.2
|
|
225.5
|
|
(6.3
|
)
|
(2.8
|
)%
|
||||||
|
Operating Income (including Restructuring, Impairment and Transaction-Related Charges)
|
56.4
|
|
87.4
|
|
(31.0
|
)
|
(35.5
|
)%
|
||||||
|
Operating Margin
|
3.4
|
%
|
4.9
|
%
|
N/A
|
|
N/A
|
|
||||||
|
Restructuring, Impairment and Transaction-Related Charges
|
$
|
32.4
|
|
$
|
30.8
|
|
$
|
1.6
|
|
5.2
|
%
|
|||
Net Sales
Product sales for the United States Print and Related Services segment
decreased
$88.5 million
, or
5.7%
, for the
six months ended
June 30, 2012
, compared to the
six months ended
June 30, 2011
, primarily due to lower print volumes, lower pricing of byproduct sales and lower print pricing due to continued pricing pressure from excess manufacturing capacity in the printing industry, partially offset by increased paper sales
Service sales for the United States Print and Related Services segment
decreased
$6.3 million
for the
six months ended
June 30, 2012
, compared to the
six months ended
June 30, 2011
, primarily due to lower sales on logistics and distribution services and, to a lesser extent, lower sales in media solutions.
Operating Income
Operating income for the United States Print and Related Services segment
decreased
$31.0 million
for the
six months ended
June 30, 2012
, compared to the
six months ended
June 30, 2011
, primarily due to margin impact of a $94.8 million, or 5.4% decline in net sales and
$1.6 million
in
increased
restructuring, impairment and transaction-related charges, partially offset by
$46.0 million
in incremental synergy savings from the integration of World Color Press' operations.
Operating margin for the United States Print and Related Services segment decreased from
4.9%
for the
six months ended
June 30, 2011
, to
3.4%
for the
six months ended
June 30, 2012
, primarily due to the reasons discussed in the preceding paragraph, and the overall negative margin impact from an increase in paper sales, which are generally sold at pass through prices reflecting minimal profit margin.
Restructuring, Impairment and Transaction-Related Charges
Restructuring, impairment and transaction-related charges for the United States Print and Related Services segment for the
six months ended
June 30, 2012
, were
$32.4 million
, consisting of: (1)
$14.7 million
of employee termination charges related to workforce reductions through facility consolidations and involuntary separation programs, (2)
$3.5 million
of impairment charges for certain buildings and equipment no longer being utilized in production as a result of facility consolidations, primarily related to the Company's Stillwater, Oklahoma facility and (3)
$14.2 million
of various other restructuring charges, including costs to maintain and exit closed facilities, as well as lease exit charges, net of a
$2.4 million
gain on the collection of a note receivable related to a settlement of a disputed pre-acquisition World Color Press note receivable.
Restructuring, impairment and transaction-related charges for the United States Print and Related Services segment for the
six months ended
June 30, 2011
, were
$30.8 million
, consisting of: (1)
$13.7 million
of employee termination charges related to workforce reductions through facility consolidations and involuntary separation programs, (2)
$0.8 million
of acquisition-related integration costs and (3)
$16.3 million
of various other restructuring charges, including costs to maintain and exit closed facilities, as well as lease exit charges.
45
International
The following table summarizes net sales, operating loss, operating margin, certain items impacting comparability and equity in earnings of unconsolidated entities within the International segment:
|
Six Months Ended June 30,
|
||||||||||||||
|
2012
|
2011
|
|||||||||||||
|
(dollars in millions)
|
||||||||||||||
|
Amount
|
Amount
|
$ Change
|
% Change
|
|||||||||||
|
Net Sales:
|
||||||||||||||
|
Products
|
$
|
246.9
|
|
$
|
226.9
|
|
$
|
20.0
|
|
8.8
|
%
|
|||
|
Services
|
5.0
|
|
6.0
|
|
(1.0
|
)
|
(16.7
|
)%
|
||||||
|
Operating Loss (including Restructuring, Impairment and Transaction-Related Charges)
|
(18.0
|
)
|
(10.8
|
)
|
(7.2
|
)
|
(66.7
|
)%
|
||||||
|
Operating Margin
|
(7.1
|
)%
|
(4.6
|
)%
|
N/A
|
|
N/A
|
|
||||||
|
Restructuring, Impairment and Transaction-Related Charges
|
18.1
|
|
2.4
|
|
15.7
|
|
654.2
|
%
|
||||||
|
Equity in Earnings of Unconsolidated Entities
|
$
|
0.3
|
|
$
|
1.1
|
|
$
|
(0.8
|
)
|
(72.7
|
)%
|
|||
Net Sales
Product sales for the International segment
increased
$20.0 million
for the
six months ended
June 30, 2012
, compared to the
six months ended
June 30, 2011
, primarily due to a $35.7 million increase in net sales in Latin America (mostly related to the Transcontinental Mexican acquisition, which was completed on
September 8, 2011
), partially offset by lower volumes primarily in Brazil, and a negative impact from currency translation.
Operating Loss
Operating loss for the International segment
increased
$7.2 million
for the
six months ended
June 30, 2012
, compared to the
six months ended
June 30, 2011
, primarily due to a
$15.7 million
increase
in restructuring, impairment and integration expenses, partially offset by the margin impact of the
$20.0 million
sales increase.
Restructuring, Impairment and Transaction-Related Charges
Restructuring, impairment and transaction-related charges for the International segment for the
six months ended
June 30, 2012
, were
$18.1 million
, consisting of: (1)
$5.9 million
of employee termination charges related to workforce reductions through facility consolidations and involuntary separation programs, (2)
$10.6 million
of impairment charges for certain buildings and equipment no longer being utilized in production as a result of facility consolidations, primarily related to the Company's Pila, Poland facility and (3)
$1.6 million
of other restructuring charges.
Restructuring, impairment and transaction-related charges for the International segment for the
six months ended
June 30, 2011
, were
$2.4 million
, consisting of: (1)
$0.7 million
of employee termination costs related to workforce reduction initiatives and (2)
$1.7 million
of other restructuring charges.
Equity in Earnings of Unconsolidated Entities
Investments in entities where Quad/Graphics has the ability to exert significant influence but not control are accounted for using the equity method of accounting. The Company holds a
49%
ownership interest in Plural, a commercial printer based in São Paulo, Brazil, as well as a
50%
interest in a joint venture in Chile that was acquired as part of the World Color Press acquisition. The equity in earnings of unconsolidated entities in the International segment
decreased
$0.8 million
for the
six months ended
June 30, 2012
, compared to the
six months ended
June 30, 2011
, due to decreased earnings at Plural.
46
Corporate
The following table summarizes unallocated operating expenses presented as Corporate:
|
Six Months Ended June 30,
|
|||||||
|
2012
|
2011
|
||||||
|
(dollars in millions)
|
|||||||
|
Operating Expenses (including Restructuring, Impairment and Transaction-Related Charges)
|
$
|
46.1
|
|
$
|
40.9
|
|
|
|
Restructuring, Impairment and Transaction-Related Charges
|
25.4
|
|
17.1
|
|
|||
Corporate operating expenses
increased
$5.2 million
for the
six months ended
June 30, 2012
, compared with the
six months ended
June 30, 2011
, primarily due to a
$8.3 million
increase
in restructuring, impairment and transaction-related charges, partially offset by synergy savings from the integration of World Color Press.
Corporate restructuring, impairment and transaction-related charges for the
six months ended
June 30, 2012
, were
$25.4 million
, consisting of: (1)
$2.3 million
of transaction-related charges consisting of professional service fees related to business acquisition and divestiture activities and (2)
$23.1 million
of acquisition-related integration costs.
Corporate restructuring, impairment and transaction-related charges for the
six months ended
June 30, 2011
, were
$17.1 million
, consisting of: (1)
$1.4 million
of employee termination costs related to workforce reduction initiatives, (2)
$14.5 million
of acquisition-related integration costs, net of a
$7.1 million
gain on the collection of a note receivable for the June 2008 sale of World Color Press' European operations, (3)
$1.0 million
of transaction-related charges incurred primarily in connection with the transaction with Transcontinental and (4)
$0.2 million
of various other restructuring charges.
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 believes its expected future cash flows from operating activities and unused available capacity under its revolving credit facilities, net of issued letters of credit (which was
$816.6 million
as of
June 30, 2012
) provide sufficient resources to fund ongoing operating requirements and the integration and restructuring requirements related to the acquired World Color Press and Transcontinental Mexican operations, as well as future capital expenditures, debt service requirements, World Color Press single employer pension plan contributions, World Color Press multiemployer pension plans withdrawal payments, investments in future growth to create value for its shareholders, shareholder dividends and share repurchases. There were no borrowings under the
$850.0 million
revolving credit facility as of
June 30, 2012
, and peak borrowings during the
three and six months ended
June 30, 2012
, were
$32.8 million
and
$104.9 million
, respectively.
Net Cash Provided by Operating Activities
Six Months Ended
June 30, 2012
, Compared to
Six Months Ended
June 30, 2011
Net cash provided by operating activities was
$170.5 million
for the
six months ended
June 30, 2012
, compared to
$116.7 million
for the
six months ended
June 30, 2011
, resulting in a
$53.8 million
increase
in cash provided by operating activities. The
increase
was primarily due to cash provided by the change in working capital of
$76.1 million
, primarily related to lower inventory levels at June 30, 2012 compared to June 30, 2011, and a reduction in income tax receivables. This improvement in working capital was partially offset by an $34.9 million increase in the non-cash adjustment for deferred income taxes related to an IRS settlement.
Net Cash Used in Investing Activities
Six Months Ended
June 30, 2012
, Compared to
Six Months Ended
June 30, 2011
Net cash used in investing activities was
$11.7 million
for the
six months ended
June 30, 2012
, compared to
$73.0 million
for the
six months ended
June 30, 2011
, resulting in a
$61.3 million
increase
in cash. The
increase
was primarily due to a
$50.0 million
refund of a deposit related to the Transcontinental Mexico acquisition (as further discussed in
Note 3
to the condensed consolidated financial statements), and a
$44.3 million
decrease
in capital expenditures. These increases were partially offset by the
$18.1 million
ManipalTech cost method investment made during the
six months ended
June 30, 2012
, and a
$10.8 million
increase
in cash payments for acquisitions.
47
Net Cash Used in Financing Activities
Six Months Ended
June 30, 2012
, Compared to
Six Months Ended
June 30, 2011
Net cash used in financing activities was
$163.8 million
for the
six months ended
June 30, 2012
, compared to
$43.0 million
for the
six months ended
June 30, 2011
, resulting in a
$120.8 million
increase
in cash used for financing activities. The
increase
was due primarily to net debt repayments of
$132.3 million
, which increased
$105.5 million
over 2011. Also, net cash used in financing activities increased due to increased shareholder dividends of
$14.0 million
and a
$3.1 million
increase in payments on unsecured notes to be issued in connection with the World Color Press bankruptcy during the
six months ended
June 30, 2012
.
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) strategic capital deployment through investments in the business, including acquisitions, (2) strengthening the balance sheet, including debt and pension repayment, and (3) returning value to the shareholders, including dividends and share repurchases. The priorities for capital 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, such as payments related to completing the World Color Press bankruptcy process. Free Cash Flow is a non-GAAP measure. Free Cash Flow should not be considered an alternative to cash flows provided by operating activities as a measure of liquidity. Quad/Graphics' calculation of Free Cash Flow may be different from similar calculations used by other companies and, therefore, comparability may be limited.
Free Cash Flow for the
six months ended
June 30, 2012
, compared to the
six months ended
June 30, 2011
, was as follows:
|
Six Months Ended June 30,
|
|||||||
|
2012
|
2011
|
||||||
|
(dollars in millions)
|
|||||||
|
Net Cash Provided by Operating Activities
(1)
|
$
|
170.5
|
|
$
|
116.7
|
|
|
|
Less: Purchases of Property, Plant and Equipment
|
(54.2
|
)
|
(98.5
|
)
|
|||
|
Free Cash Flow
|
$
|
116.3
|
|
$
|
18.2
|
|
|
__________________________________
|
(1)
|
Net cash provided by operating activities includes:
|
|
a.
|
Net restructuring payments of
$43.1 million
and
$77.9 million
for the
six months ended
June 30, 2012
, and
2011
, respectively. Net restructuring payments include total restructuring payments, less restructuring cash receipts of
$14.7 million
and
$7.1 million
related to collections of a disputed pre-acquisition World Color Press notes receivable for the
six months ended
June 30, 2012
, and
2011
, respectively; and
|
|
b.
|
Bankruptcy payments of
$7.9 million
and
$5.7 million
for the
six months ended
June 30, 2012
, and
2011
, respectively.
|
Free Cash Flow increased
$98.1 million
for the
six months ended
June 30, 2012
, compared to the
six months ended
June 30, 2011
, due to a
$53.8 million
increase
in net cash provided by operating activities and a decrease in capital expenditures of
$44.3 million
. See the Net Cash Provided by Operating Activities section above for further explanations of the increase in operating cash flows.
Debt Obligations
During the
six months ended
June 30, 2012
, the Company utilized a combination of the following significant debt instruments to fund cash requirements, including:
|
•
|
$1.5 Billion
Debt Financing Agreement which includes:
|
|
◦
|
$850.0 million
Revolving Credit Facility (no borrowings outstanding as of
June 30, 2012
);
|
48
|
◦
|
$450.0 million
Term Loan A (
$450.0 million
outstanding as of
June 30, 2012
); and
|
|
◦
|
$200.0 million
Term Loan B (
$197.6 million
outstanding as of
June 30, 2012
);
|
|
•
|
Master Note and Security Agreement (
$583.4 million
outstanding as of
June 30, 2012
); and
|
|
•
|
Facilities Agreement - a
$87.0 million
foreign currency denominated facilities agreement including both term loan and revolving credit facility components (total of
$72.3 million
outstanding as of
June 30, 2012
).
|
Covenants and Compliance
As of
June 30, 2012
, the Company's various lending arrangements included certain financial covenants (all financial terms, numbers and ratios in this
Covenants and Compliance
section are as defined in the Company's debt agreements). Among these covenants, the Company was required to maintain the following as of
June 30, 2012
(for each covenant, the most restrictive measurement has been included below):
|
•
|
On a rolling twelve-month basis, the total leverage ratio, defined as total consolidated debt to consolidated EBITDA (as defined in the debt financing agreement), shall not exceed
3.50
to 1.00 (for the twelve months ended
June 30, 2012
, the Company's leverage ratio was
2.16
to 1.00).
|
|
•
|
On a rolling twelve-month basis, the minimum interest coverage ratio, defined as consolidated EBITDA to consolidated cash interest expense, shall not be less than
3.25
to 1.00 (for the twelve months ended
June 30, 2012
, the Company's interest coverage ratio was
7.30
to 1.00).
|
|
•
|
On a rolling twelve-month basis, the fixed charge coverage ratio, defined as consolidated EBITDA and rent expense to interest and rent expense, shall not be less than
1.50
to 1.00 (for the twelve months ended
June 30, 2012
, the Company's fixed charge coverage ratio was
3.52
to 1.00).
|
|
•
|
Consolidated net worth of at least
$745.8 million
plus
40%
of positive consolidated net income cumulatively for each year (as of
June 30, 2012
, the Company's consolidated net worth under the most restrictive covenant per the various debt agreements was
$1.25 billion
).
|
In addition to those covenants, the
$1.5 billion
Debt Financing Agreement also includes certain limitations on acquisitions, indebtedness, liens, dividends and repurchases of capital stock. If the Company's total leverage ratio is greater than 3.00 to 1.00 (total leverage ratio as defined in the debt financing agreement), the Company is prohibited from making greater than $120.0 million of annual dividend payments, capital stock repurchases and certain other payments. If the total leverage ratio is less than 3.00 to 1.00, there are no such restrictions.
As of
June 30, 2012
, the Company was in compliance with all financial covenants in its debt agreements. 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.
Risk Management
For a discussion of the Company's exposure to market risks and management of those market risks, see Item 3, "Quantitative and Qualitative Disclosures About Market Risk," of this Quarterly Report on Form 10-Q.
Contractual Obligations and Off-Balance Sheet Arrangements
As of
June 30, 2012
, the only off-balance sheet arrangements that existed were operating lease obligations, which have not changed materially from that listed in the "Contractual Obligations and Other Commitments" table in the Company's Annual Report on Form 10-K filed on
February 29, 2012
. As of
June 30, 2012
, the Company's contractual obligations have not changed materially from the table and related notes to the table listed in such Form 10-K, except:
|
•
|
the Company reduced its debt and capital lease obligations by
$181.0 million
, which includes
$48.7 million
of interest payments, during the
six months ended
June 30, 2012
, and
|
49
|
•
|
the purchase price payable from the Transcontinental business exchange transaction was satisfied during the
six months ended
June 30, 2012
, with the
March 1, 2012
sale of the Canadian operations to Transcontinental.
|
New Accounting Pronouncements
In September 2011, the FASB issued new guidance on testing goodwill for impairment. This new guidance gives entities, subject to certain conditions, the option of first performing a qualitative assessment to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of the reporting unit is less than its carrying amount. The Company adopted this guidance effective January 1, 2012. Annual impairment tests of goodwill are performed in the fourth quarter of each year. The adoption of this guidance is not expected to have a material impact on the Company's condensed consolidated financial position, results of operations or cash flows.
In May 2011, the FASB issued new guidance on fair value measurements. This new guidance amends the definition of fair value measurement principles and disclosure requirements to eliminate differences between GAAP and International Financial Reporting Standards. This new guidance requires new quantitative and qualitative disclosures about the sensitivity of recurring Level 3 measurement disclosures, as well as transfers between Level 1 and Level 2 of the fair value hierarchy. The Company adopted this guidance effective January 1, 2012. The adoption of this guidance impacted the Company's disclosures and had no impact on the Company's condensed consolidated financial position, results of operations or cash flows.
50
|
ITEM 3.
|
Quantitative and Qualitative Disclosures About Market Risk
|
The Company is exposed to a variety of market risks which may adversely impact the Company's results of operations and financial condition, including changes in interest and foreign currency exchange rates, changes in the economic environment that would impact credit positions and changes in the prices of certain commodities. The Company's management takes an active role in the risk management process and has developed policies and procedures that require specific administrative and business functions to assist in the identification, assessment and control of various risks. These risk management strategies may not fully insulate the Company from adverse impacts due to market risks.
Interest Rate Risk
The Company is exposed to interest rate risk on variable rate debt obligations and price risk on fixed rate debt and capital leases. As of
June 30, 2012
, the Company had fixed rate debt and capital leases outstanding of
$614.2 million
at a current weighted average interest rate of
7.4%
and variable rate debt outstanding of
$724.0 million
at a current weighted average interest rate of
3.0%
. The variable rate debt outstanding at
June 30, 2012
is primarily comprised of the term loan components of the
$1.5 billion
variable rate debt financing agreement entered into on
July 26, 2011
, including
$450.0 million
outstanding on the
$450.0 million
term loan A and
$197.6 million
outstanding on the
$200.0 million
term loan B. Variable rate debt also includes
$72.3 million
of international variable rate debt outstanding as of
June 30, 2012
. There were no borrowings outstanding on the
$850.0 million
revolving credit facility as of
June 30, 2012
. The term loan B bears interest primarily based on the London Interbank Offered Rate ("LIBOR"); however, it is subject to a 1.0% LIBOR minimum rate and thus the interest rate on the term loan B will not begin to fluctuate until LIBOR exceeds that percentage. At
June 30, 2012
, LIBOR was significantly lower than that 1.0% LIBOR minimum rate, and as a result the interest on the term loan B would not fluctuate with a 10% increase in the market interest rate. Excluding the term loan B, a hypothetical change in the interest rate of 10% from the Company's current weighted average interest rate on variable rate debt obligations of 3.02% would not have a material impact on the Company's interest expense. A hypothetical 10% change in market interest rates would change the fair value of fixed rate debt at
June 30, 2012
, by approximately $18.7 million.
Foreign Currency Risk and Translation Exposure
The Company is exposed to the impact of foreign currency fluctuations in certain countries in which it operates. The exposure to foreign currency movements is limited in most countries because the operating revenues and expenses of its various subsidiaries and business units are substantially in the local currency of the country in which they operate. Although operating in local currencies may limit the impact of currency rate fluctuations on the results of operations of the Company's non-U.S. subsidiaries and business units, fluctuations in such rates may affect the translation of these results into the Company's consolidated financial statements. To the extent revenues and expenses are not in the applicable local currency, the Company may enter into foreign exchange forward contracts to hedge the currency risk.
As further discussed in
Note 3
to the condensed consolidated financial statements, the Company settled the short-term foreign currency forward exchange contract entered into to hedge exchange rate exposure on the
50.0 million
Canadian dollar deposit related to the Transcontinental Mexico acquisition. Excluding this fair value hedge entered into specifically due to the unique Transcontinental Mexico acquisition, the Company's hedging operations have historically not been material, and gains or losses from these operations have not been material to the Company's results of operations, financial position or cash flows. The Company does not use derivative financial instruments for trading or speculative purposes.
These international operations are subject to risks typical of international operations, including, but not limited to, differing economic conditions, changes in political climate, potential restrictions on the movement of funds, differing tax structures, and other regulations and restrictions. Accordingly, future results could be adversely impacted by changes in these or other factors.
Credit Risk
Credit risk is the possibility of loss from a customer's failure to make payments according to contract terms. Prior to granting credit, each customer is evaluated in an underwriting process, taking into consideration the prospective customer's financial condition, past payment experience, credit bureau information and other financial and qualitative factors that may affect the customer's ability to pay. Specific credit reviews and standard industry credit scoring models are used in performing this evaluation. Customers' financial condition is continuously monitored as part of the normal course of business. Some of the Company's customers are highly leveraged or otherwise subject to their own operating and regulatory risks. Based on those customer account reviews and due to the continued uncertainty of the global economy, the Company has an allowance for doubtful accounts of
$68.3 million
as of
June 30, 2012
and
$73.7 million
as of
December 31, 2011
.
51
The Company had a large, diverse customer base prior to the acquisition of World Color Press; however, the credit risk from customer concentration further decreased after the acquisition with the addition of new customers, geographies and products the Company now produces. The Company does not have a high degree of concentration with any single customer account. During the
three and six months ended
June 30, 2012
, the Company's largest customer accounted for less than 5% of the Company's net sales. Even if the Company's credit review and analysis mechanisms work properly, the Company may experience financial losses in its dealings with customers and other parties. Any increase in nonpayment or nonperformance by customers could adversely impact the Company's results of operations and financial condition. Economic disruptions could result in significant future charges.
Commodity Risk
The primary raw materials used by the Company are paper, ink and energy. At this time, the Company's supply of raw materials is readily available from numerous suppliers; however, based on market conditions, that could change in the future. The Company generally buys these raw materials based upon market prices that are established with the vendor as part of the purchase process.
The majority of paper used in the printing process is supplied directly by the Company's customers. For those customers that do not supply paper, the Company generally includes price adjustment clauses in sales contracts. The Company produces the majority of ink used in its print production. Raw materials for the ink manufacturing process are purchased externally from a variety of suppliers. The Company generally includes price adjustment clauses for ink and other critical raw materials in the printing process in its sales contracts.
The Company generally cannot pass on to customers the impact of higher electric and natural gas energy prices on its manufacturing costs, and increases in energy prices result in higher manufacturing costs for certain of its operations. The Company mitigates its risk through natural gas hedges when appropriate. In its logistic operations, however, the Company is able to pass a substantial portion of any increase in fuel prices directly to its customers.
As a result, management believes a hypothetical 10% change in the price of paper and other raw materials would not have a significant direct impact on the Company's consolidated annual results of operations or cash flows; however, significant increases in commodity pricing or tight supply could influence future customers' demand for printed products. Inflation has not had a significant impact on the Company historically.
|
ITEM 4.
|
Controls and Procedures
|
Disclosure Controls and Procedures
The Company's management, with the participation of the Company's principal executive officer and principal financial officer, has evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report and has concluded that, as of the end of such period, the Company's disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting
There were no changes in the Company's internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) that occurred during the fiscal quarter ended
June 30, 2012
that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
52
|
ITEM 1A.
|
Risk Factors
|
Risk factors relating to the Company are contained in Part I, Item 1A of the Company's
2011
Annual Report on Form 10-K, filed with the SEC on
February 29, 2012
. No material changes to such risk factors occurred during the period from
January 1, 2012
through
June 30, 2012
.
|
ITEM 2.
|
Unregistered Sales of Equity Securities and Use of Proceeds
|
|
(a)
|
None.
|
|
(b)
|
Not applicable.
|
|
(c)
|
The following table provides information about the Company's repurchases of its class A stock in the
second quarter ended
June 30, 2012
:
|
|
Issuer Purchases of Equity Securities
|
||||||||||||||
|
Period
|
Total Number of Shares Purchased
(1)
|
Average Price Paid Per Share
|
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
(1)
|
Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
(1)
|
||||||||||
|
April 1, 2012 to April 30, 2012
|
—
|
|
$
|
—
|
|
—
|
|
$
|
91,768,100
|
|
||||
|
May 1, 2012 to May 31, 2012
|
—
|
|
—
|
|
—
|
|
91,768,100
|
|
||||||
|
June 1, 2012 to June 30, 2012
|
—
|
|
—
|
|
—
|
|
91,768,100
|
|
||||||
|
Total
|
—
|
|
—
|
|
||||||||||
__________________________________
|
(1)
|
On
September 6, 2011
, the Company's board of directors authorized a share repurchase program of up to
$100.0 million
of the Company's outstanding class A stock. Such purchases may be made from time to time and can be discontinued at any time.
|
See "Management's Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Covenants and Compliance," included elsewhere in this Quarterly Report on Form 10-Q, for a discussion of covenants under the Company's debt agreements that may restrict the Company's ability to pay dividends.
|
ITEM 6.
|
Exhibits
|
The exhibits listed in the accompanying index of exhibits are filed as part of this Quarterly Report on Form 10-Q.
53
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
QUAD/GRAPHICS, INC.
|
||||
|
Date:
|
August 8, 2012
|
By:
|
/s/ J. Joel Quadracci
|
|
|
J. Joel Quadracci
|
||||
|
Chairman, President and Chief Executive Officer
|
||||
|
(Principal Executive Officer)
|
||||
|
Date:
|
August 8, 2012
|
By:
|
/s/ John C. Fowler
|
|
|
John C. Fowler
|
||||
|
Executive Vice President and Chief Financial Officer
|
||||
|
(Principal Financial Officer)
|
||||
54
QUAD/GRAPHICS, INC.
Exhibit Index to Quarterly Report on Form 10-Q
For the Quarterly Period ended
June 30, 2012
Exhibits
|
Exhibit Number
|
Exhibit Description
|
|
|
(10)
|
Quad/Graphics, Inc. 2010 Omnibus Incentive Plan, as amended.
|
|
|
(31.1)
|
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934.
|
|
|
(31.2)
|
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934.
|
|
|
(32)
|
Written Statement of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350.
|
|
|
(101*)
|
Financial statements from the Quarterly Report on Form 10-Q of Quad/Graphics, Inc. for the quarter ended June 30, 2012 formatted in eXtensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Statements of Operations (Unaudited), (ii) the Condensed Consolidated Statements of Comprehensive Income (Unaudited), (iii) the Condensed Consolidated Balance Sheets (Unaudited), (iv) the Condensed Consolidated Statements of Cash Flows (Unaudited), (v) the Notes to Condensed Consolidated Financial Statements (Unaudited), and (vi) document and entity information.
|
|
__________________________________
|
*
|
In accordance with Rule 406T of Regulation S-T, the information in these exhibits shall not be deemed to be "filed" for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, or otherwise subject to liability under that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing.
|
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TABLE OF CONTENTS
Part I Financial InformationItem 1. Condensed Consolidated Financial Statements (unaudited)Note 1. Basis Of PresentationNote 2. Recent Accounting PronouncementsNote 3. Acquisitions and Strategic InvestmentsNote 4. Discontinued OperationsNote 5. Restructuring, Impairment and Transaction-related ChargesNote 6. Goodwill and Other Intangible AssetsNote 7. InventoriesNote 8. Property, Plant and EquipmentNote 9. Restricted CashNote 10. Equity Method Investments in Unconsolidated EntitiesNote 11. Commitments and ContingenciesNote 12. World Color Press Insolvency ProceedingsNote 13. DebtNote 14. Income TaxesNote 15. Financial Instruments and Fair Value MeasurementsNote 16. Other Long-term LiabilitiesNote 17. Pension and Other Postretirement BenefitsNote 18. Earnings (loss) Per Share Attributable To Quad/graphics Common ShareholdersNote 19. Equity Incentive ProgramsNote 20. Shareholders' EquityNote 21. Segment InformationNote 22. Subsequent EventsItem 2. Management's Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II Other InformationItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 6. Exhibits